
Switzerland to vote on banning banks from creating money - walterbell
http://www.telegraph.co.uk/finance/economics/11999966/Switzerland-to-vote-on-banning-banks-from-creating-money.html
======
brownbat
Economic historian Niall Ferguson beautifully describes fractional reserves as
one of the greatest innovations of humankind in Ascent of Money.

The miseries from bank runs and crashes are real, but even so, the total
impact on human welfare from fractional reserves has been overwhelmingly
positive.

How do we know?

There were holdouts in Europe originally, some central banks were slow to
adopt fractional reserves. They were trounced by the economies of other
European nations and their superior access to liquid capital.

We've essentially done the laboratory tests here, it's one of the few areas
where econ plays like a hard science. We know the answer here, and it's not
100% reserve requirements.

It's a tragic topic to put to a referendum though, because I don't expect
every random person to be an expert on the technical nuances of financial
history. And this is a topic where intuitions are a pretty poor guide, one
where I'd expect the wisdom of crowds to fail hard. PhantomGremlin's quote
from George Bailey is a good example. Most people aren't bankers, and don't
really understand how it works as a system, beyond their own account, so it's
weird to ask them to make key decisions here.

~~~
wazoox
_> It's a tragic topic to put to a referendum though_

How one can reach such conclusion is beyond me. People will discuss the
question, and democratically decide. You'd be surprise the fierce debates that
erupts among citizens when a serious question is on the table, and how
everyone makes oneself enlightened before vote. This is what actual democracy
is. This is how it should work _everywhere_ for any serious issue.

Designating a cherry-picked representative who carries exactly zero obligation
to hold his promises is NOT democracy, but elective oligarchy. Almost all
countries calling themselves democracies certainly don't deserve the name.

~~~
mattlutze
I'm curious to which country you're assigning these noble ideals.

In no place I've lived would the average person walking into the voting box
have spent time studying the history of banking law and policy to make a well-
informed rational decision. They'd at most have read the opinions of some
journalists or listened to a news reporter, and would make their decision
after discussions between similar poorly informed friends/colleagues.

Fierce debates != well-informed debates.

We elect representatives because it's known that the body politic, once it
reaches a large size, doesn't have the time to be well-informed on all
decisions they'd need to make as a pure democracy. To suggest so exposes a
serious need for a second look at the situation.

Representative democracy isn't elective oligarchy.

~~~
wazoox
_> I'm curious to which country you're assigning these noble ideals._

Actually all of them.

 _> In no place I've lived would the average person walking into the voting
box have spent time studying the history of banking law and policy to make a
well-informed rational decision._

Because most people have been mercilessly been beaten into obedience, and the
belief that they aren't actually able to think by themselves, that they're
inferior to the oligarchs in command (hint: they aren't. The President is no
better than me and no better than the garbage man).

In 2005, in France, the "referendum on a European Constitution" lit an immense
debate, and there was an incredibly well-formed decision on an enormously
obtuse tome of legalese.

You can check that similar debates are common in Switzerland. People actually
think about the problem, discuss it, and vote in conscience.

If you think people aren't able to think and decide autonomously for
themselves, you are _actively opposing democracy_.

Ordinary elective oligarchy is the ideology that mostly pass as "democracy"
nowadays, but please don't stay abused and go on pretending you like democracy
when you don't.

~~~
ethbro
Both of you are correct. The problem with direct democracy these days is that
it ignores the power of mass media, which is to say it ignores the influence
of money on a statistically significant portion of the voters.

 _Premise 1_ : if you continue adding people to the voting pool on an issue,
at some point (X) you're going to exceed the number of people who have
interest / time / capability to render themselves informed.

When you do, mass media begins to exert a much greater effect on the outcome
(as these people are more susceptible to having their opinions swayed).

 _Premise 2_ : If you shrink the pool of potential voters, but keep the money
involved the same, then corruption increases

\--

There are of course things you can do legally to fight both of these negative
outcomes, but I feel you'll always be fighting the basic tendencies. The
solution then isn't direct democracy (where mass media overrides logic) or
oligarchy (where corruption rules) but some point in between.

~~~
wazoox
_> Both of you are correct. The problem with direct democracy these days is
that it ignores the power of mass media, which is to say it ignores the
influence of money on a statistically significant portion of the voters._

That's why the example of the 2005 French referendum is so important. All of
mainstream politics were campaigning for "Yes". All of media, papers, TV,
radios were exclusively campaigning for "Yes". However, the "No" vote won by a
comfortable margin 55% to 45%, and the campaign for the "No" almost entirely
took place on the internet and social networks.

~~~
ethbro
The outcome and the results are useless without normalizing against an
unadvertised baseline.

If either traditional/big media or the internet and social networks influenced
the vote by pursuading people who didn't do their own research -- that's a
fundamental problem.

------
walterbell
There is a website [0] and book [1] on this topic, _" Up until about forty
years ago a good percentage of the money in circulation was produced by the
Bank of England and the seignorage went to the Treasury. Today 97% of all the
money in circulation is created as debt by the banks and the seignorage profit
goes to them. The result is that between 2000 and 2009 the state has foregone
a trillion pounds. How many public services could that have funded? ...
Modernising Money shows how a UK law implemented in 1844 can be updated and
combined with reform proposals from the Great Depression, to provide the UK
with a stable monetary and banking system, much lower levels of personal and
national debt, and a thriving economy."_

A survey [2] was done as part of a master's thesis at Zurich University, which
found that, _" Only 13 percent know that private commercial banks provide the
majority of the money in circulation. However, 78 percent of the Swiss
population would like money to be produced and distributed solely by a public
organisation working for the common good, such as the National Bank. Only 4
percent preferred the system we actually have today – that money is mostly
created by private, for-profit companies such as commercial banks."_

[0] [http://positivemoney.org](http://positivemoney.org)

[1] [http://www.amazon.com/Modernising-Money-Monetary-System-
Brok...](http://www.amazon.com/Modernising-Money-Monetary-System-Broken-
ebook/dp/B00BD8PHHY/)

[2] [http://positivemoney.org/2015/09/survey-confirms-people-
have...](http://positivemoney.org/2015/09/survey-confirms-people-have-no-idea-
about-how-money-is-created/)

~~~
iofj
So what you mean to say is that the Swiss will now create a system where Swiss
banks are required to have a tiny and fully controlled "overseas" (about 5 cm
overseas preferably) subsidiary that "really"/legally originates all the loans
...

Because it would still be legal for banks in every other country to loan out
Swiss dollars with fractional reserve. (Or even with 0 reserve)

I bet France and Germany will soon be voting a 2% foreign bank tax and send a
box of flowers to every Swiss citizen as thanks. Nah doesn't sound realistic.
They're governments. They'll never send thanks to anyone for money they
suddenly can steal.

~~~
lxgr
>Because it would still be legal for banks in every other country to loan out
Swiss dollars with fractional reserve. (Or even with 0 reserve)

There is more to money creation than just extending loans and crediting
customer accounts. In order for such a debited balance to be actually useful,
a bank needs to be able to settle interbank payments.

Interbank settlements are usually performed using central bank reserve
accounts – and the central bank is free to limit access to that system only to
100% reserve compliant parties.

~~~
iofj
True. However ... any central bank is free to do that in any currency they
please. So the ECB can do it for Swiss Francs today, for instance.

If you now proceed to say that that is lunacy ... I'd agree with you. But it's
still how it works.

------
berryg
I like this initiative very much. It is simple and effective. Please do read
the website of the initiative: [http://www.vollgeld-initiative.ch/2-minuten-
info/](http://www.vollgeld-initiative.ch/2-minuten-info/). The initiative
states that all Swiss banks should hold all your money on your checking(!)
account in 100% reserve. Your money is always there. There is no interest
rate. It is just like cash money. Only digital.

If you want your money to gain interest you can open a savings account. Or you
can invest your money in any other investment opportunity. The 100% reserve
rule does not apply to saving accounts.

And thus you, as a customer, have a clear choice. Money on your checking
account is save and always yours. Guaranteed by your National Bank and/or
State. Money anywhere else is treated as an investment. You win some, you
loose some.

------
atmosx
I asked @yanisvaroufakis for a comment[1], here's the tweet: _It is a silly
idea. Tantamount to preventing banks from lending Jack Jill ' deposits. There
are far better ways to control banks_

[1]
[https://twitter.com/yanisvaroufakis/status/68180815534559641...](https://twitter.com/yanisvaroufakis/status/681808155345596416)

ps. I understand what he is saying but I have no idea where "Jack Jill'" came
from, probably he is referring to this comic:
[https://en.wikipedia.org/wiki/Jack_and_Jill_(comics)](https://en.wikipedia.org/wiki/Jack_and_Jill_\(comics\))

~~~
lepton
Jack and Jill are two arbitrary names here. With 100% reserves, a bank cannot
lend Jill's deposits to Jack.

Note the dropped 's' in Varoufakis's comment.

~~~
atmosx
I missed the dropped 's'! Thanks for making it plaintext for me.

------
carsongross
It is important to distinguish between what we call "creating money" which is
really fraudulently introducing multiple claims on the same monetary unit at
the same points of time (and which remain unexercised until a panic) vs.
loaning money, which can be done perfectly safely so long as the money being
loaned is available for the duration of the loan.

So, when a bank issues an honest loan for a million dollars for 10 years, it
needs to have 1 million dollars pledged to it by savers for at least ten years
(in the form of CDs or what have you.) This money may be spent in the economy
and thereby returned to the bank as a deposit of some duration, which can be
loaned against again safely, _so long as it is reloaned under the same
constraint_ : the bank must ensure that any loans made against the re-
deposited money are done in a shorter term than the deposit is for. You can
have very rapid loan growth in this manner, as time horizons expand during
growth phases, and suffer none of the issues with multiple parties claiming
the same monetary unit at the same time, commonly called bank runs.

Money can be safely "fractionally reserved" so long as intentional duration
mismatch (which is really fraud) is not allowed. That's the core issue in the
banking system. The production of the underlying money is a separate question,
but I'm less and less convinced it matters all that much, as long as it isn't
insane.

~~~
mrb
_" Money can be safely "fractionally reserved""_

What you describe is the opposite of a fractional-reserve system. It is a
full-reserve system.

~~~
PudgePacket
What happens if the bank lends 10 million as per the previous example, holding
only 1 million, then the bank goes bust. Does that 9 million seemingly magic
money stay with the borrower? I don't understand how it balances back again.

~~~
carsongross
I don't totally understand your question: the bank is typically slowly paid
back on the loan and the loan is collateralized, so the nine million dollars
don't puff out of existence at a single point any more dramatically than it
currently would. The bank would have time to deal with the inevitable defaults
due to the duration matching of deposits and loans.

Obviously banks could still go bankrupt, but they would not be bankrupt _by
design_ , like they currently are.

------
zombees
Can someone provide an explanation of how this works or provide a reference
with an overview? The article is light on details. I assume this means
preventing banks extending credit against deposits that don't necessarily
exist?

EDIT:
[http://ecedweb.unomaha.edu/ve/library/HBCM.PDF](http://ecedweb.unomaha.edu/ve/library/HBCM.PDF)
it seems to be more about loans being spent and thus the spent money being at
another bank and loaned out again

~~~
phaemon
It seems clear enough:

" limit financial speculation by requiring private banks to hold 100pc
reserves against their deposits. "

Normally, banks aren't required to actually have the money they lend out, so
when a loan is credited to your account that money is created (and when you
repay the loan, the money is destroyed). In many countries banks are required
to hold a certain amount reserve (I think it's about 1.5% in the USA - the UK
doesn't have such a requirement), so this is simply requiring that the banks
have 100%, which means banks can only lend money they actually have.

EDIT: Did you mean how does the whole money creation thing work at all?
There's a very clear guide at:

[http://www.bankofengland.co.uk/publications/Documents/quarte...](http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf)

It's for the UK, but pretty much all modern countries work in a similar way.

~~~
rayiner
That's not how fractional reserve banking works.

Say I deposit $100 in a bank. The bank has $100. Now, say the law requires a
10% reserve. They can lend $90--which they actually have. That person takes
the loan, and deposits it in their bank. Now, there are $190 in deposits from
the original $100. But the bank never lent money it didn't have. Instead, the
money creation comes from the fact I get to treat my $100 deposit as good as
cash on hand, even though 90% of it has been lent to another person.

~~~
phaemon
No, read the pdf I linked. Yours is the first misconception they address.

In summary, though, if we imagine that the bank is required to hold 10%
reserve: I go to the bank and get a loan for $900. This is credited to my
account. _There is no requirement for this money to actually exist._ The same
day, you go and deposit $100 in actual dollar bills. Your account is credited
with $100.

The bank's liabilities are now $100 (in your account) plus $900 (in my
account) for a total of $1000. The banks reserve is $100 (real dollar bills
you gave them). This is 10% reserve so the bank is legally OK. $900 has been
created.

That's how it works. More detail in the PDF I linked.

~~~
frankchn
Under your scenario, if a bank can lend out $900 for every $100 it collects in
deposits, then won't we see runaway monetary growth? Consider the following
scenario:

1) Alice deposits $100 in Bank X

2) Bob takes out $900 loan from Bank X and deposits it in Bank Y

3) Charlie takes out $8,100 loan from Bank Y and deposits it in Bank X

4) Eve takes out $72,900 loan from Bank X and deposits it in Bank Y

5) ... the cycle continues ...

Also, I would assume that the interest rates that my bank pays for my deposits
would be a lot higher if it could lend out 9x as much as it holds in deposits.

The model where a bank lends out 90% of its total deposits still makes more
sense to me and will result in $900 of total money created per $100 initially
deposited.

1) Alice deposits $100 in Bank X

2) Bob takes out $90 loan from Bank X and deposits it in Bank Y

3) Charlie takes out $81 loan from Bank Y and deposits it in Bank X

4) Eve takes out $72.90 loan from Bank X and deposits it in Bank Y

5) ... the cycle continues ...

and if you sum the geometric series, which in this case is finite, you get
$900 of total additional money created for the initial $100 Alice put in.

~~~
RobertoG
"2) Bob takes out $900 loan from Bank X and deposits it in Bank Y"

If Bob takes cash from Bank X and deposits in Bank Y, Bank X has less cash,
that movement is reflected in their balance and in their reserves.

If Bob makes and electronic transfer from Bank X to Bank Y, at the end of the
day, Bank X and Y have to clear their balance with each other. As some people
have moved money in the opposite direction, from Bank Y to Bank X, the balance
could be compensated.

If for some reason, people only retire money from a bank without never making
deposits, you have a bank run and it's an indicator of mistrust in that bank.

------
JumpCrisscross
This looks similar to the Chicago Plan [1], a proposal by Irving Fisher to
transition the United States to a fully-reserved banking system.

[1]
[https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf](https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf)

~~~
carsongross
Thank you very much for this link.

The elimination of intentional duration mismatch and the introduction of
fraudulent time-money claims by the financial sector is one of the most
important moral and social issues we face.

------
morgante
I don't really understand how this isn't a proposal to effectively end
lending.

If banks are required to hold 100% reserves against their deposits, where
exactly are they supposed to get money for lending?

The article says "they’ll only be able to lend money that they have from
savers or other banks" but that seems inconsistent with the 100% reserve
requirement. If I'm required to hold on to 100% of deposits, I _can 't_ lend
them out.

~~~
ucho
It is more likely to kill almost all deposits. The bank wouldn't really profit
from stored money so they will want fee for keeping money. Interesting
experiment but I definitely wouldn't want it to happen in my country.

~~~
lxgr
Only if central bank deposits do not bear interests. If they do, depositing
money at a commercial bank would increase that bank's central bank balance. If
the central bank's deposit interest rate is higher than the commercial bank's,
this would generate a profit for the commercial bank.

In the Eurosystem, for example, minimum reserves bear interest even today;
only excess reserves are "punished" by negative interest rates.

------
s3nnyy
One of the reasons I immigrated to Switzerland is direct democracy and
stability. Since two hundred something years Switzerland is politically
neutral. It is ranked the most stable economy in the world and the most
competitive nation ([https://www.quora.com/Why-is-Switzerland-the-most-
competitiv...](https://www.quora.com/Why-is-Switzerland-the-most-competitive-
economy-in-the-world)). The Swiss Franc is the sixth most-traded currency in
the world. If you get your salary in Swiss Francs, you maximize the chances
that the salary you earn will actually be worth something in the future and is
not just paper.

If you look for a tech-job in Switzerland, I work as a tech-recruiter in
Zurich. Check out my story "8 reasons why I moved to Switzerland to work in
IT" on [https://medium.com/@iwaninzurich/eight-reasons-why-i-
moved-t...](https://medium.com/@iwaninzurich/eight-reasons-why-i-moved-to-
switzerland-to-work-in-it-c7ac18af4f90) and / or send me a mail to the address
in my HN-profile.

~~~
lgieron
> If you get your salary in Swiss Francs, you maximize the chances that the
> salary you earn will actually be worth something in the future and is not
> just paper.

Or, when living in a country with untrustworthy currency, you can just
exchange your savings to USD (or CHF etc.) and have them equally protected.

~~~
irixusr
Your comment suggests you've never lived in a country where you would
want/need to exchange your currency.

The smart money (I.e. politically well connected) gets to exchange their
money. As soon as every one else finds out, capital controls have been
introduced.

The politically well connected, usually, get to continue exchanging their
money at an artificial rate.

~~~
lgieron
The idea is to be exchanging them _in_advance_, i.e. exchanging the savings
part of your monthly salary to USD every month. Don't wait till the shit hits
the fan and everybody wants to get rid of their local money.

~~~
irixusr
A country cannot have a widely distrusted currency for long, because everyone
will do as you say (exchange away).This causes capital flight, so the gov't
introduces capital controls shortly thereafter.

So the only way to do as you say is to be (far) more prescient than your
peers. You need to be far more prescient because you have to beat the gov't
insiders too.

Also, prescience does not save your future earnings (I.e. after controls have
been imposed)

Or you take a risk and use the black market

------
acd
Visual map of the money markets [http://money.visualcapitalist.com/all-of-the-
worlds-money-an...](http://money.visualcapitalist.com/all-of-the-worlds-money-
and-markets-in-one-visualization/)

The history of the Federal Reserve:
[http://www.jekyllislandhistory.com/federalreserve.shtml](http://www.jekyllislandhistory.com/federalreserve.shtml)

An implication from the power of private banks to create money out of nothing
is that people will have to borrow money for their homes essentially part of
their future income to the banks and its bond holders.

------
scotty79
How will they know how much they should create?

Could they just abandon taxes and rely 100% on printed money or are modern
states too expensive to be supported by inflation alone?

~~~
twobits
That's what I have been thinking how the system should be.

Just print eg 3% more money each year. Give eg 30% of the new money to the
state for its expenses, give the rest equally divided to all the population.
End of story.

No need for IRS, no need for filling taxes, layers, tax accountants, tax
checks. The amount would be insignificant (as a percent) for the rich,
significant for the poor, thus helping them more. The only tax would be the
specifc controlled inflation.

Looks to me as a very simple, nice system. ..Any thoughts anyone, why this
would or wouldn't be a good idea, and / or how it could possibly be improved?

~~~
rtpg
I think it would be hard for central banks to control inflation well in this
system. Japan has been trying hard for 20 years to trigger inflation through
QE and related money-printing schemes, but it hasn't translated to inflation.

In Japan's case, inflation happened because of a sales-tax increase. Taxes are
forced spending, and you can target heavy savers if you need to.

I think that just the levers of how much money to print and percent going to
gov't could give a good amount of control though.

Some practical considerations though: How do you get the money to each person?
Not everyone has a bank account. In a lot of countries (including US), there's
no good single-identifier to find people either. Fraudsters could claim for
other people, and the innocent people couldn't get their share. There's some
logistics involved.

One small thing is that taxes have also been used a way of incentivising
certain behaviour. Carbon taxes aren't about generating revenue but reducing
pollution. How would that enter in this new system? Maybe Carbon...incentives?
Kind of weird to implement I think

~~~
scotty79
> How do you get the money to each person?

Unconditional basic income?

Money would find its way from the consumers to companies that need investment.
Instead of banks estimating how viable your business is before giving you a
loan you'd get your money straight from your customers. The market would
decide which endeavors should get funding.

My only concern is that printing money would not provide enough money to run
country budget (let alone basic income) without creating hyperinflation.

~~~
rtpg
I meant on the logistics side of things. Lots of people don't have bank
accounts. Lots of people don't have any solid ID. Plus you'll get people who
are really in limbo in whatever system you build to get money to the people...
some tricky stuff (especially if it's real large amounts of money).

Maybe Medicaid has solved all these kinds of issues already, and it's just
about scaling

------
elmar
Fractional banking deployment is the equivalent to nuclear power discovery,
nuclear fusion can used to create energy using nuclear power plants our to
destroy using atomic bombs.

The same way Fractional banking can be useful by increasing the credit supply
and destructive when over leverage.

Simply put Fractional banking creates a derivative instrument on money.

------
ilitirit
Seems like an extreme move. Why not vote to raise the fractional reserve
minimum and then see what effect it has?

------
steven2012
Doesn't the stock market create (and in the inverse, destroy) money?

If Apple goes from $13/share to $700+/share, those hundreds of billions of
dollars are basically created from thin air, aren't they?

~~~
casus
No. The share price is the latest price someone purchased that share for. It's
just a metric. Someone did literally spend $700 and gave it to someone else in
exchange for one "share". Now, you may call a "share" just a piece of air--but
it is something that has value. The money for it, however, comes out of my
pocket and is definitely not thin air.

~~~
stefantalpalaru
What if you skip selling the shares for money and you use them directly to buy
something? I'm pretty sure you can buy other companies with a partial payment
in shares and you can hire people doing the same, so the share acts like
currency in some scenarios.

------
WalterBright
> as a way of preventing asset bubbles and curbing reckless lending

That hasn't worked out very well.

~~~
chillwaves
Which modern economy has a banking system that requires 100% reserves? i'm
genuinely asking. I've never heard of this kind of concept and do not
understand the implications, except it seems that the central bank would
become enomously more influential.

~~~
imrehg
Actually, a Bitcoin-based system would, wouldn't it? (just thinking). So far I
think people have hard time to figure out all the side effects of 100%
reserves. I'm tentatively for it, though humans are great at "unintended
consequences"...

~~~
nabla9
No. Bitcoin has no mechanism for limiting lending. It's just fiat asset.
Because bitcoin is not local currency anywhere, there are no mandatory reserve
requirements for giving loans against bitcoin deposits.

Fractional reserve banking affects only for very liquid money-like assets like
on demand deposits. Long term deposits create money outside reserve
requirements. I think one solution is for banks to start offering people time
deposit & credit card combinations. Income goes into time deposit and people
use credit cards almost exclusively.

Poor people without credit cards might might have to pay a lot for having
money in a bank, so they might turn into holding cash.

~~~
imrehg
Bitcoin has built in limit to lending: you can't, in the classic way it's been
done. Whoever has control of coins, has complete control. If I give you any
bitcoin in a way that you can spend it, then I don't have a mechanism to get
it back without your consent. So no "lent" bitcoin really exists within the
system.

~~~
beeboop
I think the point that needs to be made is that there is very little incentive
for a bitcoin owner to store their bitcoins with a bank. People store cash
because it's susceptible to being stolen and inconvenient to spend versus a
debit card. Banks have complete control of our cash and we can only get it
back on their terms, but that doesn't deter most anyone from lending it to
them.

~~~
sampo
> _there is very little incentive for a bitcoin owner to store their bitcoins
> with a bank_

Well, a bank could offer to pay interest on the deposits.

------
aflyax
Well, it’s a bad idea, but you can’t prevent masses from shooting themselves
in the foot but feeling good about it.

