In an unprecedented vote, citizens will be deciding whether or not Switzerland should introduce a Vollgeld sovereign money system, which would see an end to fractional reserve banking, or in other words, the ability of private banks to create ‘loans’ that then become new money in the form of bank deposits.
Contrary to popular understanding, the vast majority of the money supply in modern economies is created by commercial banks when they issue loans, as explained by the Bank of England. It is estimated that around 90% of Switzerland’s money supply is created in this way.
The way that money is essentially created ‘out of thin air’ by private banks leads to financial instability and a heightened risk of crises. The money commercial banks create is also poorly distributed, with most of the money being lent for already existing property and financial speculation, while the real economy is starved of funds.
In the decade since the financial crisis 55% of money created by UK banks has gone towards mortgage lending, 18.7% went to the financial sector, 6.1% was lent as consumer loans, 6.2% to real estate companies and around 1.5% to insurance companies and pension funds. Meanwhile productive lending only accounted for 10.4% of money created by banks, and just over 2% went towards public services.
Critics of fractional reserve banking advocate for a sovereign money system, like Vollgeld, in which only the central bank has the ability to create new money. Though the two are often conflated, sovereign money is not to be confused with full reserve banking – the former would be based on every citizen having access to a deposit account at the central bank, rather than all private bank lending having to be fully backed by reserves.
The sovereign money referendum in Switzerland was triggered by the Vollgeld Initiative gaining over 100,000 signatures in favour of it. Switzerland’s Vollgeld Initiative is part of the International Movement for Monetary Reform (IMMR), which was set up by Positive Money in 2013.
Positive Money has been one of the leading organisations bringing sovereign money back onto the agenda since the financial crisis. Its work on sovereign money attracted a growing audience of over 65,000 supporters and 35 Positive Money local groups across the UK, and in 2017 the organisation launched Positive Money Europe.
Positive Money executive director Fran Boait said:
“We welcome the fact that Swiss voters will be given a say in what kind of money and banking system they want on June 10. The Swiss Vollgeld referendum provides a crucial opportunity not just for Switzerland, but the rest of the world, to decide who should have control of the power to create money.
“Private banks have shown that they cannot be trusted with the privilege of money creation, as their irresponsible lending has resulted in financial crises as well as a failure to invest in the real economy. Money is a public good and publicly accountable institutions such as central banks should play a greater role in its creation, as Switzerland’s Vollgeld Initiative rightly argues.”
“We hope such critical issues are also given the attention they deserve in the UK, where voters are increasingly disillusioned with the self-serving nature of our financial system and support for sovereign money proposals is growing.”
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About Positive Money
Positive Money campaigns for a money and banking system which supports a fair, democratic and sustainable economy. Set up in the aftermath of the financial crisis, Positive Money is a not-for-profit company funded by charitable trusts and foundations, as well as small donations from its network of over 65,000 supporters.