This is part of a series of lectures on Islamic Economics - for the full set, see: bit.ly/IslamicEcon2023. This lecture explains the origins of the modern monetary system in 18th Century England. Gold was insufficient for the rapidly increasing needs of commercial and industrial activity. As a result, credit money, only partially backed by Gold, was created. This proved extremely useful tool to finance the industrial revolution, as well as wars. It also led to shift in emphasis from gold as money to commercial activity as the backing and basis for money. This lecture provides many details about theory of money which are not available at all in conventional economics courses.

1. The Origins of Modern Money:
Why Gold Was Abandoned
Lecture 10 of A New Approach to Islamic Economics
For complete online course, see: http://bit.ly/IslamicEcon2023
Dr. Asad Zaman

2. Preliminary Remarks
Original Title of this lecture was: Towards an Islamic Monetary
Economy – Original Plan was to finish the course here. BUT, I could not
cover that much in this lecture.
Instead, this lecture will outline how and why Gold/Silver were
abandoned, and modern (partially unbacked) paper currency came into
existence.
A key point to note is that modern economies CANNOT function with
gold/silver currencies. Re-introducing gold would require RADICAL
changes in the economic system.
We will discuss Islamic Approaches to Money in later lectures.

3. A copy of these slides is available from:
SCRIBD: http://bit.ly/SComm
For the course website, see: http://bit.ly/IslamicEcon2023
The video lecture will be made available on this website, after the
ZOOM recording is uploaded to YouTube.
All previous lectures are already available.
Alternative Copy of Slides from SlideShare: http://bit.ly/SSgold

4. Some Basics: Introduction to Money
Money has evolved and changed over time – enormously! – Our goal is
to UNDERSTAND the historical forces which led to these changes.
Economic theory is BLIND on this front – it assumes money has always
been the same.
We need to learn the history of money and how it changed. BUT, to
understand this history, it is NOT sufficient to know the historical facts.
The drivers of change are hidden beneath the facts. And we need good
theories of money to be able to understand these hidden forces.

5. Theories of Money Must Explain History
• Emergence of Gold Standard in late 19th Century.
• Collapse of Gold Standard in WW1. Attempt to restore Gold Standard in
inter-war era.
• Bretton-Woods (1944) Abandonment of Gold Standard, and its
replacement by Dollar Standard.
• Nixon Shock of 1971: Gold backing of dollars abandoned. The world of
floating fiat currencies emerges.
• 1999-2000: Repeal of Glass-Steagall Act, Commodity Futures
Modernization Act: Emergence of Shadow Banking & Derivatives.
• Great Depression 1929, Global Financial Crisis 2007, Developments in
Central Banking.

6. Methodology
History is the mother of all social science (“science” is a misnomer).
History is a sequence of facts, and CANNOT be understood without a
theory of history.
Ibn-e-Khaldun was the first to look for the hidden driving forces which
led to systematic evolution of societies across time. His methodology
has been abandoned. Rebuild Uloom ul Umran: http://bit.ly/AZUUU
Have a broad picture of historical evolution leads to theories about
historical change. Theories lead to detailed critical examination, which
OFTEN leads to rejection of theory. A new, more sophisticated theory
emerges. This back-and-forth procedure is central to understanding.

7. Brief History:
Special Historical Events in Europe led to dramatic social changes. That
led to the creation of secular modernity.
Secular modernity is radically different from all traditional society
(including Islamic Society). Founded on individualism & hedonism.
Because of European hegemony, European worldview, embedded in
European education, has become widely accepted. According to this
view, Europe is the most advanced society. All others are primitive.
Muslims are forever seeking to show that Islamic is compatible with,
and a precursor of modernity, so that Islam is “advanced”. This makes it
impossible to understand Islam.

8. The Great Transformation: Political and
Economic Origins of Our Times
Traditional Society: Markets are embedded within society.
Capitalism: Society is embedded within Markets.
To understand difference, consider the question:
Does a shopowner have the right to withhold a life-saving drug from
someone who needs it, but does not have money to pay for it?
In a market society: Unquestionably and definitely: YES
In traditional society: Unquestionably and definitely: NO

9. Three Keys to Secular Modernity
Three Artificial Commodities:
• Land
• Labor
• Money
Commodification occurs by social consensus – we agree, as a society, to
a conceptual framework regarding the three. This conceptual
framework is radically different from traditional societies.

10. Three Fictions: Artificial Commodities
Treating a man's labor power as a commodity, disposes of the physical, psychological, and
moral entity "man" attached to that tag. Robbed of the protective covering of cultural
institutions, human beings would perish from the effects of social exposure; they would die
as the victims of acute social dislocation through vice, perversion, crime, and starvation.
Treating land as a commodity, Nature would be reduced to its elements, neighborhoods
and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce
food and raw materials destroyed.
Treating money as a commodity, the market administration of purchasing power would
periodically liquidate business enterprise, for shortages and surfeits of money would prove
as disastrous to business as floods and droughts in primitive society.
Undoubtedly, labor, land, and money markets are essential to a market economy. But no
society could stand the effects of such a system of crude fictions even for the shortest
stretch of time unless its human and natural substance as well as its business organization
was protected against the ravages of this satanic mill.

11. Critical: Role and Importance of Money
Radically Increased in Market Society.
• Understanding how money functions in modern society will not
correlate well with how it used to function in Islamic societies.
• My own work concentrates on how money functions in modern
society. This requires fairly deep knowledge of history, combined with
fairly deep knowledge of theory of money. In both areas, there are
LOTS of fictions – false histories and false theories.
• “Towards” means tentative. A missing element is history of money in
Islamic societies. This does not involve mere recording of facts.
• In particular, Gold is not a good money in modern society – but this
does not have implications for Islamic society. Complex Transition.

12. How does money function in modern society?
If money, according to Augier, 'comes into the world with a congenital
bloodstain on one cheek,' capital comes dripping from head to toe,
from every pore, with blood and dirt.” ―
Karl Marx, Capital: A Critique of Political Economy, Volume 1
Money comes with a congenital bloodstain: as a social convention,
money is NOT ethically neutral – usage creates and requires certain
moral conventions which are inherently unjust.
Capital comes dripping with blood and dirt: Accumulation of large
amounts of wealth is almost always due to Opression and Exploitation.

13. Two Opposing Views of Money:
BOTH due to Aristotle!
1. Cattalactic (Exchange-Theory): Money facilitates barter of goods.
Double coincidence of wants is not required. Money emerges
naturally, from demands of the market.
2. State Theory of Money: Money is created by State authority, which
provides legal framework and enforcement for use of money.
Both theories capture essential aspects of truth. Strong arguments can
be made for both views. Sterile battle between the two schools of
thought continues to this day.

14. Terminology: Market Economy, Market
Society, Monetary Economy, Capitalism
Market Economy is one in which market plays an important role.
Society of Makka was a market economy, while Society of Madina was
not – Madina was based on agriculture: Dates, Milk, Meat
Traditional Society: Social networks are central to survival, markets are
peripheral. Zakat: paid by money holders (rich) to moneyless (poor).
Market Society: Essential needs supplied by market/trade. Money
needed for collective AND individual survival. Social networks of
secondary importance.
Capitalism: A particular money-based system for production and
distribution of goods, which requires market society & monetary
economy

15. Money: Essential Input for Production, in a
Market Economy
Agriculture: Input Seeds, Land, Water, Labor. These must be paid for in
advance of production. Production takes place LATER.
Musharka Finance: Credit Money. Inputs are purchased via promises to
pay upon harvest. If written IOU is issued, this is credit money – a
promise to pay. Otherwise, it can just be understood as social
convention. We all cooperate in production, and share in harvest.
Private property concept naturally emerges in agricultural society. In
shari’a right to own land is based on adding value – making dead land
alive. Ownership must create public benefit. Ownership does not give
us right to use property to cause public damage.(Negative Externality).

16. Critical: Motivation for Work
Islamic: Everyone responsible to provide for himself, family, kinfolks,
and neighbors, at decreasing levels of responsibility. Increasing circles
of responsibility, aligned with increasing levels of capability.
Prohibition on ASKING from others.
Prohibition on SHOWING our need to others.
Prohibition on DESIRING wealth of others.
Abu Bakr RA: Brought all his wealth (not encouraged for all)
Umar RA: Brought half his wealth.
Another Sahabi – brought gold, but it was rejected by Prophet SAW.

17. Capitalism & Market Society: Goal is Wealth
Adam Smith: The Wealth of Nations.
When labor is a commodity, money can be used to buy and sell lives.
The idea that value of life can be measured by stream of earnings was
born in England (David Hume) – and horrified his contemporaries.
It becomes natural for individuals to seek to make money, when wealth
is the marker of status in society.

18. A Universal of Human Behavior
Human beings everywhere seek to maximize social status.
In a capitalist society, money is the marker of social status. So people
seek to maximize wealth. Money is marker of status in capitalist
society, but not in traditional societies. Change in attitudes towards
wealth can be seen in Charles Dickens Ebenezer Scrooge versus
Disney’s Scrooge McDuck.
Riya: Doing things to acquire status and fame is prohibited in Islam.
This cuts the roots of a capitalist society, where status and fame is the
goal of all actions.
Sincerity of Intentions means doing all things for the pleasure of Allah
alone. This is what allows us to create radical social change.

19. Production in Traditional Vs Market Economy
Cooperative Production followed by Sharing of Output.
Private Property: Private Production, with social responsibility. The
Quranic story of two men with gardens.
“Promise” Money: issued as IOUs to workers, payable after harvest.
Critical Distinction: Finality of Transaction. When money is payed to
workers, that completes the transaction. Neither party owes anything
to other party.
When money is gold, this is barter – self-extinguishing. When money is
TOKEN, then finality is guaranteed by INSTITUTIONS.

20. Different Ways of Organizing Agriculture
Non-Monetary, Traditional Social Economy: Non-Final Transactions:
Credits, IOUs.
The ARTHI – provides seeds, fertilizer, essential inputs on loan, in return
for share of harvest. Interest rates are very high on this loan. Time-
based barter. Inputs versus Outputs.
Islamic Form: Bai Salam: Advance sale of product, specified in quality
and quantity. [Not whatever is produced]
Arthi’s are deeply integrated into the system, and operate with a large
amount of knowledge, which enables them to handle multiple risks.
Formal Bank Sector loans, at much lower interest rates, cant compete.

21. Essential role of money in production
Costs of production are incurred today. Payments are made in money
today.
Harvest occurs tomorrow. Prices are determined, by factors out of
control of farmer, tomorrow. Variables: Weather, Bumper/Famine
Aggregate Crop output. Value of PKR. Export Prices. Government
Controlled Prices.
“Profit Maximization” makes no sense because of radical uncertainty
about price of output in future.
Essential aspect of monetary economy, NOT discussed in economics
textbooks, is the necessity of money for production of goods.

22. Three Critical Ideas of Keynes:
Currently NOT part of economic theory!
Complexity, or Emergence: The MACRO behavior is not just the sum of
the MICRO. The Whole is different from the sum of the parts.
Conventional Macro, based on representative agent, rejects this.
Radical Uncertainty. Future prices are unknown, which makes utility
and profit maximization impossible.
Monetary Economy: Money plays a central and important role, in short
run and in long run. Firms seek to make money profits. Households
seek to acquire money savings, to buffer against wage shocks and
unemployment.

23. Role of Money in History
Large amounts of money lead to prosperity AND the ability to make wars.
Small amounts of money lead to recessions – insufficient production,
relative to potential AND inability to mount defense against wars.
Creation or Acquisition of Money plays central role in economic history.
There are MANY, MANY, MANY different ways to organize a monetary
economy – to arrange for “something” which is widely accepted as
money.
Modern crypto-currency, backed by nothing at all, should make this clear
to modern students. Non-Fungible Tokens are crypto-assets. Wealth is
anything which social consensus recognizes as wealth! Tulip Mania.

24. There is infinite variety of monetary systems
Present system emerged from the process of learning by experience.
Many systems were tried. Many failed, but a few succeeded. The ones
which succeeded were widely imitated. As new defects were
discovered, new patches were put in.
Current monetary system is a produce of centuries of historical
experience of European societies.
Can we say – therefore – that it is a GOOD system?

25. There are many superior alternatives
Mervyn King, the governor of the Bank of England said:
"Of all the many ways of organising banking, the worst is the one
we have today.“
One problem: Banks have incentives to gamble with depositors
money. If they win, they pocket the gains. If they lose, the
government pays for the losses to the depositors.
Second problem: The monetary system has built-in instability.
The Minsky Financial Fragility Hypothesis. An “equilibrium” where
high quality money is being produced will automatically lead to
crisis.

26. So, why are we not changing the system for
the better?
Current system is bad for the masses but good for the financial elites.
Monetary theory being taught in textbooks today applies to the pre-
WW1 Gold Standard world. It does not apply to modern fiat currencies.
In particular, with fiat currency, the concept of “sustainability” of
government debt does not arise. The government can ALWAYS payoff
domestic debt by printing money, regardless of how large it is. Foreign
debt is another matter.
MMT: Modern Monetary Theory is the theory of fiat currencies. It has
many enemies. MMT is an analysis of how fiat currencies work, NOT a
policy prescription. Main Policy of MMT: Job Guarantee Program.

27. Broader Considerations:
Hysteresis & Cost of Experimentation
Hysteresis: dependence of current state on history. The system chosen
depends on historical experience.
Because of extreme importance of monetary system, radical
experiments are not tried except in desperation. Monetary crises lead
to experimentation, and new choices.
An illustration of these ideas is the Chinese experience.

28. The Chinese Experience
Leather Currency: 118 BC : 1 sq ft of leather hide, high value currency.
900 AD: Severe shortage of copper for currency causes emperor to
issues printed paper notes as substitutes, as a temporary measure.
Much to surprise of everyone, this works just fine, and temporary
measure continues for over a century.
Leads to loose monetary policy, state issues paper of around 3M oz of
silver, far in excess of available resources. Due to High Acceptability,
this currency is exported outside, partly for imports, partly tributes.
To make up for domestic shortage, more is printed, leading to
hyperinflation. This leads to abandonment of paper.

29. Some Lessons from Chinese Experience
WRONG theory emerged and guided policy for Centuries!
Theory was that paper is inherently unstable, and MUST have silver
backing to be successful. NOT that excessive printing must be avoided.
China abandons use of paper currency until modern times. BUT, reports
of Chinese paper currency reach Europe, creating an interest in
replicating this experiment.
Critical Lesson about Learning from Experience: The WRONG lessons
can easily be extracted from the same experience.
Example: King Robert the Bruce and the Spider.

30. False Theories Abound, and Guide Policy
Need to Finance Wars led to multiple schemes to create money. Some
Failed to raise money, and some succeeded.
Many false theories of money come into being, to explain and
understand this historical experience.
FALSE theories about money CONTINUE to guide monetary policy
TODAY!
General Principle: When new events occur, they are often
misunderstood. False Theories emerge. Choice is made among them
according to the interests of the powerful, not according to truth.

31. Broad Theoretical Framework for Money
Required to understand the historical experience, and to explain the
co-evolution in both the institutional frameworks, and the theories of
money.
This is one of the keys of Uloom ul Umran: Social Theories cannot be
understood outside their historical context, and History cannot be
understood without understanding the social theories used by
contemporaries to understand and shape their historical context.
Theories and History are ENTANGLED. http://bit.ly/AZnaie42

32. Circulation of Money REQUIRES Institutions
Raw Gold trade is just Barter, NOT money.
Minted Coins carry assurance of government. Minting is guarantee of
standardization, provides easy recognition, legal backing by
government.
This requires an institutional backing: the MINT. Technology is also
important – how to prevent forgeries.
Clippers, Cullers (Sweating), Melters – all ways to profit from real gold,
instead of token coins.
True Money is always a Three Party Transaction, unlike barter.

33. Severe Money Crunch in 1620s
Crises lead to innovations. Infinite possibilities, limited by imagination.
Problem of poverty – large masses dislocated from social and
environmental networks, intrude upon public consciousness. Sheep
farming reduces need for agricultural labor.
Widespread realization of the need to increase commerce, to solve
problem of poverty, and for general prosperity.
KEY OBSTACLE: More money needed to expand commerce.

34. Gold & Silver Coins Limit Possibilities:
Debasement: tried, and led to monetary crises.
Changes in Mint Ratios: Complex relationships between gold and silver
and relationship of coins to official units of account.
Creating a trade balance surplus – export more, import gold.
Acquire gold/silver from King of Spain, by selling them English goods.
Direct access to gold/silver mines in the Americas. PIRACY of Spanish
Ships – successfully carried out. Limited/Ended by Treaty with Spain.
But NONE of these measures matched the increase in need. Demand
for gold/silver (money) increased five fold over this period of time!

35. Personal Credit Came Into Use
Promises to Pay – laborers upon harvest, suppliers of raw materials
upon sale of goods, etc.
BUT, these promises could not circulate.
This is tied to theory of effective demand by Keynes. Laborer CANNOT
buy goods with “promise to pay upon harvest” – because personal
credit does not circulate. His demand is potential, but not effective in
market. Being unknown to producer, it does not stimulate production.

36. False Theories
Malynes: Overvaluation of foreign currencies – solution: Establish a
Royal Exchange
Misselden: Negative Trade Balance, undervaluation of silver. Solution:
Ban luxury imports. Support traders, by giving them monopolies and
powers, to expand exports. Ban alms to the poor, to force them to work
and be productive. Increase price of silver at the mint.

37. Necessity: Mother of Invention
Credit/Paper Instruments – fully backed by gold/silver – already in use
on Continental Europe – were seen as a PARTIAL solution.
Reconceptualization of Money: Money is not GOLD, but TRUST in the
promise to pay gold.
Schemes to create money on this basis were proposed. Rich people get
together and issue notes of $10, backed by their own assets –
gold/silver OR other assets convertible to gold/silver on demand. When
redemption is sought, notice must be given, and joint stock-holders
provide gold/silver needed. They also re-circulate currency to prevent
extinction of debt.

38. Critical Problem: How to Create Trust?
Slightly debased coins were already in circulation. Gold Value was less
than Nominal Face Value.
Thus, paper promises to pay gold could also circulate. But, what was
needed was institutions to create trust.
Gold Banks were thought of, and REJECTED – subject to seizure by
money-hungry sovereigns above the law!
The problem of independence of Central Banks and Governments
already present here.

39. Death and Credit
Trust requires LEGAL framework guaranteeing rights of holder of notes
to be paid.
NOTE the strong protection of debt in the Quran and Sunnah. The
Prophet SAW refused to pray funeral prayers for those with unpaid
debts.
In English intellectual traditions, those who undermined trust in money
were subjected to death penalty. Counterfeiting, and other forms of
dishonest manipulations of money, were taken as the most serious
crimes.

40. Probabilistic Reasoning and Trust
We cannot arrive at certainty (about whether the promise made to us
will be fulfilled, in credit instruments).So we need to explore the basis
for what creates trust – belief that it will be paid with high probability.
External Credibility: the institutional framework. Internal Credibility:
Personal credibility of the people making the promise. Transition from
authority to internal credibility PLUS empirical evidence.
How do we know if it is possible to trust a promise to pay? Modern
credit cards are based on a VAST network of information about
personal credibility of credit card holder!

41. Critical: Move from Personal to Systemic Trust
Ultimately, personal trust must be at bedrock. So, to guarantee it,
DEATH penalty was critical
it was essential that the government was willing and capable of
prosecuting those engaged in activities that undermined trust, such as
corruption, overissuance, forgery, counterfeiting, or other fraudulent
practices. The idea of using the death penalty to deter people from
manipulating credit was an integral part of nearly all of the period’s
credit money proposals.

42. Transferability of Debt
Until the beginning of the eighteenth century, only the initial creditor
had the right to sue the debtor. Th e crucial legal change was therefore
to allow any holder of a bill to sue the initial debtor. Only then could
holders of the debt instruments be assured that they would be able to
convert their bill or bond into the money or merchandise initially off
ered as security for the loan
The ROAD NOT TAKEN: Instead of selling your debt, you create your
OWN debt. Signing the check – both parties are liable, the original
party and the second party. Adds to strength.

43. Monetization of Debt
If I have a promise to pay, IOU, can this be used as money?
It requires a legal framework. What are the consequences of failure.
A complete system of carrots and sticks – rewards for integrity, honesty,
timeliness in form of reputation. Harsh punishments for failure to
honor promises.
This whole system is incompatible with Islam. There was a huge
commercial framework based on Hanafi Fiqh, which enabled trade
across the Islamic empire. But this broke down under three major
crises: Crusades, Mongol Invasions, and Bubonic Plague.

44. Yarranton’s Five Proposals for Creating Trust
To Create Victory over Dutch without War!
Create a culture of honesty.
Make English Rivers navigable (engineering)
Create Public Bank with pawnshop for the poor. Turn assets into credit.
Create Court of Merchants, for swift settlement of commercial disputes
Create a Public Register of Lands; enabling credit on basis of real estate.

45. Schemes for creating systemic trust
Private Banks, consisting of reliable sets of leading merchants, able to
create credit notes which would circulate, on authority of merchants.
Issuance of Private Credit Notes subject to limits, based on capacity of
merchants to pay debt obligations.
State Created money. Government issues bills of $2,000,000, and raises
a countervailing tax of $300,000 to pay interest on this loan from
public. This bills/bonds would be legal tender, acceptable in all
transactions, including payment of taxes.
Issuance of Government Bonds subject to strict legal conditions, to
prevent excess issue.

46. Inherent Instability of ALL money proposals
The Quantity/Quality Pendulum
If a scheme for creating confidence works, it lays the basis for its own
self-destruction!
Confidence, once created, allows for expansion of promises beyond
original limits. High Quality Money => High Quantity
Money is extremely valuable, and often urgently needed. People then
create excess credit. High Quantity => Failure to Honor Promises.
Breakdown of Trust.
Hyman Minsky’s Financial Fragility Hypothesis is modern version.

47. The Stop Order of 1672
Government Bonds were issued as money, as per scheme.
In 1672, King Charles ordered a stop on redeeming about half of the
public debt. Because he anticipated heavy expenses for planned war!
Many Goldsmith Bankers were holding this debt as securities – Four
major bankers eventually failed because of this.
Massive Damage to TRUST occurred. Lesson learnt – never trust
sovereign, and never allow him authority to issue money!
Separation of money issuance from state authority.

48. Chamberlain’s Proposal for Private Bank
Instead of relying on reputation of people, and of managers, create
banking based on Assets.
Bank would accept Assets as collateral, and issue Credit backed by this
collateral to owner of assets, at a DISCOUNT.
Credit money is no longer backed by honesty/integrity; it is backed by
real assets.
All these proposals were to be implemented later.

49. Needs of War => Bank of England
William needed around GBP 5M for costs of war with France.
Parliament allocated him 1.2M, far below needs. BoE formed to
provide him with additional finance.
Given authority to issue currency on behalf of government. Fully
redeemable in gold. Subscribers put up 1.2M, to be paid interest of 8%
in perpetuity. Long term Government Bonds were tradeable in
secondary market.
Scheme proved to be highly successful (unlike several other schemes
launched to raise money for the sovereign).

50. Expansion of Money:
Real Bills vs Infinite Desires
Landowners upset by Bank of England – Victory of Commercial Class.
Created an Alternative Land Bank, based on land, instead of silver.
Argument – potential augmentation of money stock would be DOUBLE
of total commercial transactions. Inflationary aspect would destabilize
monetary system.
Real Bills doctrine. If BoE accepts bills of trade and issues money as
counterparts, issued money corresponds with the needs of the
economy, and would not be inflationary.
Counter-Argument: Insatiable desires are basis of money expansion!

51. Demand Side (Keynes) vs.
Supply Side (Chicago)
the insatiable demand for goods and services was grounded partly in
people’s actual enjoyment and partly in their desire for status vis-à-vis
others in society.
Demand would lead to increased supply, accommodate additional
money creation.
Supply Side: The Say’s Law: Supply creates demand. The Real Bills
doctrine. Money creation should be in line with needs of trade, actual
current supply.

52. Failure of Land Banks due to accidents of
history, strengthens Bank of England!
Essentially a political battle between Tories and Whigs.
Although proposal is sound – failure occurred due to lack of familiarity
AND the resounding success of the Bank of England.
Then all such proposals were abandoned.
Bandwagon Effect plus Hysteresis very important in understanding the
evolution of monetary institutions. China abandoned an excellent
paper currency system, due to bad theory. England adopted a terrible
Banking system, due to accidents of history. Vastly superior financial
architecture can be designed on basis of Islamic principles.

53. Outcomes/Consequences of Credit Money
England launched Industrial Revolution and colonized the globe.
Was this a positive consequence?
From a limited perspective for the English – yes. Although, the worship
of wealth has destroyed the family, social relationships, character, and
all of the fundamental sources of human happiness.
From a global perspective: NO. When gains to Europe are considered
together with losses to Africa, Aba Yala (Americas), Asia, Australia,
humans and environment, the net result is HUGELY NEGATIVE.
CAN this discovery/invention be made useful? YES, but …

54. What Do We Learn From This History?
This history has been given by many different authors, from many
different perspectives, and they have derived many different lessons.
What we learn depends on the theoretical framework we are using to
analyze and understand this history. It also depends on the purpose for
which we are studying this history.
MY purpose is to understand the Quran, and its laws regarding finance.
This gives me insights not available to Western authors. I will now
summarize these insights.
Vastly superior financial architecture can be designed on basis of
Islamic principles.

55. First: With this brief summary, you know
more about money than Ph.D. Economists.
I examined the latest issue of JME, top journal. Articles are based on
completely unrealistic assumptions about nature of money. NONE
recognizes the essential importance of money in the production
function. Many deal with concepts – like sustainability of debt – which
do not APPLY to modern money.
Gold supplies could not be increased to keep up with pace of economic
activity, and eliminate poverty. This led to the creation of credit money
via the BoE. This massively increased money supply in England, made it
flexible and responsive to economic needs. It also introduced a new
type of money into the economy. Distinction between gold/credit does
not exist in Econ!!

56. Some Broad Lessons about Econ Theory
Economic Theory is based on purely imaginary ideas about money.
Realistic models should be based on actual historical experience.
Critically missing is money as essential part of production process!
Many concepts of economic theory are based on ideas about PAST
money, not applicable to modern FIAT money post Nixon Shock 1971.
In particular, the concept of “sustainable debt” and “Debt/GDP ratio”
are MEANINGLESS in a world of FIAT money. False theories about Past!
Daniel K. Tarullo. Former Governor, Federal Reserve Board : Monetary
Policy Without a Working Theory of Inflation: We do not, at present,
have a theory of inflation dynamics that works sufficiently well to be of
use for the business of real-time monetary policy-making

57. Gold Backing BoE succeeded.
Land Based Banks Failed. WHY?
First: Nature of Gold Backing was Fractional, by design.
The key was to generate public confidence – trust is key.
NO BACKING of any type is necessary.
Gold/Silver was familiar. Public could INSTANTLY cash Banknotes for
Gold/Silver. That created confidence.
Landbanks could provide the required backing but only with some
delays. Liquidity was not so high.
Today, FIAT money rides on confidence created by success. Similarly for
CRYPTO.

58. Monetary System Everywhere is Founded on
BoE experience – is this necessarily so?
The “Success” of BoE has led to nearly universal imitation of the model.
Furthermore, this model has evolved over centuries. Current monetary
systems incorporate adjustments made in response to crises over
centuries. Huge amount of learning from experience is BUILT INTO the
modern monetary system.
One Lesson Drawn from the HUGE success of BoE is that removal of
prohibition on interest was a necessary step to the creation of the
monetary system and financial success. SIMILARLY, Muslims need to get
around prohibition of interest to achieve financial prosperity.

59. Blunders, Piled On Top of Blunders
BoE “succeeded” because of unique historical events and
circumstances. It could easily have failed, and almost did, a number of
times. It’s success and global imitation was an accident of history. Many
other successful patterns for banking could have arisen.
CRITICAL: Vast Islamic empire managed international financial
transactions on global scale based on Hanafi Fiqh. So, alternatives exist.
In particular, the idea that INTEREST is necessary for successful banking
system is FALSE. There are many zero-interest systems available.
Interest based system favors wealthy capitalists and creates inequality.

60. Mervyn King: Governor BoE: Ours is the worst
possible banking system!!
BoE had many flaws. Over the course of centuries, these flaws have
been remedied in patchwork. Current system embodies centuries of
experience, fixing one flaw after the other. This patchwork is ongoing:
Basel I (1988), Basel II (2004), Basel III (2022)
Minsky Financial Fragility Hypothesis: System is INHERENTLY flawed and
not fixable. For every fix, financiers will find a work-around to enable
them to create massive amount of flawed money (counterfeits). The
only solution is ever-vigilant Central Bank who monitor trends and
regulate, catch new methods, and patch new weaknesses!!
The idea of a FUNDAMENTAL, RADICAL change is not contemplated.

61. Islamic Monetary System is Radically
Different
Islamic Monetary Policy: http://bit.ly/AZRiba1
Critical: How can we transition from Capitalist Banks to Islamic Banks?
See: Building Genuine Islamic Financial Institutions:
http://bit.ly/AZBGIFI
Can Modern Islamic Banks play a role in this transition? YES, it is
possible. Requires switch from PROFITS to SERVICE motivation.
To create a feasible transition plan requires work on many angles. One
is the IDEAL system. TWO is the sequence of steps to get from here to
there (MMT). THREE is recognizing roadblocks – gainers and losers –
and political strategy to overcome or circumvent these blocks.