A VIEW ON PREVAILING ECONOMIC AND FINANCIAL SYSTEM: THE MONEY ASPECT

Abstract

In this paper we discuss the methodology by which money is created. The argument is presented in the light of modern monetary theorist that money comes in existence along with debt. This leads to the notion of loans create money and not the other way around. Majority of the money is created via fractional reserve banking system which arises as mere accounting entries. In which a small amount of initial base money generates a whole lot of broad money supply, in Pakistan’s context the multiplier effect is of three times. Long run relationship between domestic debt and broad money supply is empirically tested, which resulted in co-integrated series. The historical context is also taken on which discusses the root of transformation in monetary aspect from the seventeenth century in England. Starting from the rise of goldsmith banking which prevailed due to two reasons; seizure of mints by Charles I and the civil war of 1640s.
Further on, the increasing need of government financing led towards the invention of Bonds and the Bank of England, in which the whole benefit seems to divert towards its initiators.