Finance Finance News Swiss vote on whether banks can ‘create money’

Swiss vote on whether banks can ‘create money’

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A poster in favour of the 'sovereign money' initiative asks in French: 'Who should create our money?'. Photo: Getty
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Switzerland is about to vote on whether to change the way banks lend money.

The proponents of the so-called ‘Sovereign Money Initiative’ want to overhaul the country’s monetary system to protect the economy from a future financial crisis.

According to the concept, developed by economists in Germany and Switzerland, banks would no longer be able to lend excessively, as the central bank would become the only institution that can create money.

Banks could only issue loans if they had acquired an equivalent sum from the central bank, other lenders, or client deposits.

Only 10 per cent of the money in Switzerland is created by the central bank, with the rest put into circulation by the writing of loans by banks and other financial institutions, according to proponents of the vote.

“Finance bubbles will be avoided because the banks won’t be able to create money any more,” proponents said in an official statement.

“The state will be freed from being a hostage, because the banks won’t need to be rescued with taxpayers’ money to keep the whole money-transaction system afloat ie the ‘too big to fail’ problem disappears.

“The financial industry will go back to serving the real economy and society. The money and banking systems will no longer be shrouded in complexity, but will be transparent and understandable.”

The concept that banks, not governments, create most of a country’s money has been acknowledged as fact by the Bank of England.

Mervyn King, who led the Bank of England during the global financial crisis, described the process as the “most serious fault-line in the management of money in our societies today” in his 2016 book, The End of Alchemy.

“Banks are part of our daily life. Most of us use them regularly, either to obtain cash, pay bills or take out loans. But banks are also dangerous. They are at the heart of the alchemy of our financial system. Banks are the main source of money creation. They create deposits as a byproduct of making loans to risky borrowers. Those deposits are used as money,” Baron King wrote.

Proponents of the Swiss vote face broad opposition from all major parties, as well as from companies and banks.

“Sovereign money would throw a spanner in the works of our credit system and would hit borrowers and savers alike,” Swiss central bank chief Thomas Jordan has said.

The central bank also published a detailed argument against the proposal.

Voters are expected to reject it.

But surveys show voters are expected to back another proposal on the ballot – the banning of foreign online casinos.

The new gambling law would allow Swiss casinos to offer online gambling and block access to foreign online operators that do not have a licence in Switzerland.

The government argues the new rules make sure that gambling companies pay taxes in Switzerland than can be used for the common good.

Switzerland has a proud history of referenda. Any referendum question can be put to a national vote if it receives 100,000 signatures.

For a referendum to become law, at least 40 per cent of the population must participate, and a majority of the nation – and a majority of the ‘cantons’ or Swiss regions – must vote ‘yes’.

-with AAP

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