Outside, Lake Zurich glistens peacefully in the sunshine, but it isn't nearly as idyllic in the oldest think tank in Switzerland. The Gottlieb Duttweiler Institute is hosting a conference called "Our Money, our Banks, our Country." What began as a polite exchange of arguments ends in a heated debate. “The sovereign money initiative is a complete mess," said Basel economist Aleksander Berentsen. "You don't know what you're talking about," replied a spectator.
In Switzerland, money is always dead serious.
The spat stems from a June 10 referendum that will ask the Swiss if they would like to reform their monetary system and become a guinea pig in a radical economic experiment: Can a monetary system function if only the central bank alone creates money? The referendum would allow only the country’s central bank to create money and outlaw a basic pillar of global banking: lending money based on the cash deposited in their coffers. As things stand today, the project has little chance of succeeding in what is arguably the world’s banking capital.
At the conference on Lake Zurich last week, Katharina Serafimova supported the referendum, known as the sovereign money initiative. "The sovereign money system would lead us to a sustainable society once again," said Ms. Serafimova, a lecturer at the Institute for Banking and Finance at the University of Zurich. Opponents of sovereign money, on the other hand, warn against a collapse of the financial system. The initiative is "one of the most damaging initiatives we have ever had to vote on," said economist Berentsen.
As the first country to vote on such a monetary system, the country is attracting global attention – even the Deutsche Bundesbank, Germany’s central bank, has included the topic in a Wednesday conference on cash. In essence, it is a question that even economists have been neglecting for a long time: How do we make our money? They don’t mean coins and bills. They mean the electronic tender that changes hands much more quickly, and in much larger sums.
This form of money isn’t printed manually and isn’t even approved directly by any central bank. It’s created by banks and is known as “book money” and it arises when a bank grants a customer a loan. The bank then credits the customer with a credit balance and records the loan. The customer can use the credit balance to make transfers, pay bills or even withdraw cash from an ATM, for example. This type of money currently accounts for around 90 per ent of the amount of money held by individuals and companies.
Only a portion of bank deposits are actually backed by bank deposits with the central bank. If the central bank prints money, it is in a sense distilling pure schnapps. But when commercial banks lend money, they are diluting this schnapps with water from their own taps, or at least that’s how sovereign money proponents see it. And they want to prohibit this dilution by amending the Swiss constitution – the amendment would outlaw the creation of money by anyone but the Swiss National Bank. In other words, banks would only be able to loan money that they have first received from the central bank – sovereign money. Financial systems, the initiative argues, would not only become more stable, they would also reap billions in additional revenue.
The initiative is backed by the Monetary Modernization Association (MoMo), which has collected the 100,000 signatures required for the project. "The sovereign money initiative achieves what most people already consider to be a reality today," the initiative's promoters promise. "Money creation by the central bank alone."
Macroeconomist Sergio Rossi argues that the recent financial crisis was not triggered by the misconduct of individual bankers, but by exorbitant growth in the money supply. "That's where the sovereign money initiative comes in," he said.
Sovereign money also has another advantage: If a bank fails, customer assets would no longer be lost. Instead, they would remain in the customer's possession – as safe as cash in a safe. "There would no longer be any need for deposit insurance or bank bailouts," said Joseph Huber, a pioneer of the sovereign money system. According to Mr. Huber, an economic sociologist, even complicated regulations such as the Basel capital requirements would become superfluous.
Please don't do it. Ruedi Noser, FDP politician
The idea in itself is not new. As early as the Great Depression of the 1930s, economists at the University of Chicago suggested banks should be required to deposit equivalent balances with the central bank as reserves. After the recent financial crisis, the plans were dusted off but not implemented. Until now.
But as appealing as the idea may sound, sovereign money proponents are fighting a losing game in Swiss politics. The Swiss have long since weathered the financial crisis and their economy is booming. There is no party that supports the project. A majority in parliament has already rejected the initiative. The Economiesuisse think tank and the Bankers Association have also rejected the plan.
And even the National Bank, whose significance would be greatly enhanced by sovereign money, is critical of the initiative. "If it's not broken, don't fix it," said SNB Chief Executive Thomas Jordan. Banks would no longer be primarily responsible for providing the economy with credit. Instead, the SNB would have direct control over lending. This is precisely what sovereign money critics view as a threat.
"Monetary policy would be completely politicized," warned entrepreneur Ruedi Noser, a politician with the Swiss Free Democratic Party, or FDP. "No one's claiming that the current system is 100 percent correct." But, he added, the initiative is an experiment with an uncertain outcome: "Please don't do it."
Michael Brächer is a financial editor in the investment team in Frankfurt. To contact the author: [email protected]