The Swiss Central Bank was against it. The Swiss politicos were against it. And some 75% of the Swiss population who voted in a national referendum were against it. So, what was all the fuss about the Swiss financial experiment called Vollgeld?
Vollgeld, or “sovereign money”, is a Swiss initiative aimed at avoiding the boom and bust economy that has been the bane of nation states for the past 30 years, culminating in the financial crisis of 2007-2008.
The ability to create money is like a superpower that has traditionally resided in the hands of central and commercial banks. Of course, the government has its hands in the mix, but its power is normally restricted by the independence that generally accompanies the operations of a country’s central bank. Without this independence, governments have tended to overproduce currency, leading to massive inflation and inevitable financial collapse.
But the majority of money circulating in a country’s economy is most often generated by private banks when creating loans. Theoretically, that money is loaned to a borrower who spends it on goods in the economy, thus creating the demand for more goods. That increased demand leads to the creation of more jobs and a healthy economy. Unfortunately, private banks have not always had the interests of the economy at heart, and when they have identified an opportunity for a healthy profit, they have jumped at the chance, sometimes irresponsibly. The desire to fund speculative investment in real estate and stock markets is one of the main reasons why mortgages and margin loans have “gone bad”. This is precisely what happened during the sub-prime crisis in the US, which ended up having global ramifications.
The recent vote in Switzerland proposed that commercial banks avoid loans for speculative purposes by not inflating the financial sector. The Vollgeld proponents suggested that bank loans be channeled into the productive sector where they might stimulate demand and create jobs. Ideally, the best combination would be for the central bank to lend money at competitive rates to commercial banks, who would then pass that money into the economy to stimulate financial growth. Well, that was the plan. Unfortunately for the originators of the idea, the Swiss were unwilling to take the chance with this financial experiment, and only 24.3% of the Swiss public voted for the initiative. Despite the clarion call that Vollgeld would reduce debt and prevent boom/bust credit cycles, the public wasn’t having any of it.
Switzerland’s traditionally conservative establishment persuaded the public that the Vollgeld initiative would be costly, which it certainly would, and unpredictable. In addition, the final nail in the coffin was the declaration that it would inevitably increase interest rates, which frightened off undecided voters. So, the glorious promise of no more bank runs or bailouts fell on deaf ears, and the Swiss referendum voters returned to their fondues and cuckoo clocks voting down the chance for change. However, such financial initiatives are unlikely to stop following the failed Swiss referendum, and with the continuous rumble around other financial innovations such as cryptocurrencies, this is probably not the end of further economic experiments.