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The Sovereign Money Initiative Massively Rejected in Switzerland

June 10th 2018

Today, Swiss citizens were invited to head to the polls and vote on the “Sovereign Money” initiative (a.k.a. “Vollgeld” or “Monnaie pleine”), a fundamental reform of the Swiss monetary system. The initiative was massively rejected today with 75.7% of negative votes across the country.

The origin of that initiative came from the 2008 financial crisis, which brought the global economy to its knees and pushed the world to rethink its financial system. Populations began to take a greater interest in their personal finances, how they were managed by banks, and the mechanisms of the global financial system. People started to question the banks' creation of money “out of thin air”, how their deposits were actually protected (or not) and what was being done to address the shortcomings that led to the crisis.

As a solution, the “Sovereign Money” initiative was proposing to do away with the fractional banking system and hence barring commercial banks from creating deposits through lending. It wanted to establish the Swiss National Bank (SNB) as the sole organization authorized to create money (read our article on money creation in Switzerland). This restriction was not only concerning coins and banknotes, but also the electronic money in everyone's bank accounts. Sovereign money would be issued by the SNB through allocations of central bank money to the Swiss Confederation and Cantons, or directly to the public. Any loans would have to be financed through savings deposits, debt certificates or equity.

At Mt Pelerin, we believe that this initiative would have compromised the independence of the SNB and reduce competitiveness of the Swiss banking industry for many reasons. The main arguments worth mentioning were:

First, in the current system the SNB acts as the “bank of banks” and commercial banks supply households and companies with credit and liquidity. With the initiative, the SNB would have centralized both money and credit on its balance sheet as it would be dedicated to a lending role. This would have resulted in a concentration of tasks for the SNB that would jeopardize monetary policy independence as well as the fulfillment of the SNB's mandate to ensure price stability. Also, this would have hampered the competitiveness of the Swiss banking industry.

Secondly, sovereign money limits liquidity and maturity transformation as banks would no longer have been able to create deposits through lending. This would have restricted the liquidity and credit to households and companies. The financing cost of investment would likely have increased.

Furthermore, the SNB's mandate is to ensure price stability. It has three main tools to act:

  • Conduct open market operations.
  • Adjust the interest rate on sight deposits held by banks or other financial market participants at the SNB.
  • Intervene in the foreign exchange market.

Under a sovereign money system, the SNB would not have been allowed to intervene on foreign exchange market anymore as the creation of money in the context of foreign exchange interventions is not “debt-free”.

Although today's financial system seems to work well, we do not deny the fact that it needs to undergo continual (but not necessarily radical) change and improve. With technological disruption, evolution in consumption behaviors and investment beliefs, financial market supervisory authorities as well as commercial banks are already facing the need to respond with serious actions.

Finally, we do believe that one of the initiative's main proposal, the “full reserve” idea, is in fact a fundamental progress required to guarantee liquidity and safety at all times for clients. However, we believe that money creation is a crucial aspect in economic growth and should not be concentrated in the hand of a single entity. In response to the initiative and as a private sector market participant, Mt Pelerin is building a bank in Switzerland based on the very same “full-reserve” principle.

With a business model leveraging a whole new banking ecosystem connecting financial service providers, enterprises, the crowd and the crypto world instead of leveraging deposits to drive profit, the demonstration that an alternative banking is both possible and viable is on its way.