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Sovereign Money Isn’t Dead, Even If the Swiss Reject It

Swiss bank notes are seen in ascending denominations in this arranged photograph in Morges, Switzerland.

(bloomberg)

(Bloomberg Opinion) -- On June 10, Swiss voters are likely to reject a referendum proposal to strip private banks of the ability to create money. But even if it fails now, the idea of “sovereign money” (or “Vollgeld” in German) won’t die. It’s worth considering where the experiment could take place and in what form.

The basic idea of Vollgeld is to make sure money no longer comes in the form of debt — that is, a liability booked against an asset, as when a bank issues a loan. In the Swiss proposal, the central bank would control the money supply and become the keeper of all checking accounts, which would no longer pay interest. The Swiss National Bank would then distribute the money it creates to local government and directly to citizens. Typically, banks lend far more money than they keep in deposits. The new plan would have the same effect as requiring them to hold 100 percent reserves against loans: The risk of bank runs should theoretically be eliminated and the financial system should be rock-solid.

Mainstream economists have expressed strong objections to the proposal. They point out that the SNB (which itself opposes the proposal) is no more qualified to determine the necessary quantity of money in the economy than private banks are by using credit-decision criteria. Opponents argue that saddling the SNB with this responsibility carries risks, including political ones.

QuicktakeWhy Vollgeld Makes the Swiss Central Bank Nervous

But few Swiss voters will delve into these arguments, let alone more detailed macroeconomic ones. Rather, they’ll remember that their country isn't known for bruising bank crashes. During the recent global financial crisis, the only lender whose clients had to be bailed out by Swiss deposit insurance was the local subsidiary of the bankrupt Icelandic bank Kaupthing.

Even so, bankers aren’t popular anywhere, even in Switzerland, which helps explain the relatively high (though insufficient) level of support for the Vollgeld proposal.

Even if yet another exciting economic experiment is nipped in the bud by the conservative Swiss (a basic income proposal died two years ago), it doesn’t mean the sovereign money experiment wouldn’t work anywhere. A successful test would be most effective in a country that, unlike Switzerland, experienced a truly painful systemic banking crisis (there were 147 between 1970 and 2011, according to the International Monetary Fund). Iceland was once considered a promising candidate for a trial. In 2008, not much was left of the country’s banking system after all the major lenders went belly up, creating an opportunity for a different monetary system. In fact, the head of the parliament’s Economic Affairs Committee proposed moving to “sovereign money” in 2015 — but by then the momentum had been lost because the situation was no longer desperate.

In other words, only a country with a small economy that is in dire straits could justify the kind of beyond-the-mainstream rethinking of money that even respected establishment figures such as Financial Times’s Martin Wolf would like a chance to watch somewhere. 

The other problem with the Swiss proposal is that it risks obsolescence before it even gets off the ground. There are important similarities between Vollgeld and cryptocurrencies. As Beat Weber of the Austrian National Bank pointed out: 

Projects like Bitcoin and Sovereign Money attract attention by suggesting that money is not safe unless it ceases to be a claim on an issuer. Instead, it should become a pure asset and be put under strict quantity control. Neglecting the inevitable dependence on others involved in holding money or any other non-consumable asset, the underlying idea is that commodity-like money would enable individual possession of money without dependence on an issuer which may suddenly become unable to make good on its promise.

The architects of the Swiss Vollgeld proposal recognize certain “points of contact” between crypto and their idea. Nevertheless, “a grand love affair between Vollgeld and Bitcoin is hardly possible,” according to one of the authors, the economist Reinhold Harringer. Perhaps, he suggested, the blockchain technology could be used to keep track of currency in the new system, but that’s pretty much it. Not even that opportunity is developed in the proposal, which would rely on the banking system to carry out transactions even as checking accounts would no longer be on their balance sheets.

Ideally, a Vollgeld proposal should have a technical section containing a tested mechanism for running the system. It would either exclude banks altogether or explain how they should function, and still make a profit, in the new environment.  

Daring to try crypto-based Vollgeld would require more than just getting rid of credit-based money. It might be worth developing and testing the technical side of such a system, perhaps in a small community. A noteworthy experiment is taking place in the Russian village of Kolionovo, where farmers and small businesses use a local cryptocurrency to pay one another. A successful test of the currency would make it ready to be tried in a crisis-hit nation to supplant a dysfunctional banking system.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

©2018 Bloomberg L.P.

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