(This comment is from Dr Emma Dawnay, a board member of MoMo – the organisation bringing the Swiss Sovereign Money Initiative, or Vollgeld Initiative).
Great you’re continuing to cover this topic, and I enjoyed listening to your discussion with Dirk Niepelt.
The main point about the Vollgeld Initiative, which I’m not sure comes across absolutely clearly, is that money and credit are separated for the M1 money supply – similarly to times of old when M1 would have been gold. However, unlike gold, the central bank can control the supply of this money “in the best interests of the country” to support the economy, e.g. in periods of growth, more money can be created.
Some points regarding your blog above:
1) You mention that the Vollgeld Initiative does not safeguard against the shadow banking sector. You are right, BUT: if the whole banking system were to collapse, the transaction payment systems would NOT also collapse – as it would now (unless banks are bailed out with taxpayers’ money). The “man in the street” would not lose his money in this catastrophic scenario. This means that governments would not have to bail out banks (as they do now) – which should lead to banks taking fewer risks (as they can be allowed to go bankrupt). A shadow banking system may well develop, and institutions operating in the shadow banking sector may collapse in a financial crisis – but, as mentioned, this would not bring down the whole payment transaction system as well (like now). If governments think the collapse of institutions in the shadow banking sector would be too costly for society (e.g. with pension funds being wiped out), then they will need to bring in regulation – exactly as they need to now.
2) You mention that commercial banks will be beholden to a particular funding source. There is no reason why banks won’t be able to borrow money (i.e. Sovereign Money or “Vollgeld”) from each other. If the bank’s customers want to earn interest, they must put their money into savings account (with time restrictions on withdrawals). It is likely one bank will require money to fund a loan request, whilst another has too much of this savings money – so they will lend and borrow from one another and the interbank loan system will be alive and well. It is also true that the central bank can lend to commercial banks directly.
3) You mention that loans are funded through the government. This is not correct: the central bank can bring money into circulation by one of two means: it can give money to the government to spend into circulation (this isn’t a loan: it’s like giving gold), or it can lend money to commercial banks. In neither scenario is the central bank responsible for what projects get funded. In the first scenario, it is indeed true that the government can chose how to spend the money. If they do this unwisely their politicians will, no doubt, suffer at the ballot box. If the banks lend unwisely – and after all they lend with their profits in mind (not with the stability of the financial system nor with the best interests of their countrymen) – then they can cause asset bubbles and potentially banking crises rather than providing the useful function of getting funds into the real economy.
4) Minor points: the Vollgeld Initiative has no goal of supporting, or otherwise, the Swiss Franc. The Swiss National Bank can influence the strength of the Swiss Franc, much it does now.
The Vollgeld Initiative is not meant to be a panacea for all possible financial problems, but it does address a major one: the possibility that a banking crisis will bring down the whole payment transaction system, something which would be catastrophic for society.
Finally, I agree with the comment above: many people are not aware of the way that the current banking system functions. I would also add the book recommendation: "Modernising Money" by Andrew Jackson and Ben Dyson to the texts recommended above.