Why Swiss Vollgeld Vote Has the Central Bank Nervous

In Harry Potter’s world, the goblins who run Gringotts Wizarding Bank store deposits deep in caves, where they sit untouched until they’re called for. That’s not the way banks work in Switzerland, or anywhere else. But a movement calling for sovereign money, or Vollgeld in German, will get its test there this year in a national plebiscite. The idea is that by changing the way banks act, one could eliminate the kind of financial crisis that rocked the world economy in 2008.

1. How would a ‘sovereign money’ system work?

Under the Vollgeld plan, the Swiss National Bank would be given sole control over the money supply, upending the role of private banks. The SNB has come out against the idea, as has the banking sector.

2. How is that so different than today’s system?

Banks lend out far more money than they receive in deposits, keeping only a small proportion on hand in case clients ask for withdrawals. That’s called fractional reserve banking. The money you have at the bank is actually just a digital entry in its computerized books; the bank can invest most of it, so long as it promises to pay you when you want it back. When cashless payments are made, the so-called book money — which isn’t legal tender though it can be converted to cash — gets moved from one account to another.

3. Does that mean banks are creating money?

Only in a sense, not all by themselves, and not without limits. They’re creating credit, in the form of loans they grant in response to customer demand. In theory, the credit they create for projects fuels economic growth: The resources created by the project the money was borrowed for enable the borrowers to pay back the loan and also create jobs and boost consumer spending.

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4. How would things be different under Vollgeld?

As Switzerland’s central bank, the SNB currently creates money in two ways — by printing it, or by depositing electronic funds in accounts held by commercial banks. It determines the size of the monetary base according to its monetary policy objectives. Under a sovereign money system, the SNB would be the only entity allowed to create money. It would then distribute it to the federal government and cantons or even directly to citizens without requiring collateral. It’s not clear how the central bank would restrict money supply if, for example, inflation were to rise.

5. What would be left for private banks to do?

Consumers’ on-demand accounts for payment transactions would have to be fully backed by central bank cash, off commercial banks’ balance sheets. That would make it harder for the banks to grant loans, which would have to be financed via other capital, such as investment accounts, certificates of deposits or retained earnings. It’s not clear where the money for running the on-demand accounts would come from; today, such accounts typically are free of charge because banks get income from lending out the money. One possibility is that banks might levy fees on payment transactions.

6. What’s the case for sovereign money?

Vollgeld proponents argue their system would rein in credit bubbles. Ending the boom-and-bust cycle would mean no more government bailouts of banks. It would also lighten the tax burden because the central bank would be able to pay out income from issuing money (called seigniorage, meaning the profit after the cost of creating a coin or bill) to the public, they say.

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7. What do banks say?

They warn that the Swiss economy — particularly small and medium-sized businesses — would wilt as credit became constrained. They also argue that Vollgeld would provide no protection from turmoil originating abroad like the 2008 financial crisis, which began in the U.S. housing market and was magnified by derivatives. Vollgeld would have a significant impact on the monetary policy of the Swiss National Bank because it would probably have to start targeting money supply growth rather than using interest rates to influence the supply of and demand for credit. Also, having the SNB provide money to the government could undermine the central bank’s independence.

8. Has this been tried?