Switzerland's Referendum On Fractional Reserve Banking

|
Includes: EWL, FSZ, HEWL, SWZ
by: Acting Man

By Pater Tenebrarum

A Warmed-Up "Chicago Plan"

Many of our readers may be aware by now that a Swiss initiative against fractional reserve banking has gathered the required 100,000 signatures to force a referendum on the matter. It is called the "Vollgeld Initiative," whereby "Vollgeld" could be loosely translated as "fully covered money."

Click to enlarge

Swiss initiative against fractional reserve banking

Austrian School proponents will at first glance probably think that it sounds like a good idea: After all, it is the creation of uncovered money substitutes ex nihilo that leads to the suppression of market interest rates below the natural rate and consequently to a distortion of relative prices, the falsification of economic calculation and the boom-bust cycle.

However, a second glance reveals that the initiative has a substantial flaw. One may for instance wonder why the Swiss National Bank hasn't yet let loose with a propaganda blitz against it, as it has done on occasion of the gold referendum. The answer is simple: the "Vollgeld" plan only wants to prohibit the creation of fiduciary media by commercial banks.

The power to create additional money from thin air is to be reserved solely to the central bank, which would vastly increase its power and leave credit and money creation in the hands of a few unelected central planning bureaucrats. In other words, it is a warmed-up version of the "Chicago Plan" of the 1930s, which Chicago economists led by Irving Fisher and Frank H. Knight presented in the wake of the Great Depression (the debate over the plan led to the establishment of the FDIC and the Glass-Steagall Act, but its central demand obviously remained unfulfilled).

Irving and Knight

Irving Fisher and Frank H. Knight, the lead authors of the original Chicago plan

As Hans Hermann Hoppe has pointed out, the Chicago School (F. H. Knight is today regarded as one of its most important founders), was seen as "left fringe" in the 1940s. Today, its views represent the establishment-sanctioned extent to which economists are allowed to express "free market support" without having to fear academic ostracism and sudden career death (it should be noted that there are exceptions to the rule, as several universities do welcome "Austrian" scholars).

Not surprisingly, the more notorious modern-day representatives of the Chicago School have in recent years discussed little but government interventionism, how much of it and what kind they would like to see, especially from the central bank. As a pertinent example, see Kenneth Rogoff, who has inter alia made himself conspicuous by pleading for higher central bank "inflation targets" and a ban of cash. So the main concerns of a quite famous representative of a supposed "pro free market" economic school are actually statist to the core.

It should therefore also not come as too big a surprise that the backers of the "Vollgeld initiative" in Switzerland are a hodgepodge of leftists, who simply hate banks and capitalism in general. What they really seem to want is more central planning, plain and simple. In this, they are not much different from the so-called Greenbackers in the US such as Ellen Brown. In fact, after two IMF economists presented a revised version of the Chicago plan in 2012, Gary North criticized the plan by likening its aims to those of Greenbackism.

A similar plan has incidentally also been proposed in Iceland not too long ago. All these plans have in common that the central bank money issuing monopoly is to be strengthened by making it the sole creator of additional fiat money and money substitutes. This is quite audacious, especially considering that the people nowadays in charge of these institutions are best described as all-out monetary cranks.

In summary, there is little reason to endorse the Swiss plan such as it stands. Its goal is by no means the return to a free market in money, resp. the establishment of a truly sound monetary system. It would primarily centralize inflationary policy further and enable credit dirigisme. However, there are undoubtedly also positive aspects to the initiative.

The most immediately obvious one is that Switzerland's citizens will publicly debate fundamental questions regarding the monetary system for the second time in a fairly short time period. Moreover, they will also have their say on the matter, and there is nothing the Swiss political elite can do about it.

In the US, it hasn't even been possible to push through a Fed audit. The ECB is arguably even further removed from accountability than the Fed. Note here that central bank independence will ultimately always give way to political exigencies, so the argument that a shred of genuine accountability would compromise said independence is quite flawed.

A Mises Institute Interview with Claudio Grass on the Swiss Initiative

A more detailed discussion of the above points is presented in the following interview of our friend Claudio Grass by the Mises Institute in Auburn, Alabama. Claudio is the CEO of Global Gold and a Swiss citizen and thus has a front row view of the events surrounding the coming referendum on fractional reserve banking and the players behind the initiative.

Mises Institute interviews Claudio Grass of Global Gold about the Swiss referendum on fractional reserve banking