You may have heard about the Swiss referendum to end fractional reserve lending by Swiss commercial banks. It’s a fascinating development, and another example of how average Swiss people can use the federal referendum process to force both the central legislature and the 26 cantons to consider citizen proposals-- merely by gathering 100,000 signatures within 18 months.
We asked Claudio Grass, a good friend of the Mises Institute and a principal with the Swiss company Global Gold, to give us his perspective on the initiative as our Mises Weekends guest—you can listen here.
But first a bit of background is in order. The referendum, known as the Vollgeld initiative, would require banks to hold 100% reserves against their deposits. In effect, commercial banks would become money warehouses-- albeit holding both physical and electronic currency--something many libertarians and Austrians have long favored.
But while the initiative sounds like a positive step toward ending the expansionary pressures of a now almost entirely fiat Swiss franc-- and a happy development for libertarians who consider fractional reserve banks fraudulent--the reality in Switzerland is more complicated.
Austro-libertarians like Rothbard argue that we should end central banking altogether: let the marketplace decide what form money takes, how much of it is available, and what interest rates for borrowing it should be. Money is a both a medium of exchange and a commodity that is best supplied by the market.
By contrast, the Vollgeld initiative calls for giving the Swiss Central Bank absolute control over money creation. Money is too important to be left in the hands of even nominally private, profit-seeking commercial banks.
This is the philosophy of the Swiss Sovereign Money movement that’s behind Vollgeld, a loose coalition of anti-capitalist and anti-banking groups that certainly don’t want money to operate as a market commodity. Money, they argue, is so important that it must be issued and run only by the “sovereign”-- a curious term in a country that has fully rejected monarchs and centralized power at least since its federal constitution was approved in 1848. It evidences, perhaps, the same kind of loyalist fervor for centralized state control that European subjects once showed for their Kings and Queens.
In this sense the Swiss sovereign money movement has an American cousin in modern-day Greenbackers. Greenbackers in the US also want monopolized control over money, but through Congress directly rather than a central bank. In fact, they got their start by having the Union government pay for its Civil War military buildup by issuing unbacked currency.
Today’s Greenbackers include former congressman Dennis Kucinich, and presidential hopeful Bernie Sanders is a fellow-traveler of sorts who favors favors Modern Monetary Theory. Greenbackers are populist, anti-capitalist, and at least nominally anti-Fed, who correctly see the confluence between central banks and commercial banks as an unjust enrichment scheme for Wall Street.
But enriching DC instead, by handing control over monetary policy from guileful central bankers to dimwitted members of Congress, is not the answer. As economist Bob Murphy explains, the Greenbacker solution-- open political control over money by a central legislative body-- is deeply flawed:
This is a very convoluted process, but when one drills down to its essence, the Fed and the commercial banks are arguably giant counterfeiters. In this light, it is completely understandable that so many people reject the current system and seek to replace it with something seemingly more democratic.
It’s here where the modern Greenbackers go awry. Recognizing the absurdity of allowing bankers to issue new money, and then lend it to the government (taxpayers) at interest, the Greenbackers want to cut out the middleman. They want the government to reclaim control of the printing press—which of course need not even “print” money in this age of electronic financial transactions—and to issue new money whenever its spending exceeds its revenue. This would still be inflationary and raise prices (other things equal), to be sure, but modern Greenbackers argue that at least the taxpayers wouldn’t be shackled with a national debt hanging over them, requiring massive transfers just to pay interest each year.
To repeat, this cure could be worse than the disease. The fundamental danger is that an unchecked power to issue new money might prove too tempting for political officials, who would seek to curry favor with the public through various spending programs that were “paid for” through a general rise in prices. Yes, the present system is indeed absurd, but at least citizens understand—however vaguely—that massive government budget deficits will ultimately prove painful. This recognition, as well as the procedural requirement of periodically raising the formal debt ceiling, at least puts some brake on the growth in federal spending.
The Vollgeld initiative comes on the heels of another referendum in 2014 that would have required the Swiss central bank to hold 20% of its bank reserves in physical gold-- a referendum that failed under heavily coordinated media pressure urging voters not to interfere with the Swiss National Bank’s so-called independence. These are of course the same arguments we hear about Fed independence here in the US.
Still, it’s fascinating that the Swiss people, or at least some of them, have enough interest in monetary policy to hold these votes at all. It’s hard to imagine any sort of coherent national discussion in the US over the issue of fractional reserve banking(!) So kudos to Switzerland, which is probably the leading example of the value of subsidiarity we have in the world today.
