Scott Sumner  

Switzerland's Vollgeld Initiative

The Glorious Lasting Accidenta... Retroactive Krikorianism...

The Economist reports on a new initiative in Switzerland:

Campaigners in many rich countries want to strip private banks of the power to create money. In Switzerland members of the "Vollgeld Initiative" presented the government with enough signatures in December to trigger a national referendum on the subject. Bank deposits, they point out, make up some 87% of the readily available money in Switzerland, vastly exceeding notes and coins. Since money creation is the main fuel of both inflation and growth, they argue, it should not be in private hands, let alone entrusted to institutions that are prone to binge and purge.

Under the existing system deposits sit on private banks' balance-sheets. Under the proposed alternative (a variation on "narrow banking"), accounts would be transformed into something much closer to the safe-deposit boxes nestled in Swiss vaults. Customers would pay the banks a charge for storing their cash. Any loans banks make would have to be funded by shareholders or by borrowing of their own, not by deposits.

The central bank, meanwhile, would survey the economy and judge how much cash was required to maintain stable inflation. Rather than tweaking interest rates to influence private banks' lending, it would simply hand out (or siphon away) the necessary cash itself, to the government, the public, or as loans to private banks.

The system would be safer for depositors, since banks could not lend out and lose their money. That would allow governments to withdraw the implicit protection banks currently enjoy as the guardian of voters' deposits. Even big banks could be allowed to fail, since the losses would not reverberate through the system so much. That possibility would nudge lenders into behaving more prudently.

The Swiss government responds officially to every issue to be put to a referendum. On February 24th it released its verdict on the Vollgeld Initiative (the actual vote will not take place until next year at the earliest). It is not a fan. As the central bank issued more money, the government points out, its liabilities (cash) would rise without any increase in its assets. This, the government fears, would undermine confidence in the value of money.

I don't know enough about the plan to take a position, but there are two features that I really like:

1. It eliminates the problem of moral hazard by removing deposit insurance from time deposits and making demand deposits 100% safe, since they would merely represent holdings of base money. To make loans, banks would attract funds by paying interest on non-insured time deposits.

2. The central bank would stabilize the price level by adjusting the quantity of money, not the interest rate target. Zero interest rates will become more common in the future, and hence the Keynesian approach to monetary policy (interest rate targeting) will be increasingly ineffective. There is no zero lower bound problem for changes in the money supply.

Ideally, we'd remove deposit insurance from all deposits, and let banks hold less than 100% reserve backing for checking accounts. But while this initiative is not perfect, it is certainly better than the status quo, where banking is riddled with moral hazard.

A bigger issue is the question of how money is injected into the economy. It should be given to the government, not the public. And the lack of assets on the central bank's balance sheet would not be a problem. When the money supply needed to be reduced, the government would simply sell bonds and give the money to the central bank, which would extinguish the money.

If newly created money were simply given to the public, then I could not support the plan. That would be helicopter money. Some libertarians are confused on this issue; giving the money to the government is a far more libertarian method than giving it to the public. After all, the central bank is part of the government. If you shifted from giving new money to the government to giving it directly to the public, it would be exactly equivalent to creating a new welfare program and funding the program via government borrowing. Does that sound libertarian?

Whenever a plan sounds like a free lunch, thoughtful people should be skeptical. There should be a clear line between monetary policymakers and fiscal policymakers. I don't want to give the central bank discretion over what type of welfare regime a country will enact. That's for the legislature to decide.

PS. This interview contains a wealth of useful information on the initiative.

PPS. Are you a fan of David Graeber's book on debt? I confess that I have not read the book, but George Selgin and Brad DeLong deliver a one-two punch that will be difficult for Graeber to recover from.

Comments and Sharing

CATEGORIES: Monetary Policy , Money

COMMENTS (14 to date)
Bob Murphy writes:

Excuse the shameless self-promotion but Graeber and I crossed swords when his book came out. Here is my official review.

Market Fiscalist writes:

Why couldn't the CB create/destroy money under this plan by buying/selling assets just like under FRB ?

Alexander Hamilton writes:

Maybe I misunderstood this plan when I first read about it. It seemed like it had rothbardbian quackery written all over it. I like the idea of monetary policy focusing on base money as you do but isn't 100% reserve banking just destroying perfectly useful financial intermediation for no good reason?

Scott Sumner writes:

Bob, That's good to know.

Market, It could.

Alexander, As I said, it's not optimal. But the 100% is only for demand deposits. They could still raise funds for loans from time deposits.

Alexander Hamilton writes:

I wasn't particlarly impressed by what I read in the article either. It's full of the same tired clich├ęs about mainstream economics. She creates a false dichotomy between mathematics and realism. Surely the choice is between simplicity and realism (or complexity).

Obviously if it made managing the total amount of spending in the economy easier then it could be a good thing. However the project seems to be based on the prevailing fear mongering view of debt. It seems like an attempt to restrict the amount of credit availible in the economy because debt in and of itself is bad.

Doug T writes:

Yes, instead of insuring deposits, the government makes direct loans to favored banks. What could possibly go wrong?

So instead of distributing money creation, you concentrate it in the hands of the central planners. #notafan

Jeff writes:

This is just 100 percent reserves banking, isn't it? It's the system you'd get if the Fed raised the reserve requirement on transactions deposits to 100 percent.

The great virtue of this system is that "animal spirits", or bubbles and busts in the credit markets do not effect the money supply. If you coupled this with a good central bank rule, like an expected NGDP level target, it would be about as good as you could do.

Jose Romeu Robazzi writes:

But the central bank could buy private assets. Buying only treasuries may not be enough under certain conditions...

Scott Sumner writes:

Alexander, Yes, I agree, but the article did a good job of discussing the specifics of the measure. It's hard to find any detail in news reports. But yes, the rationale provided was very weak.

Doug, There's no need for direct loans, but I would point out that central banks already loan money to banks. The plan is a step in the right direction, at least on key issues like moral hazard and interest rate targeting.

Jeff, Yes, in some respects, but see my response to Doug.

Jose, Enough for what? What is the objective?

Brett writes:

I remember reading Graeber's description of the informal "credit" economies that exist in low-tech, small societies and thinking he was protesting too much in trying to distinguish them from exchange. I'm pretty sure that if you kept demanding favors without offering any, you'd find yourself cut off from the "community credit" pretty quickly except in certain cases (the elderly, children).

Floccina writes:

How would the results of this plan be different from MMT? More stable?

noob writes:
If you shifted from giving new money to the government to giving it directly to the public, it would be exactly equivalent to creating a new welfare program and funding the program via government borrowing.

Sorry for the noob question, but could I trouble you to explain this assertion in more detail? Thanks.

Lorenzo from Oz writes:

Graeber is factually unreliable and he writes considerable nonsense about mainstream economics. Yet, mixed in, are some striking ideas, as I noted in my post on Graeber's book. Very much a curate's egg of a book (with the bad bits being very bad). And I really enjoyed George Selgin's robust takedown.

Benjamin Cole writes:

The Swiss plan is interesting.

I confess I find it more attractive than the idea of the Swiss National Bank buying bonds on global markets without effect, which the Swiss National Bank says may actually cost taxpayers money some day.

As for helicopter drops, I would prefer such drops be conducted in the fashion of tax cuts, primarily on people who would tend to spend the money.

In other words, tax holidays financed by money-printing.

Or, national lotteries in which there are more winners than losers.


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