This weekend Switzerland holds a referendum on ‘sovereign money,’ a reform that aims to render banks crisis-proof and hand significant power to the central bank. Genius or a recipe for disaster?
To some, the Swiss are a peaceful, conservative nation of chocolate-lovers who count their gold bars before retiring to plush Alpine villas. Why on earth, you may ask, would they want to bet their hard-earned wealth on a plunge into the unknown?
Yet on Sunday, the Swiss will vote on a far-reaching monetary reform known as Vollgeld, or sovereign money. The chances are slim – 54 percent of the Swiss are against it, according to a recent poll – but if approved, the referendum could set off a seismic shift in Switzerland’s economy. Financial traders are said to be hedging their bets, given the surprises on Brexit and the last US presidential election.
Essentially, the referendum is about what qualifies as money, and what does not. Technically, money created by a central bank is the only legal tender. But in practice, when a bank grants a loan, it creates money, too. Banks credit the customer with a so-called sight deposit – assets that go on the banks’ books and increase the money supply.
Detractors argue this practice increases the risk of financial disasters and boom-and-bust cycles. Led by Reinhold Harringer, a former head of the St. Gallen tax office, the so-called Vollgeld Initiative includes respected professors and financial pros such as Thomas Mayer, a former chief economist of Deutsche Bank. Such support helped campaigners collect the minimum 100,000 signatures required under Swiss law to hold a binding referendum.
This nation of downhill racers knows a thing or two about financial disasters. The last bank run was back in 1991: A savings bank in the town of Thun went bust after speculating in real estate. Though the broader fallout was contained, it shattered the notion that wealthy Switzerland was immune to such troubles and remains part of Swiss folklore (the 25th anniversary in 2016 reignited the conversation). Then, in the wake of the 2008 financial crisis, the government had to bail out its flagship bank, UBS, an emblem of Swiss pride that was sucked into the US mortgage-derivatives fiasco.
In the Vollgelders’ view, private-sector banks shouldn’t be in the business of creating money, given that their prime motivation is making a profit. These lenders shouldn’t earn interest income on lending or checking accounts, only on long-term savings accounts, and should extend new loans only if they’re 100 percent covered by deposits or assets. This would end the “fractional reserve” system now common around the world, whereby banks only cover a smidgen of the loans they make.
The switch to sovereign money, required within two years of a “yes” vote, would entail a messy overhaul of the Swiss banking system. Currently, 87% of Switzerland’s monetary assets are electronic or book money, created by regular banks. But under Vollgeld, all Swiss franc deposits would be transferred to the Swiss National Bank (SNB), the central bank, for safe-keeping. Only the SNB would have the right to create new money; private banks would only be able to make loans from funds they hold in long-term savings accounts, obtain in financial markets, or get from the central bank. . .