MICRO-MONEY AND REAL ECONOMIC RELATIONSHIP IN THE 100 PERCENT RESERVE REQUIREMENT MONETARY SYSTEM

Abstract

The structure of Islamic transformation into 100 per cent reserve requirement monetary system is explained in terms of the foundational epistemology of the unity of divine knowledge (tawhid). In this, the role of micro-money and real economic exchange relations is shown to arise by a natural causality. A comparative study of endogenous money in the quantity theory of money points out significant differences between the endogenous theory of money in Islam and mainstream methodologies (Choudhury, 1997). A formal model of micro-money and its endogenous relationship with the real economy is formulated with the objective goal of realizing wellbeing, economic stabilization and sustainability of development regimes. Policy recommendations for ummatic transformation into a 100 per cent reserve requirement monetary system with the gold-backed micro-money as currency in relation to real economic transaction vis-a-vis shari‟ah are given towards the end of the paper. The principal objective of this paper is to derive a simulation model explaining the interrelationships between money, real economy, prices, economic growth and social well-being. We argue that such a relationship between money and the real economy cannot be explained by the existing macroeconomic conception of monetary relations, and thereby, by the institutional structure of monetary policies in the macroeconomic framework. Substantial changes that follow by redefining the money-real economy relations in view of market forces and institutional structure bring forth the study of specific linkages between money and resource mobilization within the market order. Here a substantive study of micro-money appears. Furthermore, in the Islamic framework of reference we find that the substantive nature of the model of money and real economy relationship is derived from the Islamic epistemological foundations. We will elaborate upon this epistemological derivation to establish our money-real economy model. Wewill show thereby, that the most appropriate monetary system that results in the case of the micro-money and real economy interrelations is the 100% reserve requirement monetary system backed by the gold standard (Dinar).

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