The Strategist

Switzerland votes down the “sovereign money” initiative. What does it mean for global banking?

06/13/2018 - 11:10

The population of Switzerland rejected an initiative to provide the national bank of the country with a "full monopoly on money" at a national referendum. The idea of refusing fractional-reserve banking in the non-standard version gained only 24.3% of the supporters among the voters in the country. However, the referendum rather opens than closes this discussion. The rigidity of banking regulation in the world offers increasingly more opportunities to view private banks as an optional addition to the issuing central banks.

The “sovereign money” initiative was proposed in 2015 by the Swiss member of the MMRA, NGO "Monetare Modernisierung" ("monetary modernization"). In November 2017, the Swiss Federal Parliament approved a national referendum on this topic, which was held on June 10. In the spring of 2018, polls of the sociological company SRG showed that the proposal could gather the majority of votes only in the francophone part of Switzerland and in the predominantly Italian-speaking Ticino. However, the voting showed that no canton fully approved the idea, and 75.7% of the Swiss who voted in the referendum were against the so-called sovereign money.
The very idea of the referendum is interesting. The initiators proposed to transfer the monopoly right to "create money" to the National Bank of Switzerland (SNB), as proposed by the country's constitution, including electronic money and all kinds of money in general. The description of the initiative states (albeit in non-financial terminology) that this is an actual ban for fractional-reserve banking in lending for commercial banks. However, Monetare Modernisierung offered a fundamentally different scheme in contrast to the classic proposals to ban fractional-reserve banking in general. The initiative suggests that the money created in the lending process should be considered a formal loan to SNB by a private bank, and SNB (which is now legally the issuer of all Swiss francs in any form) would have the right to approve or not approve creation of its new obligations. Usually, supporters of this kind of reforms require either destruction of the central bank’s monopoly for money (issuance and regulation), or introduction of commodity money (a return to the gold standard). The initiative, in fact, was about monopolizing the SNB loan in the country's banking system.
On May 3, the head of the National Bank of Switzerland, Thomas Jordan, delivered a detailed speech at the University of St. Gallen. He rejected all proposals to give SNB a monopoly on the franc, saying that "what works does not need to be corrected." Virtually all parties in Switzerland and the federal government opposed the idea of sovereign money. The ideological position of Monetare Modernisierung also played an important role: agitation for the "monopoly of the SNB" was conducted from exclusively leftist positions, whereas the idea of hard money and rejection of the currency was popular almost exclusively in the right-wing circles throughout the world. The idea that a hard franc would overcome social inequality has seemed far-fetched to Swiss voters, even though Switzerland has retained elements of the gold standard after World War II. The main idea of the counter-strategy against the initiative was not incorrectness of the proposal, but the statement that its consequences cannot be predicted. The Swiss authorities urged voters that experiments in these areas are too dangerous.
Meanwhile, there are certain grounds to believe that both SNBs and central banks of other countries in the future can change the point of view of what is happening. Growing technical capacity of central banks to interfere in the work of credit institutions, general tightening of sector regulation, spread of electronic money and creation of effective payment systems by central banks make the question of the role of private banks in the system increasingly more practical. Through a system of subsidiaries, central banks are able to build a system where the role of the private banking capital is minimized.