Over 100,000 Swiss citizens signed a petition to hold a constitutional referendum to end fractional reserve banking. Yes, really! That petition was certified on 24 December 2015 and a vote will be held sometime Sunday, 10 June 2018.
Switzerland, that scion of banking, may vote to end the bedrock philosophy underlying modern finance.
The movement is known as Vollgeld and is inspired by the torch-lighting work of Nobel Prize-winning economist Irving Fisher in the 1930s and the torch-bearing work of the International Monetary Fund (IMF). Though it draws on these antecedents, the Vollgeld Initiative features its own distinct provisions.
In short, Vollgeld backers believe that a full money reserve system will lead to:
- Greater control of business cycle fluctuations.
- The complete elimination of bank runs.
- A significant reduction in net government debt.
- A dramatic reduction in private debt.
Opponents counter that an end to fractional reserve banking will crush the financial industry and its ability to facilitate economic growth. They contend that concentrating credit creation authority in the hands of bureaucrats — as Vollgeld does — is a mistake. Moreover, they believe that depositors under Vollgeld will likely earn negative returns on their deposits. Thus the initiative will discourage deposits altogether.
Because this story features many moving parts and opinions, I have curated a reading list to help you keep track of this potentially earth-shaking movement.
- "Is This the End of Fractional Reserve Banking?" — From early 2016, my original piece on the Vollgeld movement provides links to important documents that frame the referendum.
- "Vollgeld Initiative" — I recommend opening the official homepage of the referendum movement in Chrome or a similar web browser that automatically translates sites into your preferred language.
- "The Sovereign Money Initiative in Switzerland: An Economic Assessment" — A Swiss economist concludes that the Vollgeld Initiative should be voted down.
- "Vollgeld: What It Means for Fractional Reserve Banking in Switzerland" and "The Vollgeld Initiative and the Future of Fractional Reserve Banking" — Authored by my colleague, Ron Rimkus, CFA, these pieces examine the specifics of the Vollgeld Initiative.
- "A Simple Analysis of the Vollgeld Initiative" — Two banking professors analyze Vollgeld-related issues from various vantage points in a generally evenhanded manner.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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16 Comments
While I think ending fractional reserve banking is a very bad idea, I almost hope this movement succeeds so the world can observe what happens. It would be an interesting experiment...unless you are Swiss, that is.
I can´t even imagine how one would unwind a fractional reserve system. Surely Swiss banks would not be expected to call-in all outstanding loans above deposit reserves. So do they just not make any new loans until their loan books fall to 100% by attrition. Nice way to create massive bank failures.
And all these Swiss companies no longer having lines-of-credit, banker acceptances, and other liquidity provisions provided by the banking system?
Thanks, Jason, for all these quirky stories you seem to uncover.
Hello Michael,
Thank you for taking the time to share your thoughts with our fellows. You raise very important questions, that I believe may be summarized as, "What the hell are they going to do if this thing passes?" I gave an interview here in the United States two years ago to Marketplace Radio (the most popular business show here in the US with 9 million daily listeners) and that was the nature of the questions in that interview, too. For what it is worth, if you follow some of the links in this post, as well as my previous post, you will see that the adherents to variants of the Chicago Plan do have plans for implementation. Plans and consequences do not always align, of course.
Also, regarding your point of not being able to imagine a world without fractional reserve banking. No one alive has global experience with a world without fractional reserve banking, because none of us alive have lived under such a regime. It was hundreds of years ago when we last lived in a full reserve environment.
Last, thanks for your kind words. Out of curiosity, what other stories strike you as quirky? I take quirky as a complement, by the way.
Yours, in service,
Jason
News in from Switzerland: The Swiss government has set the date of the referendum for 10 June.
CFA Switzerland will be hosting a full day conference about this topic on Monday with more than 200 participants already registered. Join us here: https://goo.gl/eGAWo1
Hello Chris,
Thank you for this detail. It is sure to be an interesting result regardless of the outcome.
With gratitude,
Jason
Hello from Switzerland,
Thank you for covering up the subject. I may add just a few things to make it clear. As you may already know it, Vollgeld isn't technically the same as a 100% reserve system, but the aim of the initiative remain more or less the same: to prevent commercial banks to create money out of thin air. Actually banks could still create money as it's the case right now, they just couldn't call it swiss francs (CHF), but "UBS Swiss Francs" for instance. Only CHF would be protected by the law and it would be the swiss national bank task to evaluate how much money supply the economy would need. Each CHF bank account would be backed by the SNB, but they could at any time ask for a loan if they are short of liquidity as long as the request matches with the monetary policy of the SNB.
That's where the initiative is still unclear. We don't exactly know under which rule the money supply would be created. If you read carefully Vollgeld website, they say that the SNB would take indicators as GDP or growth as potential standard for rules of monetary creation. This reminds, of course, monetarist theories of Milton Friedman, just put a number a let the computer do the job.
In reality, I frankly don't know if swiss economic growth is strong enough to cover up all the government spending. It's true that Switzerland doesn't spend as much as most euro countries (approx 30% of GDP), but there's a huge gap between canton of Geneva and Zurich for instance. In fact, Geneva publics spending are more than twice bigger than ZH (Geneva is at almost 60%, in other words on France standard).
It's no secret that most of countries in the world live beyond their means, but until now, the debt system did absorb inflation. I really don't know if a system like the one proposed by Vollgeld could work. On the other hand, I really believe that fractional reserve landing system is coming to an end. In our reality potential growth is far too low to sustain our living standards and Governments sizes doesn't stop to increase everywhere, destroying a big part of the economy, in my opinion. If we continue like this, short terms results will be: higher unemployment, higher social welfare needs and a never ending higher public debt impossible to pay back. All of this, just to to ensure the stability of the currency? In the end, i'd rather try something like Vollgeld. At least, if we crash, everyone will sink, not only the taxpayers and because of this, maybe, the government will act more carefully.
In the end, the more I reflect on the subject, the more I really think that a free banking system (without any central currency) is the way to go to save our economies.
Best reagrds
Hello Samuel,
Thank you for these details. It is exceedingly difficult to get information about Vollgeld in the United States. As I am not a native German or French speaker the resources available in Suisse remain out of reach, too. Therefore, thank you for the additional information about Vollgeld. This is sure to be an interesting vote.
Yours, in gratitude,
Jason