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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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.
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?
Typo alert! That should read ‘The Third Man’ and his name was ‘Harry LIME ‘!
Richard,
there are safeguards in the Swiss system. The federal constitutional initiative allows citizens to put a constitutional amendment to a national vote. The Federal Council and the Federal Assembly can supplement the proposed amendment with a counter-proposal, and then voters must indicate a preference on the ballot in case both proposals are accepted.
Constitutional amendments, whether introduced by initiative or in parliament, must be accepted by a double majority of the national popular vote and the cantonal popular votes. A similiar sysyem here would have rejected the EU referendum on the grounds that is was a constitutional change that did not have majority support in each of the four nations comprising the UK.
With respect to the meaningful vote for Parliament being debated today. In 2014, Swiss voters decided to back EU immigration quotas. Their leaders bided their time and let the consequences of such a move sink in. More than a quarter of the Swiss population is foreign born, mainly from EU member states. The Swiss economy would collapse without access to European workers. Gradually a consensus emerged in the Swiss parliament to find a way of managing immigration with internal labour market controls that avoided direct discrimination against EU workers. This was acceptable to the European commission, and the status quo prior to the referendum was restored.
If the Swiss, with their quasi-religious belief in direct democracy, can allow their parliament quietly to sideline a populist vote so clearly against the national interest, one would hope that at some stage the House of Commons could move away from the current veneration of a referendum result based mainly on gross distortions of the truth as the final word on Britain’s relations with the EU27.
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.
Peter,
there is a good article published in the Bank of England’s quarterly circular in 2014 that goes through in detail the process of money creation in the modern economy http://www.monetary.org/wp-content/uploads/2016/03/money-creation-in-the-modern-economy.pdf. The article explains the constraints on bank lending.The key points are:
In the modern economy, most money takes the form of bank deposits created principally through commercial banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system.
And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.
Monetary policy acts as the ultimate limit on money creation. The Bank of England aims to make sure the amount of money creation in the economy is consistent with
low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans.
‘ David Lean’s film ‘Harry Lime’ ‘
Carol Reed‘s film ‘the Third Man’
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!
@ 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.
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.
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?
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.
‘In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.’ Harry Lime
I don’t thank that was even historically accurate. The Swiss were involved in most European wars up to the Napoleonic wars, and they only peacefully resolved their internal religious differences in the mid-nineteenth century. Even in the nineteenth century, one or two Swiss cantons had foreign princes as their sovereign. Full female suffrage only finished spreading across Switzerland in the late twentieth century.
According to the museum of horology in La Chaux de Fonds, Swiss clock making starts from the late eighteenth century, when a local cattle dealer, after delivering his beasts to London, bought himself a clock here; being somewhat disappointed in its quality, he decided he could do better during the long dark winter evenings when farming activity was restricted.
Another Swiss export was the Hapsburg family who came to rule large swathes of Europe, much of it from Vienna, where ‘the Third Man’ is set..
@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!
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.
Steve,
“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?”
I think most people would agree it does. It is not the cost of the building that goes up though it is the cost of land and other assets such as shares. Cars and other consumer goods do not go up in price because interest rates are lower. Supply grows to meet increased demand. Land cannot increase in supply so the price increases instead.
Mortgage lenders like Northern Rock failed because they were reliant on continued access to short-term money market funds to finance long-term mortgage loan i..e. a mismatch of securities.
The banking business model is based on making money on the margin between a banks cost of funds and what they can charge custmers for loans. They grow their business by increasing their level of lending. Lending can be increases in two ways. One by increasing the amount of consumption in the economy and two by increasing the cost of assets. If mortgage rates reduce from 6% to 3% and the price of housing doubles the customer will still pay the same amount of interest for the same house. As house prices increase further the proprtion of wage income allocated for rents and mortgage payments keeps increasing.
Since the financial crisis, as interest rates have fallen, house prices have escalated and banking profits have recovered to pre-crisis levels. Meanwhile wages have stagnated and interest paid on savings account are below the rate of inflation.
This is a massive shift of income and wealth from tenants, mortgage payers and savers to financial institutions and the owners of capital,
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, as does land.
Banks currently pay a higher rate of corporation tax (8% more) than other companies, but the rate is only equivalent to what they were paying in 2010. I think we should be collecting a significant element of tax on new money creation as this is equivalent to seigniorage that historically been a source of public revenue. This revenue could usefully be applied to public housing infrastructure.
@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,
the Bank Charter Act of 1844 introduced by Robert Peel prevented any bank other than the Bank of England from issuing new banknotes in England and Wales. The Act served to restrict the supply of new notes reaching circulation, and gave the Bank of England an effective monopoly on the printing of new notes. The Act exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money.
The Act was a victory for the British Currency School, who argued that the issue of new banknotes was a major cause of price inflation.
The act did not restrict the creation of new bank deposits. While a loan is effectively a cash advance provided by the bank to the customer, in the long term the effect of unrestricted creation of bank deposits (money) can lead to inflation in the markets into which that money is channelled, such as the property market through banks’ mortgage lending.
@ 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!
@ 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.
@ 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,
I am not against the idea of full reserve banking as advocated by positive money. Like you, I do not think it is necessary to achieve financial stability in the banking sector.
I do however think that the banking sector has been able to extract a disproportionate level of economic surplus from the economy and this accelerated in the UK in the 1980s with the demutualization of building societies.
We are able to observe the effect of taxes on economic rents by looking at states that make substantial use of them in their tax systems – most notably Hong Kong and Singapore. Both jurisdictions have vibrant property markets. The demand for property remains unabated and ensures that land premiums continue to be paid (to the public authorities for land and primary leaseholders for buildings). The economic value of land and the rents that occupants are willing to pay does not decline – it is simply that these rents whether paid in advance as a lump sum or periodically are collected as taxes for the public benefit. Theses land rents finance public infrastructure in Hong Kong like the metro system and public housing developments.
@ 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.
Peter,
an LVT for London is under review by the current administration https://www.london.gov.uk/press-releases/assembly/mayor-positive-about-a-land-value-tax-trial
There are few people I have met who make the single tax argument. Those who do point to the economic growth anticipated as a consequence of relieving the deadweight of taxes on labour and capital and the consequent substantial increases expected in the level of productivity and economic surplus produced.
My own view is that it should be part and parcel of a wide-ranging reform of the tax and benefit system based around the Mirrlees review that would include:
Merging personal income tax with social security contributions;
Replacing income-tested transfers by a single integrated benefit;
Exempting interest on bank and building society accounts, making a “rate-of-return allowance” for equities, business assets and rental property; and otherwise taxing capital income at the same rate as earned income; introducing an allowance for corporate equity into the corporation tax;
Removing nearly all zero and reduced rates of VAT and introducing a tax on financial services equivalent to VAT;
Introducing a tax on the current value of domestic property, and a land value tax for business, to replace existing council tax (on housing) and Stamp Duty, and business property tax.
Corporation tax would be assessed at relatively high rates marginal rates on profits in excess of an allowance for corporate equity based on normal rates of return in the economy,