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Swiss money referendum gets the whole world watching

posted onJune 5, 2018
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Swiss voters are heading to the polls on June 10 for a referendum on whether the wealthy Alpine nation should give the central bank of Switzerland (SNB) the sole authority of "creating money”. In other words, commercial banks would only be able to loan money that they have first received from the central bank – sovereign money.

At present the SNB only creates legal tender in the form of banknotes and coins, which make up around 10 percent of all money in the system. The rest of the money in in circulation in Switzerland currently is thought to be electronic money “created” by domestic banks, within a range of legal and commercial constraints.

The referendum does not concern the printing of banknotes or the minting of coins, as this remains under the exclusive authority of the SNB which has had this right since 1891.

The initiative known as “Vollgeld” or the Sovereign Money Initiative (SMI), which has its origins in ideas proposed by US economist Irving Fisher in the 1930s, is backed by the Monetary Modernization Association (MoMo), a Swiss NGO which has collected the 100,000 signatures required for the project. Switzerland's political system is designed so that referendums can take place when an issue receives more than 100,000 signatures.  

Supporters of Vollgeld- including dozens of German and Swiss economists and sociologists -say it would make the banking system much safer and will reduce the occurrence of financial crises, by taking the power to create money away from banks, preventing bankers from recklessly lending and putting people's savings at risk.

“The arbitrary way in which commercial banks can create money leads to credit bubbles, an unstable financial system and excessive indebtedness,” the Vollgeld organizing committee says. 

“The sovereign money system would lead us to a sustainable society once again,” Handelsblatt quoted Katharina Serafimova, a lecturer at the Institute for Banking and Finance at the University of Zurich as saying.

Swiss National Bank chairman, Thomas Jordan
Swiss National Bank chairman, Thomas Jordan

Opponents of sovereign money, on the other hand, argue the plan would take the country and its highly important banking sector into uncharted waters since it outlaws a basic pillar of global banking: lending money based on the cash deposited in the banks' coffers 

Banks, led by the SNB, have expressed their opposition, a majority in parliament has already rejected the initiative as well as the Economiesuisse think tank.

SNB warned the acceptance of the initiative would have serious consequences for the structure and the stability of the financial system and plunge the Swiss economy into a period of extreme uncertainty.

“Switzerland would have an untested financial system that would differ fundamentally from that of any other country" The Swiss National Bank chairman, Thomas Jordan said.

"The Swiss Sovereign Money Initiative would, if adopted, generate significant uncertainty, which would be bad for the Swiss economy and the franc," Paul Wetterwald, chief economist at Indosuez Wealth Management, said in a research note.

In Switzerland, a country where the banking system is twice the size of the economy, according to ING strategists, money is always dead serious.  As the first country to vote on such a monetary system, the whole wold is watching. 

Shares of banking giants UBS and Credit Suisse tumbled to multi-month lows in May and bank shares are widely expected to fall even further if Vollgeld wins enough votes on June 10.