Switzerland – a country famous for its banks – is voting on one of the boldest monetary reforms ever devised. If passed, the Vollgeld Initiative will amend the Swiss Constitution to destroy fractional reserve banking, which may have significant implications for the world’s financial systems.
UPDATED | June 11, 2018:
The Vollgeld Initiative, described below, was voted down in a popular referendum on Sunday, with roughly one in four voters supporting the measure.
ORIGINAL | June 10, 2018:
Most of us think that our checking account balances represent the money we own – the money we have “in the bank.”
In thinking that, we are wrong.
We haven’t been lied to, per se. Like with our social media, we just haven’t read the fine print closely enough. We fail to understand the terms of service because it does not seem relevant: Using Facebook does not require that you understand what it does with your data. In the same way, you do not need to understand how banking works, or how it has come to work in the digital era, to do your banking. In both cases, it seems we have allowed ourselves to be duped.
Is this what it felt like for the illiterate peasants of medieval Europe, lorded over by the more highly educated? Indeed, “computer literacy” has become increasingly important for those wishing to affect, or even understand, the systems that shape the world and our lives. Carl Sagan once cautioned that technological illiteracy “is a prescription for disaster. We might get away with it for a while, but sooner or later this combustible mixture of ignorance and power is going to blow up in our faces.”
We would do well to be cognizant of the ways in which these technologies shape systems, so that we are not blindsided by the limitations, side effects, failures, and misdeeds of these systems and the actors who control them.
Thomas Jordan, chairman of the governing board of the Swiss National Bank (SNB), noted that after the financial crisis of 2008, which threatened to bring the global economy to its knees, people began to take a greater interest in their personal finances and the “global financial system.”
While it may seem difficult to envision now, the financial carnage that could have ensued after the Lehman Brothers collapse, had the banks not been bailed out with taxpayer funds, would have virtually wiped out Wall Street and its investors.
If not for emergency action by regulators, the financial tsunami would have crippled marketplaces worldwide, just as it threatened to during the dot-com bubble. It sounds sensational, but every facet of society is interconnected in this extraordinarily complicated global financial system.
In some ways, the fact that markets are enmeshed with each other is nothing new. “Money,” both predicated on and enabling humanity’s interconnectedness, is one of our first inventions.
Recognizing the dangers of potential domino disasters, Switerland’s central bank has a monetary strategy to combat the negatives of resurgent crises called the countercyclical capital buffer. This pattern is key to understanding the heart of the Swiss Sovereign Money Initiative, commonly known in Switzerland as the Vollgeld Initiative. While the near certainty of the next financial crisis has been recently espoused by prominent figures such as Bill Gates, on June 10, 2018 – today – the people of Switzerland will have the opportunity to vote on the Vollgeld Initiative, which some hope will allow the country to avert such a crisis. If passed, the bill would do away with fractional reserve banking by creating a sovereign money system.
Monetäre Modernisierung and the Vollgeld Initative
A Swiss nongovernmental organization known as Monetäre Modernisierung (MoMo) created and stewarded the Vollgeld Initative, from inception to today’s vote. Founded in 2011 after Hans-Ruedi Weber read a German translation of “Creating New Money” by Joseph Huber and James Robertson, MoMo seeks to reform the banking system, “to ensure that the financial system serves the real economy and that money is not the master of our society, but its servant.”
Weber’s spark of inspiration came in two parts following his reading of “Creating New Money“, which was published in the immediate aftermath of the 2000 crisis and advocates for broad monetary reform. Weber’s first realization was “that the real cause of the recurring financial crises is that banks can create money in unlimited quantities,” which he notes that most people do not understand. Secondly, Weber understood that “Switzerland, with its own currency and system of direct democracy, is the ideal place to bring about a Sovereign Money Reform.”
Like Nakamoto’s cryptic message in Bitcoin’s genesis block, it seems as though Weber had also had enough of the banks acting irresponsibly at the expense of others. This could suggest cryptocurrency is not the sole phenomenon disrupting banking and finance. Perhaps the Vollgeld Initative, cryptocurrency, and emerging meta-level economic theories are all a part of an overarching shift in the financial psychology of our civilization, which could be fed up with money as a master, rather than as a servant.
Dr. Emma Dawnay on the Vollgeld Initative
Switzerland has a governmental system of “direct democracy,” which stipulates that citizens over the age of 18 can vote, and that any citizen-launched initiative capable of garnering at least 100,000 valid signatures must be put to a vote.
On December 1, 2015, the Vollgeld Initative was submitted to the Swiss government with 110,000 signatures, which led to today’s impending vote. Specifically, the Swiss citizenry is voting on a proposed change to Article 99 of their constitution, which outlines the creation of money in Switzerland.
As mentioned, the “money” in our checking accounts is dubiously classified as “book money.” It is not the same as “sovereign money,” or money created by a central bank. Essentially, book money is an IOU from a commercial bank, a promise of payment, nothing more. “For the first time, most media outlets are correctly describing how, under the current system, banks can create money out of nothing,” MoMo board member and author of the background report on the national referendum Emma Dawnay told ETHNews. “It’s just written into the bank’s balance sheet as an item under ‘assets’ and another item under ‘liabilities.’ Previously, most people had assumed it came from the Swiss National Bank (SNB). This alone is a huge achievement.”
The advent of electronic, digitized money has aided in blurring the distinction between electronic book money and sovereign money. Sovereign money is brought into circulation by a central bank, rather than a private or commercial bank. Sovereign money constitutes the paper notes and coins we call “cash.” Electronic book money is best understood as the numbers in your bank account. This electronic book money is not “legal tender.” It is a virtual, digital promise represented as your account balance. As stated in Dawnay’s report: “It’s just a promise made by the banks to pay us cash and settle payments on our behalf, when requested. Legally it belongs to the bank, not to the holder of the bank account.”
The Vollgeld Initative would destroy the ability of private and commercial banks in Switzerland to create book money, which is normally done by digitally injecting book money into circulation through the issuance of loans.
Members of the Swiss banking establishment, including the SNB and Switzerland’s largest commercial bank, UBS, are adamantly opposed to the Vollgeld Initiative, with the SNB’s comments being echoed by UBS’ chief executive, who recently stated: “I don’t expect the Swiss people to be suicidal and approve it.”
ETHNews: Why is sovereign money preferable to book money? What do you say to the SNB’s criticisms of the Vollgeld Initative?
Emma Dawnay: It is true that a financial reform in Switzerland will not make Switzerland immune from global financial crises, and this is not the aim of the reform. However, under the reform, money in people’s checking accounts would be 100 percent safe – like treasures in a vault. If a bank were to go bankrupt, this money would not just disappear (as it would under the current system) – so a financial crisis won’t bring down the whole Swiss financial transaction system. People will still be able to get paid, pay their rent, and buy their food. Under the current system if a large bank were to go bankrupt this would not be the case, consequently the need to bail out large banks. A sovereign money system in Switzerland would make the Swiss financial system more resilient to financial crises, rather than immune from them.
ETHNews: What has it been like making an argument for the SNB yet at the same time against the SNB?
ED: It is a happy coincidence that under a sovereign money reform, the state (rather than the banks) will profit from creating new money – either from the face value when the money is spent into circulation or the interest if it is lent into circulation. (By the way, this is not new: coins are currently spent into circulation and bank notes are lent into circulation). The amounts are massive – the whole of the money supply “M1” is involved. We’ve calculated that if the money supply increases in line with economic growth, and economic growth is 1 percent, this would amount to a few hundred Swiss francs per person. This is more difficult to explain, so has not been the main message in our campaign, which focuses on the simple question “Who should create our Swiss francs?”
ETHNews: Do you feel as though the Swiss banking establishment has tried to undermine your efforts?
ED: Unfortunately the Swiss National Bank (SNB) and Swiss Federal Council have not given unbiased factual information about the referendum, which by law they should (a legal case against them is pending). For example the information with the voting papers implies that, under the Vollgeld system, all new money must be spent debt-free into circulation: this is not true as the SNB can also lend money to the banks. Thomas Jordan, the head of the SNB, has gone much further by giving his opinion – that it would be a catastrophe – apparently based on incorrect facts such as the SNB would have to return to targeting monetary quantities rather than interest rates (it is quite possible for the SNB to target interest rates under the Vollgeld system if it chooses). As many people will be influenced by what they say, this is likely to affect the results.
ETHNews: Was the 2008 financial crisis truly the inspiration for the Vollgeld Initative? Most Americans think the crisis was related to bad housing mortgages here in the States.
ED: From our viewpoint the 2008 financial crisis was global, with UBS – Switzerland’s largest bank – also needing to be bailed out by the government. Measures taken since the financial crisis are not strong enough. Banks have lobbied hard to water them down, and big banks can invest huge amounts to find out how to circumvent them. The Basel banking rule-book is becoming longer with each new round of rules, yet the banks are always one step ahead. Enforcing the rules becomes ever more costly for the state, and compliance costs are a problem for smaller banks. Ever more rules are not the answer.
ETHNews: Even so, surely there must be rules if financial crises are cyclical?
ED: I believe that history will repeat itself. Banking was transformed by the 1844 banking act in the UK when banks there were no longer allowed to print their own bank notes – something that spread globally. Extending this to the electronic book money that we now all use for the huge majority of our financial transactions makes sense. I hope that Switzerland will lead the way for such a global reform, making the financial system work better for everyone.
ETHNews: So much time and effort has been put into educating the Swiss population about the severity of this vote and its stated goals. Are you ready for the vote?
ED: It is really exciting for those of us that have been involved in this project for the last few years. Having worked for so long – first the constitutional text, then collecting over 100,000 signatures and finally a referendum campaign – it seems almost unbelievable that the Sovereign Money or “Vollgeld” referendum is on Sunday.
It seems that like Nakamoto, proponents of the Swiss Sovereign Money Initiative share a common distrust of banks. Regardless of what happens on Sunday in Switzerland, perhaps questioning the status quo of cyclical financial crises is just the beginning of an emerging, new, global system. History may record that our era, the advent of electronic money, was in fact only a stopgap measure on the way to a new global financial system. Like with Bitcoin, the Swiss Sovereign Money Initiative may be a chapter in the larger story of where we are going with our financial systems.