Technocratic Dreams, Political Realities: Evaluating Full Reserve Banking for Pakistan

This paper critically examines a recent proposal advocating full-reserve banking in Pakistan, inspired by modern revivals of the Chicago Plan. While such proposals are motivated by legitimate concerns about financial instability, excessive debt creation, and the social consequences of private money creation, the paper argues that they are best understood as institutional power-sharing arrangements rather than purely technical reforms. Using a historical–institutional methodology, the analysis examines the causal mechanisms through which monetary systems evolve and the political constraints shaping reform feasibility. Drawing on historical experience in Pakistan and international cases—including Japan’s window guidance system and China’s state-led financial institutions—the paper shows that proposals such as full reserve banking typically require a rare balance of power between governments, financial institutions, and external actors. In Pakistan’s current institutional context, where domestic financial interests and IMF programmes constrain monetary sovereignty, such conditions are unlikely to emerge. The paper therefore proposes a set of more feasible reform pathways, including credit guidance, development of finance mechanisms, and greater transparency in credit allocation. It also argues that deeper reforms may gain political traction when framed within Pakistan’s constitutional commitment to Islamic finance, which provides a powerful source of social legitimacy for monetary reform. More broadly, the paper illustrates how historical and institutional analysis can be used to evaluate counterfactual policy proposals that cannot be analysed using conventional data-driven empirical methods