Money in Switzerland

Switzerland’s system of direct democracy includes the right to submit a federal initiative and a referendum, both of which may overturn a parliamentary decision.
Last year they held a referendum on a Universal basic income and last Sunday they had one on re-establishing sovereignty over money creation as per this economist article https://www.economist.com/finance-and-economics/2018/06/09/a-referendum-on-the-way-money-is-created.

The proposal would have brought an end to the fractional reserve banking system in Switzerland. The central bank would have become the only provider of Swiss francs in a full reserve system. In other words, commercial banks would no longer be able to create cash; their ability to lend money would be restricted.
The proposers argued that commercial banks could and should be in the business of intermediating between borrowers and savers and not in the business of creating money. The money they lend should come from those who wish to invest in the lending business, just as is currently the case with mutual stock funds. The government’s practice of giving banks the power to create money guaranteed by taxpayers represents an unfounded implicit subsidy to the banks. Money creation and intermediating between borrowers and lenders are conceptually quite different. There is no reason in today’s world of electronic money to allow such intermediaries to carry out monetary creation as part of their intermediation.
Supporters of the initiative argued that the potential change would make the system less dangerous to credit risks. They use the 2008 global financial crash as an example of why the banking system needs to reduce irresponsible spending. Opponents, such as UBS Chief Executive Officer Sergio Ermotti argued that approving the initiative would be “suicidal.”
“For us, it’s actually a really intellectual challenging exercise. What you just mentioned… would effectively prevent the commercial banking sector from running money multipliers, from lending out to the economy and creating deposits,” Evelyn Herrmann, European economist at Bank of America Merrill Lynch, told CNBC’s “Squawk Box Friday.”
The Vote last Sunday decisively rejected the initiative https://www.ft.com/content/686e0342-6c97-11e8-852d-d8b934ff5ffa

The UK based Positive Money said “The fact that around a quarter of voters supported the Vollgeld initiative shows there is a real appetite for radical reform of a money and banking system which does not seem to be working for most people,”
Pressure for reform of fractional reserve banking has grown since the global financial crises of 2007-08, with proponents of changes including Mervyn King, former governor of the Bank of England.
The Vollgeld proposals were similar to ideas that emerged in the US in the 1930s, in the wake of the Great Depression. In 1935, the economist Irving Fisher proposed a “100 percent reserve banking” system to eliminate bank runs, smooth economic cycles and reduce indebtedness.
Former US congressman Dennis Kucinich introduced a bill in 2011 along similar lines https://www.congress.gov/bill/112th-congress/house-bill/2990

* Joe is a Vice-Chair of Hounslow Liberal Democrats, Chair of ALTER and PPC for Brentford and Isleworth

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25 Comments

  • Richard Underhill 12th Jun '18 - 4:21pm

    Vince Cable’s speech in the Commons today, 12/6/2018, referred to the Swiss, who have much experience of referendums, as being familiar with the concept and use of confirmatory referendums, namely that the Swiss government has done what they were asked to do when the previous referendum was decided.
    Some statistics on how often that happens might be helpful.

  • John Marriott 12th Jun '18 - 4:55pm

    Ah, the Swiss. Thinking of them reminds me of Orson Welles’ famous quote about them to Joseph Cotton on the ‘Riesenrat’ in Vienna’s Prater Fun Fair from David Lean’s film ‘Harry Line’ of the late 1940s. Probably very unfair; but it does make you think!

    PS For those of you who are too young to remember, the words “cuckoo clock” feature prominently. Time to get Googling?

  • John Marriott 12th Jun '18 - 4:58pm

    Typo alert! That should read ‘The Third Man’ and his name was ‘Harry LIME ‘!

  • Peter Martin 12th Jun '18 - 5:14pm

    This can’t work. There’s a general misconception about banks ‘creating money’ when they lend. Banks don’t have any magical powers in this respect. If they really could create money in the way some are led to believe they’d never go broke.

    The Swiss franc, in its fundamental form, is an IOU of the Swiss central bank, the SNB. But any bank can create asset/liability pairs denominated in Swiss francs. Any person can too. If I write an IOU in Swiss francs I’m using the Swiss franc as a unit of measure. It becomes like an inch or a centimetre. Neither I nor the commercial bank can make ourselves rich, by writing them out, because we hold the liability too. But if anyone is prepared to trust me, or (much more likely!) the commercial bank, to make good our IOUs on demand, they can use them as money. They hold the asset part of the IOU.

    Not the Swiss tax collectors BTW! They always insist on real Swiss francs from the central bank.

    So this process can’t be outlawed any more that anyone can be prohibited from using feet or metres on a tape measure.

  • John Marriott 12th Jun '18 - 6:57pm

    Quite right, Ian. I’m mixing up ‘The Third Man’ with ‘Oliver Twist’. I need to get out more. Mind you, I still stand by the quote!

  • Peter Martin 12th Jun '18 - 9:37pm

    @ Joe B,

    I don’t dispute what the BoE are saying. I’m pointing out that the phrase “money creation” can give the wrong impression unless it’s carefully explained.

  • William Fowler 13th Jun '18 - 7:27am

    Ha, just had a mad idea that should appeal to radical Liberals. Get rid of the House of Lords and on major issues have a referendum via online or smart phones with some kind of incentive for people who vote like 5 percent off council tax.

  • Steve Trevethan 13th Jun '18 - 7:41am

    An interesting article and conversation!
    Might the Swiss be on to a helpful practice in having frequent “bottom up” referendums?
    They appear to have tested, understood, applied rules and procedures, apply a significant democratic pressure on parliamentary bodies and are not unilaterally/”dictatorially” imposed as happened with “Brexit”?
    Does current money creation, with its use of loans via the banking industry, affect the prices of housing upwards and so make us less competitive internationally?

  • Peter Martin 13th Jun '18 - 8:07am

    On the general point of referendums we should make a distinction between asking for everyone’s opinion on anything that crops up, and having a referendum on constitutional matters and important foreign treaties.

    MPs can vote on whatever they choose providing they don’t fundamentally change anything for other MPs who might follow. Power ultimately resides with the people and should only be borrowed between elections. MPs should not give away what is not theirs in the first place.

  • John Marriott 13th Jun '18 - 9:26am

    @Ian Sanderson
    Thanks for the quote and your robust defence of the Swiss. Let’s not forget Wilhelm Tell. And then there’s the Swiss Family Robinson and, of course, that delicious Swiss Roll!

  • John Marriott 13th Jun '18 - 9:32am

    Pressed the ‘Send’ button too early! I was going to add that, in order to get the full impact of the quote you need to quote the previous sentence, which compares Switzerland to Italy under the Borgias.

  • Peter Martin 13th Jun '18 - 1:37pm

    @JoeB,

    “Money creation is a natural monopoly ( licensed by the state) just as railways and utilities are. It needs to be regulated and taxed as such……..”

    The pound is an IOU of government and only the British Government/Bank or England can create pounds in the sense we know them as notes in our wallets and purses. At least in England. But that doesn’t mean that “money creation” in the wider sense is a monopoly. There’s a nuance of meaning here that many fail to grasp.

    As Minksy famously said “anyone can create money. The problem is getting it accepted”.

    As a Liberal/ Lib Dem you shouldn’t even be trying to tell anyone just what they should and shouldn’t issue or accept. If Barclay’s bank wants to issue electronic tokens which I am perfectly confident that I can exchange for crisp new BoE notes in their ATMs, if I want to, then I’m going to take them. Why wouldn’t I?

    But if I don’t think they are good for it then I won’t take them.

  • Peter Martin 13th Jun '18 - 2:30pm

    @ JoeB,

    It’s not the creation of new money per se that can create inflation. It’s the extra spending that goes with the borrowing. If I lend my kids some money I know they’ll spend it and contribute to inflation – or keeping the economy going! Whichever way you want to look at it. It really makes no difference (apart from the interest charged) whether they borrow the money directly from me or via the banking system providing I wasn’t going to spend that money myself.

    The decision of the British currency school has been overtaken by technology. Most money isn’t in the form of notes it is just digital. Does it make a difference? Not really. It all about the level of spending in the economy not about the quantity of money. Especially as that money is a asset/liability pair. Say I “create” some money by writing out an IOU for £1000. I give you that because I owe you £1000. If you can find someone who’ll take that IOU it can be used as money. So my IOU has contributed to the spending pattern in the economy. It has had an effect on the economy because you have spent it. Not by its mere existence.

    On its own it is completely inert. The economy doesn’t know it’s there!

  • Peter Martin 13th Jun '18 - 4:21pm

    @ Joe B,

    The proposition you advocate is sometime known as 100% reserve banking. In other words ALL the money that banks handle has to be backed by reserves. As it is, when I deposit money into a bank all I really have is an electronic record showing the bank owes me money.

    In other words, the objection to fractional reserve banking is that banks largely use their own IOUs rather than government IOUs. OK if that is the problem, it is easily fixed by nationalising the banks! Then bank IOUs are the same as Govt IOUs. This obviously won’t change anything in the economy -providing that the nationalised bank runs the same business and lending policies as previously.

    Even if the bank is in private ownership, it still won’t change anything very much. The central bank will just credit the commercial banks with the reserves, presently at ultra low or zero interest, that are required using the banks asset base as collateral. It’s the asset base that gives banks their credibility in any case. If the central bank had a policy of charging banks, via interest rates, for these reserves which they obviously don’t need – they manage quite well without them now- then its effectively the same as taxing the banks according to the amount of cash they hold on deposit. If that’s what you want to do then OK! Just do it, but at least be open about it.

  • Peter,

    I do not advocate 100% reserve banking. What I advocate is the capture of economic rents derived from natural resources and state created monopolies. In the banking system this already happens to a certain degree with the banking levy and higher rate of corporation tax. I would advocate for a higher rate of tax on interest income derived from lending for land acquisition. It is the expansion of the money supply for the purchase of a fixed supply of land that generates housing inflation. No new land is produced and hence no extra spending occurs. It is largely the same stock of land changing hands at artificially inflated prices that is at the heart of the rentier society and the kind of inter-generational income and wealth inequality that we see growing around us everyday.

  • Peter Martin 13th Jun '18 - 6:39pm

    @ Joe B,

    I do not advocate 100% reserve banking.

    OK.

    The proposal would have brought an end to the fractional reserve banking system in Switzerland

    The end to fractional reserve system has to mean a full reserve system. I took your OP to be in support of this? But maybe that’s my mistake?

    Anyway, I’m not saying we couldn’t have it. Just that there’s no real need for it.

    I know you are keen on land tax. We could have that too. But as the wealth of those who hold land and property is largely based on valuations. You’d need to be aware that taxation could see those valuations melt away.

    When the stock market crashes and shares lose hundreds of billions of dollars – people ask “Where did they go?”. That’s a common question. They didn’t go anywhere because they never existed in the first place. It was just a valuation that has decreased. And if the dollars (or pounds) don’t actually exist you can’t get hold of them with taxation.

  • Peter Martin 15th Jun '18 - 7:56am

    @ Joe B,

    Hong Kong and Singapore are both city states with land in very short supply. Much more so than even in the UK. So a LVT there isn’t going to have the same effect as a LVT here. Maybe a LVT could work similarly in London. That’s a possibility that could be investigated.

    But it’s not going to work as a “single tax”. It doesn’t work anywhere in the world in the way Henry George advocated. There’s nothing wrong with George’s idea that economic value derived from land, including natural resources, should belong equally to all members of society. If that’s what we want we just nationalise the lot without compensation and rent it out to those who want to use it.

    That would work but the rents received wouldn’t replace the need to have VAT, income and other taxes too. A LVT can be included in the general taxation structure, to improve equality generally, but only if the general structure is properly maintained.

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