An innovative economic solution to Pakistan's grave problems is the implementation of full reserve banking. The proposed system seeks to eliminate the colossal government debt burden and huge interest costs through a more streamlined financial system.
The plan aims to ensure financial stability, control inflation, and promote economic prosperity. The fractional reserve system, responsible for money supply fluctuations and economic instability, can be efficiently replaced with a full reserve system, creating a stable economic environment.
The new system would operate on a straightforward principle – completely segregating money/deposits from credit/loans. By doing so, as mentioned above, it aims to eradicate all of Pakistan's domestic debt residing on bank deposits and significantly reduce the substantial interest burden, which currently consumes over 60 per cent of government revenue. With the State Bank of Pakistan (SBP) gaining complete control over money creation and supply, the need for a monetary rather than interest rate policy of the SBP, which is a main issue, would cease to exist. This proposed system offers comprehensive protection for monetary holdings and promises financial stability for our economy.
Full reserve banking advocates a reform to the banking system that would prevent banks from being able to ‘create money’ in the form of bank deposits whenever they issue loans. In this reform, known as a ‘Sovereign Money or full reserve system’, the power to create money would be removed from the banking sector and transferred to a public body, such as the SBP. New money would be created only by the SBP, up to the level of GDP growth to avoid inflation, and then transferred to the government, which could then use this money to finance public spending primarily to remove unemployment.
The full-reserve banking system is based on two fundamental and simple principles: one, banks cannot invest or lend the funds held for safekeeping, which may be reimbursed by the depositor anytime. Instead,........