When “Vollgeld” comes up in conversation, the reaction is usually puzzlement: Vollgeld? What’s that? But this weekend’s Swiss referendum on the topic, known in English as “sovereign money,” touches on an issue that affects us all: Where does the money in our bank accounts really come from, and how safe is it in a crisis?
The Vollgeld referendum wants to make the money in your account as safe as the cash in your pocket. The problem is that money in your account, electronic deposits, are not the same as cash, even if they appear similar. Cash is issued by central banks, but deposit money is created by banks when they make loans. When you go to withdraw cash from an ATM, you are trusting that the bank can convert your credit into cash.
“Virtual” electronic deposits comprise around 90 percent of all money in circulation. This means the vast majority of money creation is done by private banks, not by the state. This has implications for the stability of the financial system, because it gives rise to a conflict of interest. Banks are meant to take risks – in short, to lend out money – but this can lead to debt bubbles. However, what bank customers want above all is for their money to be safe. The consequences of this became clear during the last financial crisis.
Whatever the charm of the Vollgeld idea, it deserves to be rejected by Swiss voters.
Switzerland’s Vollgeld proposal wants to solve the dilemma with a simple idea: instead of banks, electronic money should be created by the central bank. The banks would just look after it, in the same way they keep cash in a safe. Money in your bank account would be proper, fully-fledged money, as safe as cash.
The idea is attractive. Even one of the main columnist for the Financial Times, no one’s idea of a leftist publication, has urged the Swiss to vote in favor. But whatever the charm of the Vollgeld idea, it deserves to be rejected. Even if it is an interesting experiment, Switzerland is the wrong laboratory.
The fact that the Swiss are deciding on the question is not because the country urgently needs monetary reform. Rather, it reflects the long Swiss tradition of direct democracy, which makes it comparatively easy to put something to a popular vote: all it takes is 100,000 signatures. In Germany, a scheme with no support from major parties – like Vollgeld in Switzerland – would simply never make it to parliament. Which is ironic, since the idea was originally thought up by a German economist, Joseph Huber.
Supporters of the proposal want Switzerland to set an example to the rest of the world. But the Swiss seem unlikely to play ball, and with good reason. The ballot organizers claim the introduction of Vollgeld would be “smooth and without disruptions.” That seems highly unlikely. In fact, Switzerland would be the first country ever to attempt the Vollgeld “upgrade.”
The country should heed the old IT saying – never change a running system. If it ain’t broke, don’t fix it without very good reason. As it is, Switzerland has long put the financial crisis behind it. Ten years ago, UBS, the country’s largest bank, had to be rescued by the government. But unlike Germany, where the taxpayer still owns a stake in Commerzbank, the Swiss government sold off its UBS stock five years ago, and even made money on the bailout. Today, Swiss banks are running up billions of francs in profits, and the real economy is in good shape too. Voters are not suffering at the hands of the banks; this relative calm is reflected in a low expected turnout. You could say the Swiss are just too well off to vote for change.
All well and good, say Vollgeld supporters, but shouldn’t we take precautions for the next crisis? But they overlook the clear risks which come with Vollgeld, especially since the country’s open economy makes it particularly vulnerable. The Swiss banks may be exaggerating when they call Vollgeld a “high-risk experiment.” But it would not be as simple as changing the oil in your car.
Take one example: the Swiss franc is today regarded as a safe haven. When things get sketchy in the outside world, as with Italy’s recent political upheaval, investors like to take their money to the safety of the Swiss Alps. There would be even more demand for a franc based on Vollgeld – bad news for Swiss exports that would become more expensive. Even the proposition’s supporters recognize this risk. They point out that if necessary Switzerland could impose capital controls, like Greece did. Not exactly a reassuring comparison for Swiss voters.
Polls indicate that a majority will vote against the proposal. Our Swiss neighbors keep a close eye on how the rest of the world deals with problems, then adopt the best solutions. Risk-taking is not really part of the Swiss temperament. However interesting the Vollgeld idea might be, they would prefer another country to go first. Why not Iceland, for example? They have mountains and lakes too, and banks which sometimes lend more money than they should.
Michael Brächer is Handelsblatt’s Switzerland correspondent. To contact the author: firstname.lastname@example.org