Switzerland’s Vollgeld Initiative: the monetary system at the ballot box

On June 10th, Swiss voters will go to the polls to vote on the ‘Vollgeld Initiative’ (‘Initiative Monnaie Pleine’ in French) which would instate a Sovereign Money system in place of the current banking system in Switzerland. In this blog post we explain what’s at stake in the referendum and how it relates to Positive Money’s research. 

How did we get to this point?

Thanks to the Swiss political structure, which means public campaigns that gather enough signatures must be put to a public referendum. Seven such votes were held in 2017, including on the country’s energy transition, food security, and pension reforms.

What is the Vollgeld Initiative?

Sovereign Money would completely change the way money is created in the economy. Almost all modern economies rely on fractional reserve banking, which means that commercial banks only need to hold reserves representing a small fraction of the total amount of money they manage for their customers. They can therefore extend loans without first finding money, in the form of customers’ deposits, to ‘lend out’.

As the Initiative’s website points out, the reform would represent no more than ‘what most people want and think is already the reality [of the banking system]’: that only the National Bank can create new Swiss Francs. The proposal would revoke private banks’ power to create money by extending loans.

People would store their money in current (or ‘transaction’) accounts at the Swiss National Bank, administered by transformed versions of today’s banks. Those who want an interest-bearing savings account can hand over their cash to one of those banks and receive credit in an ‘investment account’, a record kept by the bank and rendered completely separate from people’s everyday transaction accounts (and therefore from the payment system). Banks would only be able to make loans using the funds provided by savers and investors choosing this option. When investors want to redeem their savings, the bank would have to pay back into their transaction account. 

So is Vollgeld the same as full reserve banking?

Not exactly; while the proposals might look similar, Vollgeld-style Sovereign Money means that customers’ money is held at the central bank itself. Private banks would only administer those accounts (including their own), while keeping a record of loans and savings (investment accounts) as their main form of business.

Under full reserve banking – at least in the form proposed under the Chicago Plan from the 1930s – customers’ deposits would still be held at private banks rather than at the central bank. Positive Money’s work explaining the difference further is available here.

Isn’t Switzerland known for its banking?

The nation does have a large financial sector, which represents around 10% of the country’s GDP and manages total financial assets nearly 5 times total GDP. Bank deposits alone are almost 180% of GDP (a similar amount to here in the UK).

It’s important to remember that a Sovereign Money system wouldn’t prohibit financial trading and investment entirely. It would simply mean that banks are no longer allowed to extend loans with money that they don’t already have from other people’s savings with them.

Interesting – but what’s the point?

Banks are motivated to lend to economic activities that are good for their bottom line rather than those that are good for society. This results in lending going mostly to speculation on financial instruments, and investment in real estate, including mortgages, and ties a valuable public good – the money supply – to the dangerous impulses of private organisations.

Some forms of lending can be good at a micro level – a mortgage that helps a family or individual get a house is in itself socially beneficial – but socially harmful system-wide when taken to extremes. Excessive bank lending to certain activities can generate financial instability, inequality, and even environmental degradation.

Vollgeld would prevent this market failure from being so extensive, insulate the money supply and payments system from its consequences, and greatly expand the role of the Swiss central bank in creating new public money for socially useful investment.

Is it a good idea?

Positive Money’s own research spells out the risks and disadvantages of fractional reserve banking and the potential benefits of a Vollgeld-style system. The Swiss proposal has received support from some prominent commentators, including Martin Sandbu and Martin Wolf, both in the Financial Times. Wolf writes that ‘in no other economic area is public power so mixed with private interests’ as in banking.

The referendum has prompted the Swiss National Bank to join large private banks in expressing doubt: the chairman of the SNB called the Initiative an ‘unnecessary experiment.’ But it makes little sense to object to a reform that would lead into the unknown when the present situation is as dysfunctional as commercial banking is today. Martin Wolf again: ‘familiarity with [the current] arrangement cannot make it less undesirable.’ Given the scale and regularity of financial crises in the current system, ‘the burden of proof should not be on those who favour change.’

The Vollgeld Initiative team have annotated the SNB response with their own arguments here.

Will it happen?

At the moment, surveys indicate that the ‘yes’ vote is shy of the majority it needs to make the transition. Almost a half of respondents are thought to be planning to vote ‘no’, with a sizeable chunk (around 12% to 16%) still undecided.