Sometimes Swiss voters are presented with questions that only specialists are equipped to answer. The vote on 10 June 2018 to change their monetary system appears to be one of these.
On the surface it appears simple. Upon closer inspection it contains much complexity and uncertainty, compounded by a widespread misunderstanding of how the financial system works – banks do not act simply as intermediaries, lending out the deposits that savers place with them, nor do they multiply central bank money.
The initiative would bring two major changes. Firstly, it would prevent commercial banks from creating money – how banks create money by lending. This task would become the exclusive domain of the Swiss National Bank (SNB), Switzerland’s central bank.
It is true that commercial banks get a free ride off taxpayers – banks’ deposits are implicitly guaranteed by the government. This subsidises banks and promotes risky behaviour and is an obvious flaw in the system. Governments have reduced this problem by imposing tougher reserve and capital requirements on banks and other measures, however this has reduced but not eliminated the weakness.
Hansruedi Weber, a retired primary school teacher and one of the initiators, says that banks can create money in unlimited quantities. However, commercial bank money creation is constrained by capital and reserve requirements and the demand for loans, something constrained by interest rates and minimum mortgage requirements. It is not a free-for-all system.
Secondly, the initiative would change the way the central bank puts new money into the system. New money would be given to the government and the people. The premise here is that governments and people would do a better job of allocating funds than banks.
The initiators claim these measures would improve the stability of the financial system by shifting all money creation into the responsible hands of the SNB, and, benefit society by giving new money to the government or people, from where it would be better invested. They also argue their system would reduce the risk of bank runs, government bailouts and asset bubbles.
Both the Federal Government and SNB disagree.
The SNB says its ability to ensure financial stability would be seriously hampered. Currently, one of its two main tools for managing the money supply is the buying and selling of assets – when it buys assets it releases francs into the system. When it sells assets francs come out. The proposed system would remove this tool, says the SNB. It would be able to put money in by giving it to the government or the people, but would have no way to take money out.
In addition, the central bank could become ensnared in politics. Imagine if everyone got 1,000 francs from the SNB last year and politicians called for another 1,000 francs this year. The bank might get politically prodded into doing things that would undermine financial stability.
Both of these changes would affect not only the central bank’s effectiveness but also its credibility.
In addition, the SNB thinks that any benefits that might come from the plan would be small compared to the negative economic impact it could have on the wider economy and the value of the Swiss franc if the country’s financial stability was questioned.
Also, the SNB says that asset bubbles are born from exaggerated price expectations and an underestimation of risks. Lending can reinforce them but does not create them. Changing the way the central bank operates will not give it control over these forces as the initiators suggest.
While there are clearly weaknesses in the current system, like the need for government bank bailouts in a crisis and the implicit subsidy that comes with this, the position of the Federal Government and SNB on this proposal is clear: the plan has flaws and would be a big step into the unknown that could have nasty unintended consequences.
Dispatch of the Federal Council on the popular initiative (in French) – Take a 5 minute French test now
Sovereign money initiative (in English)
Money creation in the modern economy – Bank of England (in English)
Arguments of the SNB against the Swiss sovereign money initiative (in English)