SWITZERLAND – The initiative which aims at a sweeping reform of Switzerland’s monetary system is challenging not only for the banking industry and politicians but also for average citizens.
What impact would the introduction of the so-called Sovereign Money system have in the case of a – rather unlikely – approval by voters on June 10?
Here are some key points of the initiative:
The promoters of the idea are a small group comprising economists, financial specialists and entrepreneurs. Their initiative is aimed at minimising the risk of financial crises like the global economic downturn which began in 2007 when the subprime mortgage bubble burst in the United States.
Sovereign money is basically bank notes and coins issued by the central bank as a legal tender. The proposal to reform the ability of private banks to create money is based on a theory of American economist Irving Fisher from the 1930s.
So far, no country in the world is using the sovereign money system. The debate about the June 10 vote in Switzerland is therefore necessarily somewhat hypothetical. The promoters regularly point out the innovative approach of that in their proposal.
Today: Money is put into circulation by banks which grant individual loans, mortgages and credits to businesses. By doing so, it creates a debt with the creditor.
The initiative wants to give the central bank the sole right to create money. The commercial banks would only act as distributors, transferring the money of the Swiss National Bank to borrowers.
Today: The credits granted by commercial banks exceed by far their cash reserves. A bank is doomed and collapses if all clients withdraw their deposits at the same time during a crisis.
Initiative: The created money is no longer based on a debt. The banks would simply manage the sovereign money accounts, which have a100% coverage by the Swiss National Bank. It would be similar to the management of valuables held by clients in bank safe deposits. Such a system rules out the risk of bank runs.
In other words: The system would make deposits safe for clients and their money would always be fully covered whether it is in an account or stored in a mattress at home.
Today and with the initiative: The value of money is based on trust. CHF100 are only worth CHF100 as long as people are willing to believe this.
A loss of trust under the current system leads to the book money dropping in value, because the commercial bank collapses as a result of a bank run.
A sudden loss of trust is not impossible under the new system. If nobody is prepared to take sovereign money it becomes worthless too.
By Renat Kuenzi (Swissinfo) Adapted from German/urs, swissinfo.ch