Money and Its Creation: The U.S. Federal Reserve System (Central Banks) and Interest Rates

This chapter is about money and, in particular, its use in helping the economic growth and prosperity of the community through providing a medium of exchange and credit. The question is how to fairly reward those who own the money, in order to entice them to invest within the community. Chapter 2 concluded that the RF Judeo-Christian-Islamic law (the Shari'aa law) and lifestyle prohibit the charging of a rental rate or a fee for the use of money (i.e., riba/ribit/usury, which is now called interest) and encourages investing in the community to achieve economic prosperity and fair return on that investment. It also concluded that if money is given for helping the poor and the needy, there must not be any increase when it is paid back. In Chapter 3, we discussed how the Judeo-Christian-Islamic Shari'aa law requires that when pricing a service or an item, we should use the RF disciplines of Commodity Indexation (using precious metals or food staples as references to calibrate real value and price) and of Marking to Market (gauging the value of properties and services according to actual leasing values on the local open market).

Any discussion of the riba-free (RF) banking and finance system, as compared to the riba-based system, should be based on a clear understanding of money and how the monetary policies of the leading reserve currency of the world — the U.S. dollar — are designed and handled. This chapter is a must for everyone who is interested in understanding the way modern paper (fiat) money is created and for those interested in popularizing the new RF lifestyle advocated in this book.


Money is an important factor in our lives. Many of us say that we work in order to “make” money. We try to save money in order to buy the things that bring comfort and pleasure to us. Others spend money to seek personal satisfaction — perhaps through impressing others, by showing off an expensive new car or a designer watch. Money has become so important that people fight over it and hate and love because of it; unfortunately, some would be willing to kill for it. It is amazing to witness all this respect and admiration for a piece of paper that may be green, red, blue, or even have an impressive array of colors and designs. This piece of paper may only be recognized and honored in the place it was printed and issued. Not all currencies in the world are as well known as the major currencies, such as the U.S. dollar, the euro, the Japanese yen, or the British pound. Money cannot reproduce in the way that “money experts” have been leading us to believe. If one seals one's money in a jar for two years and returns to open the jar, one will find the same pieces of paper — except in most cases the paper will buy you less than it did two years before. It is also fundamental to understand clearly that we cannot eat or drink these pieces of paper called money. However, we can use the money to buy food from those who produce it, so that they can take that money and buy their needs — which may include clothes and medicine in addition to the items needed to produce more of that food. Money is not anything but a medium of exchange to conduct transactions in the economy — a measuring device.

To realize the American dream of buying a house for which one has insufficient capital, one can go to a banker to seek financing. The applicant fills out an application and passes a few due diligence checking procedures. After appraising the value of the house based on the price at which the most recent sales in the neighborhood were concluded, the banker will arrange for the applicant to get the money. The bank draws a loan agreement that essentially states that it is renting you the money at a rental rate called the interest rate, to be paid back in installments over an agreed-upon number of years. As we learned in Chapter 2, interest rate is the cost of (the price paid for) renting the money from the bank. The bank does this mechanically, regardless of whether the deal of buying the house makes economic sense. A buyer might have expected the banker to advise him/her as to whether he/she should proceed to buy a house because it makes economic sense or rent a similar house or apartment because of a prevalent real estate price bubble being experienced in the community. That does not happen because the banker is interested in getting the customer to rent that money in order to make money for the bank. We realize that this scenario does not happen in most cases because the world is full of honest and decent bankers and wonderful people. Unfortunately, at some time or another, all of us can be blinded by the prevailing culture without stopping to think.

As to the “culture of making money,” many have forgotten that there is only one entity that can make (i.e., manufacture, print, or coin) money: the government. That is why we should rethink this concept. Money can be earned only when one offers a service. That is why it is important to ask ourselves every night before we go to bed how much money we earned for the services we have offered. It is also important to respect that earned money, which represents time — which is life. As is said in some proverbs, “Money respects and stays with those who respect it.” Money is earned when we offer a product or a service that is needed or when it is invested in a productive project that will make a prudent economic difference in our communities by increasing production and creating job opportunities and economic prosperity. If we discipline ourselves to think this way, we will enjoy a new lifestyle that is more productive and less consumptive — the RF lifestyle. We will enjoy living within our means without a heavy burden of debt. This lifestyle is the lifestyle described at length in Chapter 2: the RF lifestyle.

Another important aspect of money over the years has been its purchasing power and how much that power changes over the years. We all have heard our grandparents tell us how cheap things once were. Members of my generation remember that a gallon of gasoline in Texas in 1971 was 20 cents, compared to $2.50 in 2009 and almost $4 in 2013. This is the same gallon, of the same gas, in the same country, using the very same currency.

The question is: what is money? Is the money revealed in the original Judeo-Christian-Islamic value system and described in Chapter 2 the same as the money we use today? This chapter will focus on this very important issue. This chapter will try, in the simplest terms, to familiarize the reader with paper (fiat) money used today, how it is printed, who decides how much should be printed, and what parameters influence that decision.

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