Germany and Switzerland are two countries where cash is still king. The Swiss, especially, love their francs, despite the high number of banks offering anonymous off-shore accounts. That’s why a group of Swiss citizens have launched a campaign, called “Savings Pig,” advocating banks should be banned from lending more than they have in cash. Switzerland is due to hold a referendum on the issue later this year or early next year.
Banks currently create money by issuing more loans than the assets they own. Advocates of the referendum say that limiting loans to the deposits that banks receive from their customers or the central bank would make the financial system stronger and prevent crises. After all, it was profligate lending to US home buyers that created the mortgage debt collapse of 2007-2008, triggering a global financial disaster with bank failures and recessions in the United States and Europe.
Switzerland, a global financial hub and net exporter of medicines, machines and watches, was hardly affected by the financial crisis, but the turmoil has convinced some citizens to limit the power of money creation to the Swiss central bank. This notion is known as sovereign money or positive money. Banks would be restricted to the role of an intermediary between creditors and borrowers.
It’s a movement not restricted to Switzerland. Some economists in Britain, the Netherlands and Germany also support the idea. But the German central bank, or Bundesbank, is not among them.
“It is not obvious that these limitations will truly make the financial system as a whole more stable.”
In its monthly report, published Monday, the Bundesbank doesn’t directly refer to the Swiss initiative, but it does criticize plans to bar banks from creating money: “It is not obvious that these limitations will truly make the financial system as a whole more stable as it would already be achievable through effective regulation,” the German central bank writes. Furthermore, the transition to implement the ban could “adversely affect important economic functions of the banking system, which are required for a stable economic development.”
Proponents of the ban, such as Deutsche Bank’s former chief economist, Thomas Mayer, criticize the fact that lending is difficult to control in the current monetary system. “At the time of lending, it is not guaranteed that an investment financed through borrowing corresponds to the amount of savings (held by the bank),” said Mr. Mayer. This encourages more real investment than can be covered by real savings, leading to overinvestment and asset price bubbles, such as in the US real estate market before the financial crisis. “If the bubble bursts, the investments collapse, and this threatens to destroy the money generated by the banks,” said Mr. Mayer.
In addition to the risk of bubbles, electronic money created by banks is not safe, the referendum’s initiators say, because deposits are only guaranteed to a maximum 100,000 francs ($100,460) if the bank collapses. If the central bank were the only insitution with the power to create money, electronic money would equal cash and enjoy the same guarantee, making the financial system safer, say the Swiss proponents, who have been active since 2011.
— VOLLGELD-INITIATIVE (@Vollgeldreform) April 5, 2017
The Swiss plan, known in German as “Vollgeld Initiative,” launched a campaign earlier this month aiming to win supporters. The tweet reads: Vollgeld tour takes off at full throttle! The word from (town of) Schaffhaussen: People are upset about finance and monetary system.
The Bundesbank, however, questions whether such a ban could be implemented at low economic costs. It argues that financial cycles can be more effectively balanced with other regulatory instruments, such as through equity rules for banks that are oriented towards the level of lending. Mr. Mayer, however, argues that while they could make the credit system more secure, stricter equity rules alone are not enough.
“As long as the banks themselves are making money, there is always the risk of banking and financial crises,” he said. Other critics go even further, arguing that higher capital rules would not be very effective, because banks can create money that serves them as equity themselves.
The question of who gets to create money is also interesting for another reason. Since the financial crisis, the money stock in large central banks has practically exploded. The European Central Bank, for example, is currently pumping €60 billion into the financial system every month by purchasing government bonds. Its central bank money stock amounted to around €200 billion in 2008, but is close to €1.5 trillion currently. And yet, inflation has stayed very low because lending has remained weak. With its stance on the money-making process, the Bundesbank wants to make it clear that additional central bank money does not automatically lead to higher prices, something that is widely feared in inflation-averse Germany.
Clearly there is at least one thing the Swiss initiative has already achieved: It’s sparked a broader debate over the structure of the world’s monetary system.
Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact the author: email@example.com