The Swiss have decided to go to vote on a radical initiative that could prevent private banks from creating money via fractional reserve banking.
Fractional reserve banking allows a bank to lend out first its initial depositors’ savings, and then the “new” depositors’ savings as the money on loan gets spent and earned by another group of individuals.
This cycle of lending and saving allows an initial savings of $1,000 to “create” $10,000 worth of money in the case of a 10% reserve requirement. This sort of money “creation” incentivises riskier lending procedures, particularly at low reserve requirements, the effects of which were observed in the last financial crisis when the housing bubble was inflated on cheap credit and burst when the market deemed it unsustainable.
“Banks won’t be able to create money for themselves anymore, they’ll only be able to lend money that they have from savers or other banks, or even, if necessary, money that the Swiss National Bank has provided them,” said the campaign in a statement.
A 100% reserve requirement would prevent banks from lending out money. While safe, the concern expressed by some economists (such as Alan Blinder, Princeton economist) is that shadow lenders would step in to fill the void.
On receiving the requisite 100,000 signatures, the Swiss government has confirmed that it will hold a referendum some time in the future.
This referendum comes from The Swiss Sovereign Money Initiative; the group wishes to end financial speculation, concerned that the tradition of fractional reserve banking grants banks a licence to print money.
“Most people believe that the money they have in their bank accounts is real money… This is wrong! Money in a bank account is… a promise the bank makes to provide money, but it is not itself legal tender,” said the group in a statement.
They believe that the extreme booms and busts of the financial system could be avoided if banks could not create money.
Currently, no country in the world requires its banks to keep 100% reserves.
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