One month ago, the Swiss population rejected by referendum a proposal to introduce a sovereign money system. What can we learn from the campaign in Switzerland? Here are takeaways from the debate event we hosted on June 27 in Brussels with Vollgeld’s spokesperson Maurizio Degiacomi and asset manager Michael Malquarti.
You can watch the full debate below:
On June 10th, 2018 75% of Swiss voters rejected the Vollgeld (“full money”) initiative which proposed a radical reform of Switzerland’s banking and monetary system.
In essence, a Vollgeld system would do three things:
- It would remove the possibility for commercial banks to create money when they extend credit. It is now a well established fact that the banking sector is the main supplier of money. The Bank of England and the Bundesbank have explained this process better than me. With a vollgeld system, bank could only extend loans if they have usable funds such as time deposits.
- In return, the central bank would have the monopoly over the money supply. In practice the central bank could inject money into circulation by distributing money to the State, or directly to citizens, but it could also provide funding to the banking sector as loanable funds.
- Ultimately, this means that all deposits – your money in the bank – would become entirely safe even if the bank goes bankrupt. This is because deposits would be converted into central bank money and be accounted off-balance sheet. This also means we would not need any deposit guarantee anymore. For some of Vollgeld supports, such as the Former governor of the Bank of Spain the main benefit of such system is that this would pave the ground for a truly free banking market. Or As the Financial Times, chief economics commentator Martin Wolf, “ With money unambiguously safe, it would be far easier to let risk-taking institutions bear the full consequences of their failures.”
Despite the negative outcome of the Swiss referendum, one must salute and pay tribute to the organizers for having created such strong media attention and intellectual discussion about the way the money system works. This is a truly unprecedented success, which marks a new milestone since the founding of the Positive Money in 2010 and the International Movement for Monetary Reform (IMMR) in 2013.
Many lessons can be drawn from this unique experience for our movement and this is why we organised a debate in Brussels to look back at what happened. We were delighted to welcome two excellent speakers who came directly from Switzerland to witness and discuss how the campaign happened and why it failed.
Putting the question on the agenda isn’t enough without a longstanding movement building support
One of the most shocking realisations from the Swiss referendum was the level of confusion that arose from the public debate. The low turnout (34%) probably reflects this confusion. ‘When the Vollgeld campaigns says one thing and the the government or the central bank says the other, people are just confused and do not know what to think, and even less how to vote.” Maurizio Degiacomi said.
Although the Swiss did not approve the Vollgeld proposal, a poll had found that around 59% of Swiss people actually do want the central bank to have the monopoly on money creation. Hence, the result of the vote should not be interpreted as support for the current monetary system where private banks create most of the money.
On several occasions, the Vollgeld campaign had to fight back against misleading statements by the media and opponents of the initiative. For instance, the Federal government put forward misleading claims such as that “Banks can lend money … by using the money that customers have deposited into their bank account” or that under a sovereign money system, a central bank would have to lend money directly into the economy. Those two claims alone go right in the opposite direction of what the Vollgeld initiative is about, and rightfully, some supporters of Vollgeld have brought a legal complaint to the Federal supreme court. The case is currently pending.
The process of making technical topic like this mainstream is a difficult one, especially given the lack of education that is being provided. More education is required to ensure that people understand how the money they use everyday is actually being created.
In spite of the confusion, overall the initiative has contributed to increasing the level of awareness about money creation in Switzerland but more importantly abroad. This is in itself a huge victory for the campaign, even though it didn’t help the campaign immediately.
Vollgeld showed that central banking is political
Central bankers cherish their independence and are usually proud to cast themselves as bureaucrats who do not engage in politics. However it appeared during the referendum campaign that the Swiss National Bank did exactly the opposite, by clearly campaigning against Vollgeld.
Thomas Jordan, the head of the SNB loudly spoke against Vollgeld in several speeches and media interventions. Shortly after the preliminary results came out, the SNB issued a press statement expressing its relief that Vollgeld was turned down by the Swiss people. Paradoxically, Jordan’s argument against Vollgeld is that it would politicize monetary policy, but the very act of campaigning against Vollgeld has resulted in a politicization of the SNB.
Given the authority of the central bank, the SNB’s role created an enormous difficulty for the pro-Vollgeld campaign. “In fact the banks themselves did not need to campaign because the central bank was in the frontrun of the campaign against us”. Maurizio Degiacomi told us. How do you convince people to vote for Vollgeld if the very institution supposed to implement the reform is so clearly against it? It was probably an impossible task.
The proactive political role of the SNB during this campaign is quite extraordinary and goes beyond the usual tradition of central bank independence. Did it go too far?
On the one hand, the SNB is primarily concerned with the topic of the campaign, so it has a legitimate stake and expertise in the debate. On the other hand, Malquarti thinks the problem is not so much that the SNB took a position, but that they usually pretend to be neutral when in fact they are not. “When you hold power, you are never neutral” he said. “We should simply recognise that being the head of the central bank is de facto a political position.”
Overall, the Swiss experience provides another living example that the central bank independence will be increasingly challenged as the discussion over money creation goes mainstream and becomes politicized.
Serious objections against sovereign money
Despite the confused discussion, the debate in Switzerland has brought up some serious challenges against the sovereign money proposal. One of the main objections was the fact that Vollgeld would greatly reduce the possibility of the banking sector to extend loans to the real economy, ultimately provoking an economic downturn.
This objection isn’t new to Positive Money. In 2015, we published a full paper dedicated to addressing this question. While we think the objection doesn’t stand in theory, in practice we have to recognise the challenges of the transition and the fact that moving to a sovereign money system would induce a behavioral change from bank’s customers. Put simply, people would have to voluntarily move their savings from sight deposits towards time deposits or mutual funds in order to make their savings available for lending to businesses.
This induces a cultural change in society on how we manage our money This assumption should not be taken lightly.
Going step by step
Despite the defeat, Malquarti thinks the outcome of the referendum does not mean people endorse the status quo. It was only a rejection of one specific proposal which was “too abstract, too vague and to some extent it was disconnected with the political realities.”
Hence Michael Malquarti’s biggest critique of the Vollgeld initiative is that it focused “a proposal that came out of the blue, without prior consultation with the current political establishment”. This goes against the Swiss tradition of popular initiatives, which often stem from political parties themselves.
Malquarti’s suggested the way to go would be narrow the proposals on how to reform the monetary system. For example “Helicopter money” or using QE for financing infrastructure investments are workable solutions to cope with recessions. Issuing a central bank digital currency and offering the public current accounts at the central bank is also one way to make the financial system more stable and improve the efficiency of monetary policy. Those ideas do not require a full-fledged sovereign money system, yet they would move society closer to it.
Positive Money was founded in the UK in 2010 with the historic purpose of advocating for a “sovereign money system”. However over the years we have realised that such a change is unlikely to come out of an overnight revolution. Switzerland’s experience provides ample evidence that system change cannot happen in one go! We must think about the different layers of change, from education to customer behaviors and also a cultural shift within central bank’s and the financial sector.
While we remain committed to demonstrating the intellectual and theoretical validity of a sovereign money system, Positive Money Europe’s short-term priority isn’t so much to ban private money creation but to create a hybrid system where public money creation can be mobilized to compensate for the pitfalls and dangers of the privately controlled money creation system. This is especially true in the Eurozone where the European Central Bank is prohibited from doing monetary financing: this effectively prevents the ECB from using its most powerful tool.
Ultimately, we also realised that our mission goes beyond the implementation of one single proposal such as sovereign money. Our mission is to create a money and banking system that serves a fair, democratic and sustainable economy. To fulfill this ambitious mission, we will probably need more ammunition than just one silver bullet.
You can watch the full debate below:
Pictures credit: CC Vollgeld
“Vollgeld would greatly reduce the possibility of the banking sector to extend loans to the real economy, ultimately provoking an economic downturn.”
Bonjour à tou-te-s
Merci Stanislas, pour ce texte édifiant et clair.
Il me semble que la crainte d’un fléchissement d’activité en raison du passage à la monnaie pleine, naît de la perspective que les banques, (ramenées au statut de simple intermédiaire financier), n’accorderaient plus que des prêts en monnaie existante. (Au lieu de crédits en monnaie nouvelle, créée ex nihilo du fait du privilège bancaire, comme c’est le cas actuellement.)
Cette crainte de difficultés aggravées pour les ménages et les entreprises désirant financer un investissement, se fonde sur la double hypothèse que:
i) la seule ressource des banques pour accorder des prêts serait l’épargne (collectée auprès des ménages pour l’essentiel),
ii) que cette collecte pourrait se révéler insuffisante par rapport aux besoins des emprunteurs.
Même si les opposants à la MP ont, avec une mauvaise foi évidente, agité la menace d’une récession qui serait déclenchée par le succès de l’initiative… cette hypothèse ne correspond guère à la réalité puisque la proposition insistait sur le rôle de la Banque Centrale pour garantir, par divers moyens, une quantité de monnaie en adéquation avec l’activité économique:
outre le reversement par la BNS du bénéfice du seigneuriage aux cantons ou aux citoyens, il était également prévu dans son mandat, l’octroi de prêts aux banques, (comme c’est déjà le cas actuellement).
En fait, au cours du délai de 2 ans, (prévu en cas de succès pour mettre en oeuvre la réforme), les détails de procédure auraient largement pu être fixés (par exemple, existence d’un portefeuille de demandes d’emprunts acceptées mais non encore financées, faute de liquidités.)
C’est en passant sous silence l’existence de dispositions qui anticipaient correctement la difficulté que tu soulignes, que la BNS a pu, hélas, effrayer des électeurs trop peu, (ou trop mal), informés !
Ce point est particulièrement sensible puisque nous avons pu observer sans plaisir que des économistes, membres d’Attac ou des Atterrés, faisaient écho à cette crainte mal fondée !
Il me semble qu’il y a au moins 2 autres leçons à tirer du “galop d’essai”… que fut l’initiative Monnaie Pleine:
– Un mécanisme de recueil de préférences collectives analogue aux votations helvétiques devra comporter l’instauration d’un Conseil de surveillance des conditions du débat public. Il sera chargé de garantir l’équilibre des moyens entre le “Pour” et le “Contre”:
dans le cas du débat suisse sur la “Monnaie Pleine”, le document officiel que le Conseil Fédéral a distribué aux citoyens, comportait 1 page “Pour” et… 7 pages “Contre”, tandis que des infos erronées ont été diffusées le 29 mai sur la RTS !
– Tant que perdure un système politique perverti, dans lequel les “1%” disposent de moyens suffisants pour convaincre les “99 %” de… voter contre leur intérêt, il peut être important pour les citoyens soucieux de s’émanciper… de faire preuve d’un peu de roublardise:
si, au lieu de parler de restauration du monopole de la BNS sur la création de monnaie légale… la délibération proposée s’était contentée d’ouvrir simplement la possibilité pour les ménages et les entreprises de confier leur argent à la Banque Centrale, (comme c’est déjà le cas pour les employés de la BNS…), le public peu informé aurait tout aussi bien compris la différence entre un compte bancaire entièrement garanti par la collectivité… et un compte bancaire susceptible de contribuer au sauvetage d’une banque en difficulté ! (Comme hélas… chacun des nôtres !)
Face à une proposition simplifiée… (débarrassée de mots aussi inquiétants que… “rétablir le monopole de création de monnaie légale” !), le lobby bancaire et ses “économistes à gages”… auraient eu du mal à agiter la menace et la peur, n’hésitant pas à évoquer les “invasions de sauterelles”… les “inondations”… ou les “fièvres malignes” que “cette proposition étrange, qui n’existe nulle part ailleurs”… allait inéluctablement provoquer !
Bien amicalement
Raymond
This movement is one of the best ideas which we could get in the financial world. I fully agree with this and would like to welcome this referendum in EU countries. It`s very important for our societies to take serious look at this and step in to it. This would need strong support by governments, medias and professionals. It have to be explained to ordinary people so they would understand and see point clearly. Until then, we will struggle with contemporary financial system which is outdated and doesn`t work in societies` favour.
While I applaud what Positive Money is doing I believe it is creating an insurmountable hurdle for itself by limiting private bank lending to deposits.
The actual role of the private banks is to distribute the money supply to the community and given proper due diligent conditions for doing so, they can do the job very well. As we all know, the amount of money created as interest-bearing credit far outweighs the conventional interest-free currency created by the Governments. The reform that is needed to supply an answer to this anomaly is simply to have the Government sell access to digital credit to the private retail banks. This would be done in accordance with properly assessed loan applications from the bank’s customers. The private banks would then add a competitive loading to cover their administrative charges and a profit margin that would be spread over the period of the loan. The concept of compounding interest would be eliminated. Every legitimate borrower benefits and the banks would revert to their proper role of distributing the money supply rather than gouging the public.
This would eliminate the objection to reducing the needed supply of money needed for a growing population and a growing economy.
The Government would be in a sound position to manage the nation’s supply of money to avoid both inflation and deflation. The supply would be balanced through the nation’s population levels, it’s necessary and desired productive capacity and a measure of the nation’s consumption capacity.
The private banks would be set up exactly as they are now through shareholders and any gambling on markets would be entirely at the bank’s own risk using approved shareholder or investor funds. There needs to be a separation between retail banks and investment banks and no Government credit access would be available to the investment banks for gambling or profiteering.