Another Sound Money Initiative from Switzerland

Another Sound Money Initiative from Switzerland.

Swiss Sovereign Money Initiative would require private banks to hold 100 percent reserves against their deposits.

Initiative launched by the Swiss Association for Monetary Modernization would outlaw fractional reserve banking.

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A Swiss group, the Swiss Association for Monetary Modernization (SAMM) has gained the necessary signatures to force a ballot initiative, the Swiss Sovereign Money Initiative (SSMI), to change the Swiss constitution to outlaw fractional reserve banking in Switzerland.

The Swiss Constitution contains a procedure, known as the Volksinitiative (Peoples’ Initiative), that allows the Swiss citizens to put changes to the Swiss constitution up for a vote. In order to have an initiative reach a vote, its backers must gain 100,000 signatures in support of it over an eighteen month period. SAMM has gained the necessary signatures to bring the SSMI to the ballot box. A date for the vote has not yet been set.

Anti-fractional reserve, but not necessarily free market

SAMM managing committee member Mark Joób, cites six fundamental issues with fractional reserve banking (headings are from Mr. Joób/explantions from Smaulgld):

1. Money is created as debt.

Under a fractional reserve system, money comes into existence through borrowing. In order for an economy to grow SAMM aruges, increases in debt must be incurred, leading to excessive indebtedness and bankruptcy.

2. The money supply is under private control.

SAMM argues that the bulk of money creation is done by private banks and not the central bank of Switzerland. They view private money creation as leading to potentially socially undesirable and often inequitable results as private banks decide which loans get made, and therefore how much money is created and to whom it goes.

3. Bank deposits are not secure.

Under a fractional reserve banking system, banks can make loans in multiples to the amounts they have in customer deposits. Under such a system, banks do not maintain sufficient legal tender notes (cash) to satisfy the withdrawal requests of all their depositors. If many, not necessarily all of their depositors were to request their cash, the banks would not be able to meet their requests. Therefore, fractional reserve banks rely on government insurance and the faith and confidence of their depositors that their money is there when they need it. If confidence is lost, and too many depositors request their cash (a bank run), banks can go bankrupt and bank bailouts/bailins may become necessary.

4. The money supply is pro-cyclical.

Under a fractional reserve system private banks help to exagerate the boom bust cycle by over lending during boom times and under lending during recessions. This creates bubbles during periods of economic expansion and severe credit contractions during recessions, further exasperating the downturn.

5. The money supply fosters inflation.

Long term fractional reserve banking leads to an oversupply of money creation and to consumer price and asset inflation. Consumer price inflation harms the less wealthy, by raising their costs of living, while asset price inflation benefits the wealthy by increasing the value of their assets.

6. The privilege of creating money is a subsidy to the banking sector.

Because banks collect interest and interest must be paid, the entire society pays as interest on government debt must be paid by all in the form of taxes. Thus, private banks are a direct beneficiary of the current fractional reserve system at the expense of the Swiss citizens.

The SSMI Solution: Take the power to create money from private banks and give it to the national bank

To ameloirate the conditions created by the complaints above, the SSMI aims to remove money creation from the hands of private banks and turn that function over to the state as Mr.Joób writes:

“The sovereign money concept aims to establish a sovereign public authority with total control over the money supply (emphasis added), both cash and electronic money on current account holdings. A great advantage of the sovereign money system is that money would be issued debt-free (emphasis added) by the monetary authority and would therefore not carry interest.”

While Swiss commercial banks may not like the proposal, the Swiss National Bank may not oppose it as it would grant them total control over the money supply.

Save Our Swiss Gold Redux?

Anti-banker/populist referendum are not uncommon in Switzerland. Last year a Save our Swiss Gold referendum (SOSG) was held and shot down.

The SOSG initiative would have required the Swiss National Bank to:

– hold at least 20% of its reserves in gold;

– repatriate of all of its gold currently held outside its borders; and

– ban selling any of its gold.

We predicted the anti SOSG rhetoric would be relentless. It was. The Swiss parliament and the Swiss National Bank joined in attacking the proposal. The attacks worked as support for the initiative faded.

International banker, Citibank’s Willem Buiter even recycled his own 2009 blog post – “Gold is a six thousand year old bubble” and issued it as Citibank “research” on the eve of the SOSG vote.

The SOSG initiative failed by a wide margin.

We will be following the SSMI closely, especially the reaction of the Swiss National Bank and their counterparts at the European Central Bank as well as reactions from the large private Swiss banks. We expect the rhetoric on both sides to accelerate once a ballot date for the SSMI is set.

We will provide regular updates on the SSMI as they develop.

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Further Reading:

The Swiss Sovereign Money Initiative Criticisms Answered
The Vollegeld Initiative

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