Qanit Khalillah

Editor’s Note: This is the second rejoinder by the authors. It responds to the first reply to the rejoinder. The original book review can be seen here. The first rejoinder to the original review by the authors of the book can be seen here. The reply to the first rejoinder can be seen here. In response to the reply to the first rejoinder, the authors had written this second rejoinder.

We appreciate the reviewer’s continued engagement with our book. However, the reply to the rejoinder largely repeats speculative concerns about hypothetical transition risks while overlooking the structural weaknesses and repeated failures of the existing debt-based monetary system.

The objection that full-reserve banking has “no real-world example” is historically weak and conceptually misleading. For most of monetary history, money creation remained fundamentally a sovereign function of the state. The large-scale creation of money by private commercial banks through leveraged debt expansion is itself a relatively recent phenomenon. Full-reserve banking therefore represents a sovereign money proposal aimed at restoring monetary stability and separating money creation from excessive debt expansion.

The suggestion that the proposal lacks academic seriousness is also untenable. Full-reserve banking has been supported or seriously examined by leading economists including Irving Fisher, Henry Simons, Maurice Allais, and Milton Friedman. Friedman explicitly stated:

“There is no technical problem in achieving a transition from our present system to 100% reserves easily, fairly speedily and without any serious repercussions on financial or economic markets.”

This directly contradicts the repeated implication by the reviewers that the proposal assumes unrealistic “business as usual” conditions or would necessarily destabilize financial and capital markets. Similarly, Irving Fisher described the 100% reserve proposal as one of the strongest solutions for eliminating depressions, controlling inflation, reducing debt burdens, and restoring sovereign control over money creation.

The reply to the rejoinder also discusses the IMF study by Benes and Kumhof but draws conclusions inconsistent with the paper’s actual findings. The DSGE model, calibrated using real U.S. economic data covering banks, households, manufacturers, and government sectors, concluded that full-reserve banking could significantly reduce business-cycle volatility, eliminate bank runs, sharply reduce public and private debt, and generate substantial long-run output gains.

Importantly, the IMF study did not support the claim that full-reserve banking would lead to restrictive credit conditions or collapse productive financing. On the contrary, the findings indicated that productive investment and economic output could improve materially under a sovereign money framework. The reply to the rejoinder selectively focuses on technical modeling limitations while overlooking the principal conclusions of the study itself. Every macroeconomic model necessarily relies on assumptions and calibration parameters, including models used to justify existing inflation-targeting and monetary frameworks. Merely pointing to modeling limitations does not invalidate the study’s findings, especially when no comparable empirical evidence is presented demonstrating that the current debt-based system is structurally superior or stable.

Ironically, while criticizing the IMF study for assumptions regarding expectations and behavioural responses, the reply to the rejoinder itself heavily relies on speculative assumptions regarding inevitable capital flight, financial collapse, investment paralysis, and economic disruption under full-reserve banking without empirical demonstration.

The reply to the rejoinder repeatedly demands “causality,” yet ignores the overwhelming empirical reality of the current system: unprecedented global debt, recurring banking crises, inflationary pressures, speculative asset bubbles, widening inequality, and repeated taxpayer-funded bailouts despite Basel regulations and central bank oversight. If debt-based money creation were genuinely disciplined and stable, the world would not be facing such persistent financial fragility. In reality, the present system has not restrained governments at all; rather, it has enabled unprecedented debt accumulation despite interest rates, prudential regulations, and market discipline.

The repeated “zero interest rate” criticism also fundamentally misrepresents the proposal itself. Our framework does not advocate elimination of investment returns or productive financing. It proposes replacing debt-based money creation with genuine profit-and-loss sharing and real investment-based financing. Financing would continue through equity participation, investment accounts, Musharakah, Mudarabah, Sukuk, and other risk-sharing arrangements linked to productive economic activity rather than guaranteed debt expansion disconnected from the real economy.

In fact, the current system itself increasingly suppresses productive investment by channeling enormous volumes of newly created bank money toward government borrowing, speculative asset markets, and financial engineering rather than genuine enterprise. Full-reserve banking directly addresses this distortion by separating transaction money from investment capital and redirecting financing toward productive economic activity. The claim that productive financing would collapse is therefore not only unsupported, but contradicted by both logic and the IMF study itself.

The concerns regarding capital flight, investment collapse, and financial paralysis are likewise speculative assertions without empirical demonstration. Such instability already exists under the present debt-driven system through currency crises, speculative real-estate booms, capital flight, and recurring financial instability. The reply to the rejoinder effectively assumes that the current system is stable despite overwhelming evidence to the contrary.

The reply to the rejoinder also misrepresents our discussion regarding remittances. The book does not advocate “confiscation” or coercive state capture of remittances. Rather, it explains that if Pakistan’s exports and imports are broadly balanced, inward remittances of approximately USD 3 billion per month could enable repayment of around USD 100 billion in external debt within a relatively short period while still supporting domestic economic activity.

The objection assumes, without evidence, that overseas Pakistanis would suddenly stop using formal channels merely because the country adopts a sovereign monetary framework. In reality, remittance flows are primarily influenced by exchange-rate stability, trust in the financial system, transaction costs, and economic confidence. A more stable, less inflationary, and less debt-dependent economy would likely strengthen confidence in formal channels rather than weaken it.

Likewise, the claim that full-reserve banking would weaken long-term financing is overstated. Modern economies already rely extensively on equity markets, Sukuk, pension funds, bonds, and investment institutions for long-term capital formation. Full-reserve banking simply restores greater financial discipline by aligning investment more closely with genuine savings and risk-sharing principles instead of artificial credit expansion.

The reply to the rejoinder’s concern regarding a “money creation committee” is equally exaggerated. Rule-based sovereign money creation subject to constitutional and institutional constraints is not inherently more politicized than the present system where private banks effectively influence money creation through profit-driven credit expansion. At least under a sovereign framework, money creation becomes transparent, publicly accountable, and constitutionally governed rather than indirectly driven by private banking incentives.

The observation that advanced economies are moving toward “no reserve” systems actually reinforces our concern. The progressive removal of reserve constraints further expands the power of commercial banks to create money through debt, increasing leverage, speculative asset inflation, and systemic fragility.

Finally, the criticism regarding “economics academia” is unconvincing. The book extensively uses banking data, debt statistics, inflation trends, central bank publications, IMF research, and monetary literature. Academic inquiry should encourage serious examination of structural alternatives rather than intellectual gatekeeping in defense of a monetary order that is itself increasingly unstable and unsustainable.

The central question therefore remains unanswered: why should private profit-driven institutions possess the power to create the vast majority of a nation’s money supply through debt despite the recurring instability, excessive indebtedness, and financial fragility this system continues to generate globally?