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.
The Swiss government, central bank and banking lobby fiercely oppose the plan, calling it a foolhardy experiment that creates the real prospect of a credit crunch. Under sovereign money, only a fraction of the current loan stock would be available to customers. Some economists estimate the reform would lop 0.4–0.8 percent off annual GDP. Thomas Jordan, the SNB’s president, describes it as “a dangerous cocktail” that would undermine consumption, investment and the country’s famed prosperity. UBS boss Sergio Ermotti says he “doesn’t expect the Swiss people to be suicidal and approve it.”
Opponents also say that financial regulation, such as the deposit insurance which guarantees current accounts of up to 100,000 francs, already guards against bank runs. Other rules, like increased capital requirements, have also been put in place since 2008 to prevent future disasters.
Nor is it clear the referendum would make Switzerland crisis-proof: Vollgeld might have stopped the 1991 bank run, but it wouldn't have done much good in 2008. Sovereign money couldn’t have prevented a Lehman Brothers-style meltdown, which was less about traditional lending and more about speculative investments (sub-prime mortgages) that will not be limited by the referendum. Martin Brown, a former SNB economist, claims Swiss banks could actually be made more vulnerable to crisis. That's because they would turn to financial markets to raise the capital they need to offset the estimated 500 billion Swiss francs (€432 billion, $510 billion) they would lose under the reform.
After the changeover, the SNB would face serious problems. It would have to conduct monetary policy mostly by steering the money supply – regarded as an outmoded concept – as the central bank could no longer change interest rates to boost or curb demand for credit. Its traders would also no longer be able to buy and sell foreign currencies, a practice used frequently since 2008 to weaken or strengthen the franc and maintain price stability. That inability to act could threaten the franc’s status as a safe haven for foreign investors.
The reformers play up the bright side, pointing to the SNB's new role as a creator of so-called “debt-free money.” Instead of pumping Swiss francs into the economy by purchasing bonds and equities – as is the case in quantitative easing – the central bank could shower cash on the federal government, cantons (districts), or even private citizens. This so-called “helicopter money,” the campaigners argue, would be “dropped” directly into the real economy rather than go towards speculative loans.
Just how this manna from heaven would appear – through payments or tax cuts? – is still unclear. The reformers say it could amount to several hundred francs per citizen per year, a paltry amount in rich Switzerland. But the central bank could, at its discretion, up the payout through seignorage (the profit between the material cost of creating banknotes and coins, and their face value) and by sales of its considerable assets. For its part, the SNB says this activity would make it subject to political pressures and jeopardize its independence.
Ideas about sovereign money have been kicking around for years. During the Great Depression, a group of economists led by Irving Fisher tried to sell a similar reform, dubbed the Chicago Plan, to then-president Franklin Roosevelt without success. More recently, followers have lined up in the UK and Germany, but so far, no country has dared to try it out. The Swiss, who are not known for their financial bravado, seem unlikely to put their golden eggs into this basket.
Jeremy Gray is an editor at Handelsblatt Global. Michael Brächer, Handelsblatt's correspondent in Zurich, contributed to this article. To contact the author: [email protected]