Dear PGM Capital blog readers,
On Thursday, December 24, 2015, the Swiss Federal Government informed the media, that it had received enough signatures and would hold a referendum as part of the so-called “Vollgeld”, or Full Money Initiative, also known as the Campaign for Monetary Reform, which seeks to ban commercial banks from creating money, and which calls for the central bank to be given sole power to create the money in the financial system.
FRACTIONAL RESERVE BANKING:
Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, and holds reserves that are a fraction of its deposit liabilities.
It allows banks to act as financial intermediaries between borrowers and savers, and to provide longer-term loans to borrowers while providing immediate liquidity to depositors.
However, a bank can experience a bank run if depositors wish to withdraw more funds than the reserves held by the bank.
Fractional-reserve banking is the current form of banking practiced in most countries worldwide.
SWITZERLAND’S DIRECT DEMOCRACY:
No other country in the world gives its citizens the right to vote on so many issues as Switzerland. The main instruments of Swiss direct democracy are referendums and popular initiatives.
It means Swiss citizens head to the polls every three months to vote on a range of issues at local, canton (state) or federal level.
Below video shows how the Swiss direct democracy works.
THE REFERENDUM ON FRACTIONAL RESERVE BANKING:
An initiative to strip private banks of their power to “create money” and make it exclusively a central bank privilege has gathered enough support for the Swiss government to announce a referendum on the issue.
In other words, an initiative to ban fractional reserve banking in Switzerland, and revert to a 100 percent reserve banking.
The move comes as part of the Swiss Sovereign Money Initiative (known as the Vollgeld-Initiative in German) that seeks to put an end to financial speculations. The group is concerned with the current state of affairs in traditional fractional reserve banking, where real coins, banknotes and central bank liabilities account for only a minor part of money in circulation, while most of it exists as electronic cash created by private banks.
The initiative claims that it strives to change the system so that it complies with the Swiss Constitution, guaranteeing safety and avoiding such phenomena as finance bubbles and empty money.
If the vote passes, and if Swiss banks are barred from creating deposits (by way of loans), it would shake to the core the entire modern financial system.
A date for the Swiss referendum has not been set yet.
PGM CAPITAL ANALYSIS AND COMMENTS:
In a sovereign money system, all physical and electronic money is created by the central bank and the commercial banks act only as intermediaries.
The referendum would prohibit commercial banks from creating electronic money through lines of credit without using reserves to back the loan and would make the Swiss National Bank the only institution to be able to bring money into circulation.
According to article 99, paragraph 1, of the Swiss Constitution, the Confederation is responsible for money and currency and has the exclusive right to issue coins and banknotes.
The Confederation has transferred the exclusive right to issue banknotes to the Swiss National Bank (SNB). (National Bank Act of October 3, 2003, SR 951.11, art. 4)
The initiative would amend article 99 of the Swiss Constitution to include the competence to create “electronic money” among the exclusive rights of the Swiss Confederation.
The idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fischer as a way of preventing asset bubbles and curbing reckless lending.
In modern market economies, central banks control the creation of banknotes and coins but not the creation of all money, which occurs when a commercial bank offers a line of credit. Central banks aim to influence the money supply with monetary policy and regulatory tools.
Iceland – which saw its bloated banking system collapse in spectacular fashion in 2008 – has also touted an abolition of private money creation and an end to fractional reserve banking.
Until next time.
Yours sincerely,
Eric Panneflek