For a website that proclaims the importance of getting the word out, I didn’t see any description of what this “sovereign money” proposal actually is. What is being proposed and why?
I'd liken it to Repblicanism vs Monarchism. The differences between the positions are pretty extreme; to the point where it is hard for normal people to educate themselves.
It looks like something I'd be in favour of. Not because I don't understand monetary policy but because I disagree with its goals, methods and outcomes.
Its the sort of argument that people make when they don't have a clue. This idea that banking and trading demand against banks is the problem is just fundamentally misguided.
There are many things we could improve in banking regulation and the way the central bank operates. This however, is just a uninformed populist campaign.
Most of the claims on their website are total nonsense based on all known economics.
I really hope Switzerland will not vote for this stupid initiative. I will vote against it for sure. That said, the Swiss population has a fairly good track record of shooting down these absurd ideas from the right and the left.
Does "Banks won’t be able to create money for themselves any more" mean the same as ending fractional reserve banking, or am I misunderstanding things?
Perhaps, but it will be closer to banning bank lending (as it is fundamentally different from lending between individuals).
"Fractional reserve" is just a convenient scapegoat, as banks, once the rules and numbers are reviewed, do not lend from reserves. Any time they approve a loan, new money is put into circulation.
Which means that banks, get to loan money they don't have in the fractional reserve bank system. So banks are levered up like you wouldn't believe, which is a huge weakness of the financial system.
And what happens to all the profits from money printing ? Why, that goes to the banks, of course.
This proposal seems to simply be to only allow the central bank to lever up, and force Swiss banks to become old-US-style "investment banks".
The issue with that is simple: if some banks are allowed to print money (with profits going to the richest, and everyone or "the taxpayer" guaranteeing the loans, of course), and others are not, the banks that are allowed to print money are going to marketshare, profits, ... and counterintuitively, when the economy is expanding, historically even the people they lend to.
It is looking more and more like the economy is reconfiguring to the way it worked in the middle ages.
You are rejecting the negative connotation of the word “print” but the fact is that the bank can do a financial operation that would be illegal for a non-bank and which most humans would call printing money, and make a profit
Well. Sure, but that the government who specifically wanted it like that because that has been the traditional role of banks and everything needs to be regulated. The government went out and gave licences to do that stuff to banks.
If you don't like that only some group of people is allowed to do something, then why not allow everybody to do it.
Now, of course some will say, that would be bad. Fair enough, but then again, you need to select the group that you will give that privilege too. Right now that is banks.
I would be perfectly happy to adopt a legal system where banks are not subject to extraordinary rules let the market decide who's debt is worth taking as 'money' but apparently most people in the world don't want that.
So really that argument leads you nowhere.
The question what is the goal of this initiative? For all the problems they have (or think they have) there is a pretty easy solution that one could adopt that require this essentially random solution.
Thanks for the references. I'll read them when I get time.
On a side note, it seems bizarre to me (as a layman) that economists still debate the the nature of banks and the creation of money, given they are the foundation of the economy. Kind of like physicists not understanding thermodynamics, or something.
Economists generally follow the idea that all trade is barter trade and that money is just an indirection layered on top the “real” economy, which alleviates some of the issues with bartering goods.
That’s all fine, but historians and anthropologists have found zero edvidence that the monetary system developed out of barter.
Rather, banking seems to have co-evolved alongside interpersonal informal credit systems (contract based, not spot-trade) and religious practices in early agricultural city states. The first written records are bookkeeping documents of grain supplies and outstanding debts between citizens. In time, people started trading these documents against each other.
E.g. If you need to pay Garry for fixing your plumbing, but Sally still needs to pay you for the 8 eggs she borrowed, you can just tell her to pay it to Garry instead and you’l be even.
What coins are in this model are abstract tokens representing the ledgers inside the third party’s accounting table which denote the debts and credits people hold against eachother. In other words, it’s all about accounting. Economics courses do not include accounting, generally.
The real issue economists fail to “get” it is that it invalidates many of the axioms on which they construct their theory. Economics is still very much a deductive science. Because there is such a large hivemind around these fundamental founding myths the field has been able to get by with simply ignoring outside criticisms, this includes a number of “own goals”.
If you have some econ 101 knowledge you might want to look up the “anything goes” theorem. Many nobel prizes can be thrown out of the window.
I found Steve Keen’s “Debunking Economics” and Phillip Mirowski’s “More Heat Than Light” to be very revealing.
I have to admit to not understanding this, though I think I know somewhat well about money. Isn't this "sovereign money" the way it is in other countries, where banks either have money deposited by some customers and/or borrowings from a central (government controlled) bank or reserve that controls the total amount of the currency/money?
If banks create money on their own for lending, wouldn't that cause an uncontrollable chain reaction on the valuation of the currency, on the ability to control inflation (to some extent) by policy measures like interest rates and other things?
Any explanations, or better, links to articles would be helpful.
(please don't hesitate to correct me if I'm wrong)
Say there are 3 customers at a single bank.
Customer 1 = Investor, has 100 cash and deposits it into a bank account
Customer 2 = Borrower, borrows 100 from the bank
Customer 3 = Restaurant, provides a service for Borrower. Borrower pays a 100, and Restaurant deposits it to it's bank account.
This is how the "sovereign money" travels: Investor -> Borrower -> Restaurant
But the customers see the following account balances
Investor : 100
Borrower : -100 (owes the bank 100)
Restaurant : 100
If now Investor and Restaurant both want to withdraw their money the Bank would be in trouble. The bank only has 100 "sovereign money" on their books. Investor and Restaurant won't care who owes the bank, they want their money.
But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm.
I've heard people say that the fractional reserve system causes the boom and bust cycle, because when banks lend money, the create the principal not the interest which leads to a shortfall at some point. Not sure if this is right tho.
> I've heard people say that the fractional reserve system causes the boom and bust cycle
That is only with Austrian Economics and even there its not the majority position. Its actually only the position of a subgroup called 'Rothbardians'.
In a real market for banks the reserve ratio was determined by relative demand to hold money. Meaning if demand to hold money was high (low monetary velocity) banks could reduce their reserves. The elegance is that the profit motive makes banks automatically conduct policy like that and it leads to overall stability (at least most of the time).
The western world has spent a lot of time destroying these mechanism and replacing them with layers of regulation that are impossible to understand and get influenced by what the banks want.
Money has a very long history and discussions about money are deeply entangled in bitter and fanatical battles between political/ religious/ philosophical viewpoints. Many of those viewpoints ignore the counterintuitive ways that money and banking actually work. For the most part, bankers and economists have a vested interest in keeping as many outsiders as possible from understanding how it really works.
For all its flaws and strange history, the first Money as Debt video [1] still makes the most sense to me and I have yet to find an economist at a dinner party who refutes the disturbing conclusion that modern monetary policy is inherently unstable and depends on continuous economic growth. I welcome any links to any counterarguments that are not a confusing morass of obfuscating terminology. Show me a crystal clear model, or a common sense presentation like this video, that argues that the current monetary system is not a Ponzi scheme.
> But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm.
That is totally wrong. That solution has existed for 100s of years and you can have 100% reserve accounts now if you like.
The reason its not used now is the same it was not used in 1800 Amsterdam. People want interest.
We don't need a 'solution' its a perfectly fine system IF you actually allow banks to be real companies and not part of the government protected services. The problem is the government saving banks.
Note, I have nothing against monetary policy during a crisis, but that should focus on the avg. bank, not at saving bad actors.
Sort of, except that the bank can only lend out 90 of the 100 with, for example, a 10% reserve.
But in the end, that doesn't matter. The process is multiplicative, with a diminishing return.
Presuming that 10% reserve, when the restaurant deposits that 90, it can then serve as a reserve for the restaurant's own bank to lend out 81 which will then be deposited in someone else's bank. Now there is: the original 100, the 90, and the 81 all deposited as funds. 100 magically becomes 271, with the corresponding debt offsetting it. Rinse and repeat.
The reserve requirement is the only real brake on runaway inflation. With a 10% reserve, the theoretical maximum amount of money that could be created is 9X the original deposited amount. The formula for the multiplier is: 1 - (1 / reserve%). Of course, that's the theoretical maximum. It never goes quite that far.
But of course, then there's the interest that must somehow be paid. Interest is the only reason we have banks in the first place. It is why people deposit their money in banks, and it is how banks make their money. No interest, no banks, and (consequently) no loans. Since most money is actually created through loans, there is not enough money in the system to pay off the loans and the interest. The only way to pay back that interest is if loans continue to be made and the money supply perpetually expands. This is why we have central banks and government monetary policies.
Keep in mind, that this is all a simplification of the process. There are many layers to it, especially when the central banks get involved. Witness the Fed system in the US with the lending windows, T-bills, the role of government debt, etc. But it all boils down to the same thing when you strip the layers away.
If the sovereign currency referendum passes, the Swiss will inevitably have to deal with this problem. Their central bank will be forced to expand the money supply electronically in the form of loans made to banks, with an ever shrinking reserve. I just don't see this referendum making any difference whatsoever, except to centralize all debt.
Wow, I really hope they have success.
Private money creation through fractional reserve is a real con, and completely unnecessary with modern communications.
I don't see what this will actually change. If the SNB is the sole provider of money, whether electronic or currency, they will inevitably become the sole provider of loans, with the banks serving as brokers for those loans. Net zero game.
Personally I am peeved that I can’t individually make fractional reserve loans in genuine fungible currency (costs ~$30m to be a bank), so I’d like to choose a zero-sum point where the rich don’t get richer by default
32 comments
[ 3.5 ms ] story [ 84.4 ms ] thread[0] https://www.vollgeld-initiative.ch/fa/img/English/2015_10_22...
Honestly, most people who want this dont have a clue about monetary policy.
It looks like something I'd be in favour of. Not because I don't understand monetary policy but because I disagree with its goals, methods and outcomes.
There are many things we could improve in banking regulation and the way the central bank operates. This however, is just a uninformed populist campaign.
Most of the claims on their website are total nonsense based on all known economics.
I really hope Switzerland will not vote for this stupid initiative. I will vote against it for sure. That said, the Swiss population has a fairly good track record of shooting down these absurd ideas from the right and the left.
"Fractional reserve" is just a convenient scapegoat, as banks, once the rules and numbers are reviewed, do not lend from reserves. Any time they approve a loan, new money is put into circulation.
And what happens to all the profits from money printing ? Why, that goes to the banks, of course.
This proposal seems to simply be to only allow the central bank to lever up, and force Swiss banks to become old-US-style "investment banks".
The issue with that is simple: if some banks are allowed to print money (with profits going to the richest, and everyone or "the taxpayer" guaranteeing the loans, of course), and others are not, the banks that are allowed to print money are going to marketshare, profits, ... and counterintuitively, when the economy is expanding, historically even the people they lend to.
It is looking more and more like the economy is reconfiguring to the way it worked in the middle ages.
There are lots of regulation we should change about how banks work, but this proposal isn't one of them.
If you don't like that only some group of people is allowed to do something, then why not allow everybody to do it.
Now, of course some will say, that would be bad. Fair enough, but then again, you need to select the group that you will give that privilege too. Right now that is banks.
I would be perfectly happy to adopt a legal system where banks are not subject to extraordinary rules let the market decide who's debt is worth taking as 'money' but apparently most people in the world don't want that.
So really that argument leads you nowhere.
The question what is the goal of this initiative? For all the problems they have (or think they have) there is a pretty easy solution that one could adopt that require this essentially random solution.
See:
Richard A. Werner, A lost century in economics: Three theories of banking and the conclusive evidence https://www.sciencedirect.com/science/article/pii/S105752191...
Richard A. Werner, Can banks individually create money out of nothing? — The theories and the empirical evidence https://www.sciencedirect.com/science/article/pii/S105752191...
Zoltan Jakab and Michael Kumhof, Banks are not intermediaries of loanable funds - and why this matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
German Bundesbank, Die Rolle von Banken, Nichtbanken und Zentralbank im Geldschöpfungsprozess https://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentl...
Piti Disyatat, The bank lending channel revisited https://www.bis.org/publ/work297.pdf
Beardsley Ruml, Taxes For Revenue Are Obsolete https://m.huffpost.com/us/entry/542134
On a side note, it seems bizarre to me (as a layman) that economists still debate the the nature of banks and the creation of money, given they are the foundation of the economy. Kind of like physicists not understanding thermodynamics, or something.
That’s all fine, but historians and anthropologists have found zero edvidence that the monetary system developed out of barter.
Rather, banking seems to have co-evolved alongside interpersonal informal credit systems (contract based, not spot-trade) and religious practices in early agricultural city states. The first written records are bookkeeping documents of grain supplies and outstanding debts between citizens. In time, people started trading these documents against each other.
E.g. If you need to pay Garry for fixing your plumbing, but Sally still needs to pay you for the 8 eggs she borrowed, you can just tell her to pay it to Garry instead and you’l be even.
What coins are in this model are abstract tokens representing the ledgers inside the third party’s accounting table which denote the debts and credits people hold against eachother. In other words, it’s all about accounting. Economics courses do not include accounting, generally.
The real issue economists fail to “get” it is that it invalidates many of the axioms on which they construct their theory. Economics is still very much a deductive science. Because there is such a large hivemind around these fundamental founding myths the field has been able to get by with simply ignoring outside criticisms, this includes a number of “own goals”.
If you have some econ 101 knowledge you might want to look up the “anything goes” theorem. Many nobel prizes can be thrown out of the window.
I found Steve Keen’s “Debunking Economics” and Phillip Mirowski’s “More Heat Than Light” to be very revealing.
If banks create money on their own for lending, wouldn't that cause an uncontrollable chain reaction on the valuation of the currency, on the ability to control inflation (to some extent) by policy measures like interest rates and other things?
Any explanations, or better, links to articles would be helpful.
Customer 1 = Investor, has 100 cash and deposits it into a bank account
Customer 2 = Borrower, borrows 100 from the bank
Customer 3 = Restaurant, provides a service for Borrower. Borrower pays a 100, and Restaurant deposits it to it's bank account.
This is how the "sovereign money" travels: Investor -> Borrower -> Restaurant
But the customers see the following account balances
Investor : 100
Borrower : -100 (owes the bank 100)
Restaurant : 100
If now Investor and Restaurant both want to withdraw their money the Bank would be in trouble. The bank only has 100 "sovereign money" on their books. Investor and Restaurant won't care who owes the bank, they want their money.
But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm.
I've heard people say that the fractional reserve system causes the boom and bust cycle, because when banks lend money, the create the principal not the interest which leads to a shortfall at some point. Not sure if this is right tho.
That is only with Austrian Economics and even there its not the majority position. Its actually only the position of a subgroup called 'Rothbardians'.
In a real market for banks the reserve ratio was determined by relative demand to hold money. Meaning if demand to hold money was high (low monetary velocity) banks could reduce their reserves. The elegance is that the profit motive makes banks automatically conduct policy like that and it leads to overall stability (at least most of the time).
The western world has spent a lot of time destroying these mechanism and replacing them with layers of regulation that are impossible to understand and get influenced by what the banks want.
For all its flaws and strange history, the first Money as Debt video [1] still makes the most sense to me and I have yet to find an economist at a dinner party who refutes the disturbing conclusion that modern monetary policy is inherently unstable and depends on continuous economic growth. I welcome any links to any counterarguments that are not a confusing morass of obfuscating terminology. Show me a crystal clear model, or a common sense presentation like this video, that argues that the current monetary system is not a Ponzi scheme.
1 https://www.youtube.com/watch?v=4AC6RSau7r8
That is totally wrong. That solution has existed for 100s of years and you can have 100% reserve accounts now if you like.
The reason its not used now is the same it was not used in 1800 Amsterdam. People want interest.
We don't need a 'solution' its a perfectly fine system IF you actually allow banks to be real companies and not part of the government protected services. The problem is the government saving banks.
Note, I have nothing against monetary policy during a crisis, but that should focus on the avg. bank, not at saving bad actors.
But in the end, that doesn't matter. The process is multiplicative, with a diminishing return.
Presuming that 10% reserve, when the restaurant deposits that 90, it can then serve as a reserve for the restaurant's own bank to lend out 81 which will then be deposited in someone else's bank. Now there is: the original 100, the 90, and the 81 all deposited as funds. 100 magically becomes 271, with the corresponding debt offsetting it. Rinse and repeat.
The reserve requirement is the only real brake on runaway inflation. With a 10% reserve, the theoretical maximum amount of money that could be created is 9X the original deposited amount. The formula for the multiplier is: 1 - (1 / reserve%). Of course, that's the theoretical maximum. It never goes quite that far.
But of course, then there's the interest that must somehow be paid. Interest is the only reason we have banks in the first place. It is why people deposit their money in banks, and it is how banks make their money. No interest, no banks, and (consequently) no loans. Since most money is actually created through loans, there is not enough money in the system to pay off the loans and the interest. The only way to pay back that interest is if loans continue to be made and the money supply perpetually expands. This is why we have central banks and government monetary policies.
Keep in mind, that this is all a simplification of the process. There are many layers to it, especially when the central banks get involved. Witness the Fed system in the US with the lending windows, T-bills, the role of government debt, etc. But it all boils down to the same thing when you strip the layers away.
If the sovereign currency referendum passes, the Swiss will inevitably have to deal with this problem. Their central bank will be forced to expand the money supply electronically in the form of loans made to banks, with an ever shrinking reserve. I just don't see this referendum making any difference whatsoever, except to centralize all debt.