money creation

Internal money creation, which is the most important function of commercial banks, accounts for a large amount of liquidity. The inappropriate performance of banks in this field and the lack of close supervision by the Central Bank make internal money creation a main cause of creating liquidity and inflation. Providing reserves for internal money creation through the Central Bank's resources is the worst way for commercial banks to create money. Now large amounts of money are withdrawn from the Central Bank's resources regardless of religious concerns. Using an analytical-ijtihad method, this article analyzes and examines the jurisprudential issue of money creation from nothing. In this context, the question arises as to whether the creation of money from nothing, i.e creating money by commercial banks and securing its reserves by the central bank’s resources, faces jurisprudential and religious restrictions. Based on the research findings, the creation of money does not comply with jurisprudential rules. The incompatibility of the creation of money from nothing with jurisprudential principles can be documented with regard to rules such as the rule of unjust possession and the rule of not disturbing the system.

A resistance economy is a country's economic and management policy strategy with the approach of restoring economic structures and institutions to optimally use opportunities and achieve the goals of upstream documents and resistance economy in its narrow sense is recognized as an Islamic economy. In the resistance economy, the basis of behaviors and attitudes in daily life should be reviewed based on the observance of Islamic economic patterns and codes of conduct. One of the means of financing to equip the necessary resources for the mplementation of profit and nonprofit plans and programs of governments and companies in the direction of sustainable growth and development, is the issuance of debt-based securities. Debt bonds, without creating a limit on the ownership and managing control of the issuer, indicate the amount of the financial right of the holder to the issuer, which is traded in an organized market called the debt market. By analyzing documentary and library data with a fundamental-applied approach, examining the conventional debt market, and stating its positive effects and negative consequences, this article concludes that the debt market in the resistance economy system must be based on Sharia contracts, observing Sharia frameworks and rules, plays a role by establishing a link between the real and credit sectors and as a facilitator of equipping and allocating funds, and with the operational implementation of Sukuk complies with the Sharia and not just changing the name and issuing a version with an Islamic cover, a market worthy of the Islamic system can be formed.

The purpose of this paper is to examine how money is created by recording accounting events in the balance sheets of banks. Therefore, a hypothetical economy, comprised of a central bank, a gharzolhasaneh bank, a commercial bank, and the people has been simulated. We pay special attention to special accounting records in the balance sheet of a commercial bank, interest rates and deferred bank loans in the banking system and their effect on the money creation process.  According to the results, the combined use of accrual basis of accounting in identifying uncollected facility income and cash basis of accounting in the payment of interest on deposits in a commercial bank leads to the money creation in the banking system and the higher the interest rate on deposits, the more money will be created. This will not happen in gharzolhasaneh Bank due to non-payment of interest on deposits and non-use of accrual basis of accounting system in identifying the income of paid loans. Also, in case of non-repayment of granted facilities and creation of deferred bank loans, the accrual basis of accounting system allows the commercial bank to continue the process of identifying facility income and paying unrealized interest on deposits, and interest paid on deposits enters the banking system as the new created money.

One tool to achieve macroeconomic goals is to control the volume of liquidity. There are two views on the control of liquidity volume. The first view argues that good governance and commitment to the laws for money creation hinder increasing  and uncontrollable volume of money. This view emphasizes the important role of institutions in controlling or growing liquidity. So, one of the reasons for the growth of liquidity is rooted in the laws and the extent of the rule of law of the countries. The second view suggests how the creation of money affects the rule of law and its influence channels. Long-term mismanagement of money has sudden and unpredictable effects and leads to institutional and sometimes fundamental change. The purpose of this article is to explain the non-linear relationship between money creation and the rule of law. For this purpose, the panel model with a threshold approach (PSTR) has been used, based on the data of the countries having oil reserves during 2002-2020. Based on the results, the variables of money creation and rule of law have negative relationships with each other, and the results confirm the acceptance of both views. In other words, the creation of money and its consequences changes and weaken the rule of law through various channels. Also, the weakness of laws in oil countries leads to the growth of money creation. Therefore, one of the causes of the weakness of the rule of law in these areas should be sought in the creation of money and its consequences. Moreover, the growth of liquidity is affected by the weakness of the rule of law in the growth or control of the amount of liquidity.

In the early models of economic growth, the role of saving and investment was emphasized. In the next models, factors such as the growth of knowledge and technology, human skill and business growth were taken into consideration. In the last few decades, the role of non-economic factors such as democracy (Sen, 1999) and institutions (North, 1990; Acemoglu, 2004) on economic growth has been emphasized. Acemoglu et al. (2005) argue that the distribution of resources and the distribution of power have dominant effects on the growth path of countries precisely through their effect on economic institutions such as property rights (Hartwell, 2018). From this point of view, it is political institutions that affect economic variables.
On the other hand, extreme behavior by economic institutions, whether during or in the acceleration of a crisis, may in turn disrupt or determine political institutions and their subsequent paths and quickly change the status quo in a destabilizing manner. Periods of crisis and periods of severe inflation have the ability to impose changes in the distribution of power throughout society, and as a result, change political institutions. Even more "normal" economic disturbances may change bargaining strategies and political coalitions, and transform a country's political institutions (Hartwell, 2018). From this point of view, the economic institution of money will have an effect on political institutions (Money affects political institutions)
Based on this, the present study, while examining the relationship between money creation and the rule of law, and how these two affects each other, seeks to examine two perspectives. The first perspective believes that the rule of law prevents the expansion of the money supply. Therefore, the reason for the growth of liquidity should be investigated in the laws and the extent of rule of law. In other words, the weakness of the rule of law causes the growth of liquidity. Another perspective emphasizes the issue of money creation and its benefits and examines how money creation affects the rule of law and its influence channels. If we look at money as a receipt for production, it means that the people of a nation determine GDP by producing and creating wealth and receive a receipt in the form of money in return for their share in it. Next to this group, there is another group (governments and bankers) who have the power to create money (or those who are given money created by the choice of the government and banks) and when dividing GDP, next to the first group own part of the production. This is the effect of money creation on property rights and consequently on the rule of law.

In this research, the bilateral and non-linear relationship between money creation and the rule of law is investigated among selected oil-abundant countries during 2002-2020 by using the Panel Smooth Transition Regression Models (PSTR).
To investigate the mutual effects of rule of law and money creation, two models were considered. In the first model, the rule of law index was considered as a dependent variable, and in the second model, broad money growth (annual %) was considered as a dependent variable. Control variables according to previous studies include oil rents (% of GDP), economic growth (GDP growth), trade openness, urban population growth, quality of regulations and abundance of natural resources.

The linear part confirms the negative and one-way causality relationship from money creation to the rule of law. The estimation results of the non-linear part of the model confirm the existence of a negative relationship between money creation and the rule of law, and confirm the bilateral causality relationship between the two. In other words, the results show that the creation of money is a factor to weaken the rule of law and the weakness of the rule of law has also caused the growth of liquidity.

The results confirm the existence of a negative relationship between money creation and the rule of law, as well as the bilateral causality between these two variables. In other words, the results show that the creation of money and its benefits change and affect the rule of law through various channels. Also, the weakness of rule of law in oil countries leads to the growth of money creation. Based on the results, it is suggested that the oil governments provide space for investment and free trade by shrinking their bodies, and with commercial freedom and the development of financial markets, and by directing foreign exchange income and stray liquidity to the real sector of the economy in a targeted manner. It is also suggested that the oil countries manage their liquidity by reforming the monetary system and the banking sector, and defend private property and the rule of law by preventing the transfer of ownership that occurs through money creation and inflation. This can provide more opportunities for the private sector. The prosperity of the private sector and the increase of competition in different economic sectors and the use of economic freedom policies lead to more dynamism of the economy.

This paper investigates the implications of bank money creation by developing a New Keynesian model that incorporates price rigidity and financial frictions but without real rigidities. Banks play a dual role as intermediaries of loanable funds and creators of credit. Their unique ability to create credit stems from the acceptance of their liabilities as a medium of exchange by economic agents. While the microeconomics of banking literature has addressed this function as liquidity transformation, there is a lack of macro-level analysis on this topic. We compare our baseline model with two alternative models: one featuring banks solely as intermediaries of loanable funds and another based on deposit multiplier models. Our model demonstrates that when banks have access to investment deposits held by households, their money-creation power predominantly affects nominal variables in the economy.

The issue of money creation is one of the most important monetary and economic issues and has a decisive effect on macroeconomic variables. Usually, the process of money creation in commercial banks is well explained in economics textbooks and is accepted as a normal matter, and after that only the issue of money supply and liquidity volume and their impact on macroeconomic variables is considered. is placed However, the economic effects of money creation are rarely investigated. Some economists have paid attention to the great influence of the banking system on the flow of money creation as well as its economic effects and have put forward various suggestions to prevent its negative effects. What has been discussed in this article is: an overview of the different viewpoints of economists about the creation of money, an overview of its economic effects, an examination of the nature of credit money and banks, and finally a jurisprudential examination of the phenomenon of money creation by banks. and the government with ijtihad and analytical method. The innovation of this article is a relatively comprehensive jurisprudential review of money creation and also presenting some suggested rules to avoid the negative effects of money creation.

According to the Austrian School of Economics, money creation as the new purchasing power causes a boost in inequality because it is not simultaneously available to consumers. Therefore, imposing restrictions on money creation prevents the increase in inequality. Although assessing moral hazard and creditworthiness is an essential factor in credit supply, "Money Multiplier Theory" also considers it a function of the inflow of reserves and their supply by the central bank. In contrast, according to "Money Creation Theory," reserves are not a prerequisite for creating money. Banks' lack of need for reserves results in passive money creation, which is inelastic to the supply of reserves, and a large amount of it is made up of loans paid to related individuals and close to the bank. Although this kind of lending reduces the cost of evaluating creditworthiness, it provides new purchasing power to a small part of society who have access to new money earlier than others and are not limited to prudential rules such as the loan-to-value ratio. Analyzing the performance of the banking system in the Iranian economy shows that the amount of loans provided to people with a long-term relationship with the bank is beyond the limits specified in the prudential regulations.

One of the most important factors affecting the creation of liquidity in Iran's banking network is the capital adequacy ratio. Based on this, the present study aims to investigate the role of capital adequacy requirements on money creation in the banking system based on Bal III committee as well as the effects of other variables such as inflation, exchange rate, non-performing loans, and profitability of the banking network in Iran in the period of 2010:1-2021:1 with seasonal frequency using structural vector autoregression model. The results show that a positive shock to inflation, exchange rate, and profitability of banks increase money creation. But, a positive shock to capital adequacy ratio and non-performing loans has not had a significant effect on money creation. This finding indicates that the banking system has practically not reacted to changes in capital adequacy due to the lack of executive guarantee in applying the capital adequacy requirements. And as a result, capital adequacy requirements have not been able to play their role in restricting money creation. Also, the results show that the creation of bank money in Iran is mainly influenced by macro-level variables so that inflation and exchange rate respectively played the most important role in explaining the changes in the creation of bank money.

Among the modern phenomena in the field of economy, banking and its belongings are one of the oldest things that Islamic thinkers have discussed. However, due to the complexity of the discussion and the rapid changes of these phenomena, these discussions are still alive and are not considered finished. The nature of demand deposits can be examined from the two perspectives of the customer's relationship with the bank and their relationship with society. The relationship between the customer and the bank, which is the subject of discussion in this research, is one of the topics on which various viewpoints have been raised The main problem of these opinions is that they went straight to solving the problem without examining these demand deposits from the perspective of their relationship with the society, which does not seem to have taken the right path; Therefore, in this article, first by explaining the nature of demand deposits from the perspective of the relationship between these accounts and the society, we are looking for an answer to this problem and solving its jurisprudential and legal complexities.

The purpose of this study is the investigating of the government spending effects on the important macroeconomic variables in the Iranian economy in terms of full reserve banking. To achieve this goal, a stochastic dynamic general equilibrium model of the new Keynesians is designed by considering the full reserve banking system (FRB) and in view of the Iranian economy realities and then examines the effects of the impulse under two financing scenarios -with and without money creation. After the determining of  the model input values and estimating the parameters by using quarterly data of Iran’s economy during the period of 1991-2020 by the Bayesian estimation method, the results of the model variables simulation indicate the validation of the model in describing the fluctuations of the Iran’s economy. Examining the dynamics of the model shows that the response of the important macroeconomic variables such as production, inflation, consumption and money supply to the impulse of government spending are very similar under the two scenarios. in general, money creation under full reserve banking system causes the reducing of the government debt. The effectivity of the monetary policy increases because by increasing of the deposits, the reserves of the central bank increase by the same amount, or in other words, one hundred present reserves for deposits occurs, which in turn leads to a decrease in money without support or Money supply. Theoretical and empirical results also confirm that under one hundred present reserves banking, monetization of the government budget deficit, in addition to a significant reduction in the government debt, leads to a further reduction in the inflation, increasing of the consumption and the boom in the production. In other words, the FRB generate more capacity for fiscal policy.

Money creation as the most important function of commercial banks is one of the most controversial issues in Islamic economics. This banking process has been opposed by some jurists and Islamic economists. One of the most important reasons for opposing the money creation process is that this process cause falsehood and incorrect possession of property (akl mal bialbatil). Examining the conformity of money creation with the rule of akl mal bialbatil, the paper considers jurisprudential legitimacy of money creation. Illegal income of banks from money creation, impossibility to return deposits, betrayal of trust, being based the creation of money on usury, violation of property rights and inflation are opponent's reasons that are given for adapting the creation of money to akl mal bialbatil rule. The paper tries to show if the process would be under proper governance and in accordance with specified laws and standards, the money creation will be legitimate. However, some performance of Iranian banks makes money creation an example of this rule. What raises the suspicion of illegitimacy is lack of law compliance and soundness standards of banking activity.

One of the important issues of Iran's economy in the last half century has been the high growth of liquidity, which shows the manipulation of money by the government and monetary authorities. One view considers the weakness of the rule of law as the cause of this problem, but another view states the causal relationship in the opposite direction and believes that money and the benefits derived from it are a factor in weakening the rule of law. Theoretically, there is a bilateral relationship between money creation and the rule of law. On the one hand, it is the laws that determine how much money should be created, the extent powers of monetary authorities, and how its benefits are distributed. On the other hand, the growth of liquidity and inflation take the structure of the economy out of the free market process and affect the rule of law. This study seeks to investigate the causal relationship, the existence of a long-term relationship and the type of relationship between these two variables in Iran using data from the rule of law index and liquidity in the period 1996-2020 with Toda and Yamamoto causality method, band test and autoregression vector method. It was concluded that the volume of liquidity in Iran has been a factor in weakening the rule of law.

This study aims to simulate the money creation mechanism by the banking system in the form of a dynamic system of credit economy based on macroeconomic and microeconomic parameters. For this, a computer simulation has been designed and implemented. special attentions are to the role of debt and the factors influencing its creation and its disappearance. A new expression of the money multiplier and the velocity of money are presented. The traditional method of comparing numbers is not used to display the results, but with the aim of deep and easy understanding , the results are shown in 2D,3D plots as a range of colors. According to the results, whatever the agents' income and wealth, the more marginal propensity for consuming leads to increasing their planned expenses and consequently more requests for loans and increasing the money volume. Debt volume in the system decreases with more repayments, because the higher the debt repayment rate, the brokers are required to repay a larger proportion of their overdue debts, and this leads to the disappearance of debts and a reduction in the volume of money. Increasing the repayment rate due to higher payments leads to an increase in the velocity of money.

The present study aims to investigate the effects of monetary and financial shocks on macroeconomic variables in fractional and full reserve banking conditions. To this end, two stochastic dynamic general equilibrium models have been designed in terms of the realities of Iran's economy and then the effects of shocks have been studied. After determining the input values ​​of the model and estimating the parameters using the quarterly data of the Iranian economy during the period 1990-2020 by Bayesian estimation method, the simulation results indicate the validity of the model in describing the fluctuations of the Iranian economy. Examining the dynamics of the model shows that the positive shock of government consumption and investment expenditures under fractional reserve banking will increase production, money supply and decrease consumption, but in full reserve banking will increase consumption, production and reduce money supply in the Iranian economy. On the other hand, the shock of monetary policy under fractional reserve banking will increase inflation, government spending, and reduce consumption, production, investment, and employment. Also, comparing the reaction functions of the selected variables in the two models shows that 100% banking has caused the contribution of shocks to the fluctuations of key variables to change and even the position of some of them to be replaced by the shocks of government spending and monetary shocks. In the shock of government expenditures, the variables of consumption, inflation and money supply and in the monetary shock, the variables of production, consumption, investment, employment, and government expenditures have been affected by the type of banking. Moreover, comparison of the two shocks indicates that the effect of these two shocks in fractional reserve banking slowly disappears and remains in the economy for a longer period of time compared to full reserve banking.

This study examines the relationship between money creation and the rule of law as two social institutions effective in economic growth and development. Money is created in the context of laws, and therefore it is stated that if there is the rule of law, it will not be possible to expand the money supply; on the other hand, the creation of money and the resulting inflation alter the distribution of income and relative prices and, consequently, affect private property, increase the incentive to engage in non-market activities and government intervention in the economy, and in this way affects the rule of law. Following the study of the relationship between these two variables and the discovery of the causal relationship, using the data of the rule of law of the World Bank and the volume of liquidity in the period 1996 to 2020 for Iran, using Engle Granger method and vector error correction model (ECM), it was found that in the short run, there is a negative and two-way causal relationship between the rule of law and the amount of liquidity. However, in the long run, there is a negative relationship between the volume of liquidity and the rule of law, and causality is established from the volume of liquidity to the rule of law. In other words, the increase in liquidity has reduced the rule of law in Iran.

Over the past 100 years, three approaches have been presented in the literature about the nature of the bank, including "financial intermediation", "Deposit Multiplier", and "money creation" theory of banking. In the present article, using analytical-descriptive method, these three perspectives are analyzed and the compatible approach with the reality of modern banks is introduced. Besides, the precise investigation of the laws and regulations regarding usury (interest) free banking in Iran, especially the definitions, the contracts between depositors and the bank, and the mechanisms designed for dividing bank income from Joint/Non-joint activities, shows that these regulations are designed based on "financial intermediation approach".In order to increase the consistency between these laws and regulations and the nature of modern banks, recommendations are made, including definitions for banking operations and deposits; amending contracts related to depositing (Wakalah and Qard-al-hasan); and modifying the method for identifying and sharing bank revenues between the bank and depositors. Nevertheless, regarding the relationships between banks and the central bank, and also among banks in the interbank market, serious problems can arise, which make the compatibility between the modern bank's nature and the regulations for usury free banking almost impossible, through the use of Wakalah theory. Accordingly, continuing attempts to eliminate usury form banking system, based on the financial intermediation approach (the current ruling approach), will not be fruitful. Although as a short-term strategy, the above suggestions can be useful, but a fundamental and long-term approach to eliminate usury from the financial system necessitates different arrangements and institutions from modern banks.

In this study, it is explained that the perception of the conventional economics of the bank as an intermediary institution of funds, while not conforming to reality, distorts the analysis of monetary fluctuations and subsequent economic turmoil; But in the alternative approach, the bank, as the most important player in the monetary system, has the power to create flexible credit. The specific question of the present study is whether it can be said that in the current form of the monetary and banking system, the interests of the bank and society are inherently in conflict with each other. To answer the above question, the library and documentary method has been used and Finally, it is concluded that the bank is an institution that can outsource the costs associated with the flexible and irregular expansion of credit and affect the economic interests of individuals in society, and in return, Gain the benefits of creating credit; This important result is based on Minsky's explanation of the dynamics of bank-firm relations; In his view, the internal mechanisms of the money manager capitalism and specifically the way the firm and the bank interact, cause "stability to create instability". The result of the current research is that, firstly, the conflict between the interests of the bank and the society is the natural outcome of the unrealistic understanding of the conventional economic knowledge of the "bank", and secondly, the examples of this conflict can be seen in three recurring periods of time: 1. Before the appearance of the initial signs of the monetary and banking crisis. 2. After the initial signs of the crisis appear. 3. The occurrence of a widespread crisis and its spread to other sectors of the economy.

Historical-Economical attention to the Emergence of the banking system in the Qajar period and the Confrontation of religious scholars to this modern phenomenon is one of the most important challenges in the Iranian contemporary history, which in addition to confirming the feasibility of Islamic economic models, is a rich source for historical experience in the field of Islamic banking. This research shows that religious scholars in dealing with the bank emergence, have taken three different approaches according to the time conditions. At a time when contacting with the new technological world had not been spread significantly, religious scholars with complete caution and precision, prevented the bank entrance to Iran with a general ban. But after the staggering influx of modern political-economic structures into the country, religious scholars tried to establish an independent national bank based on adapting the banking system, and secondly, to remove its structure from usury so as not to contradict jurisprudence. But after the activity of relative independence in the banking system, the third approach of religious scholars was to design and model socio-economic structures based on religious orders. While commercial banks have the exclusive right to Endogenous money for certain individuals, at this time, the Islamic economic models made it possible, liquidity should be directly available to the real sector of the economy, firstly, and secondly, all members of society should be able to participate in productive economic activities on the basis of collective cooperation, and the resulting wealth should be distributed fairly among them

The property rights play an important role in organizing the economic system; to the extent that some consider economics to be the science of studying the property rights Property rights determine how individuals benefit or suffer in economic interactions and the framework for resolving conflicts of interest. In the course of the evolution of this concept, the meaning of ownership has changed from an absolute right - that is in the possession of the owner - to the concept of a package of rights. Accordingly, in the ownership of an asset, there is a set of rights and the right owner. Each right is related to a set of rules that determine how that right is applied for the right holder and other obligors. This perception of ownership provides an analytical system for organizing all kinds of assets, charities and gifts, which its application in the analysis of private goods and common resources has precedent. Using an analytical application method, this paper uses this approach in the case of money and specifically in the case of money creation. To organize the issue of money creation, the result of this approach provides a matrix of rights and rules that any monetary school, including in Islamic economics, should be able to complete the blocks of this matrix.