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​The Swiss Vollgeld Referendum Is Step One To Real, Global Financial Reform

May 06, 2018 11:21 AM ET56 Comments
Laurence Kotlikoff profile picture
Laurence Kotlikoff


  • The June 10th Swiss Vollgeld referendum, if passed, would stop money creation by Swiss banks.
  • This change would also reduce bank leverage, which, in addition to opacity, is the reason for past, recent, and future financial crises.
  • The Swiss change in banking would quickly spread to banking systems across the world.
  • It would represent an important step toward adopting Limited Purpose Banking (LPB), which would eliminate all leverage by financial middlemen as well as the opacity under which they operate.
  • Unlike Dodd-Frank and other so-called post-2008 financial "reforms," LPB would end financial crises for real and for good.

On June 10th, Swiss voters can permanently fix global banking by voting Yes on the Vollgeld referendum. With enough Yes votes, Swiss banks will no longer be able to spontaneously make money to gamble at the taxpayer’s potential expense. A Yes vote would also lead to similar reforms in other countries.

To see how banks work their money-creation magic, consider a bank that lends 500,000 Swiss francs to a household or firm. To make the loan, the bank simply opens up a 500,000-franc demand deposit (checking) account for the borrower. Presto, the money supply, which is the sum of currency and demand deposits held by the public rises by 500,000!

This financial alchemy leaves the borrower with a new asset – the demand deposit – and a new liability of equal size – the loan the borrower must repay. The bank’s balance sheet also gets bigger, but remains balanced. It owns the new loan but also owes payment on the newly created demand deposit, whose balance can be demanded at any time.

The bank’s new asset - the loan - is risky since the loan may not be repaid. In contrast, its new liability - the demand deposit - is safe, i.e., it has to make payment when demanded no matter the circumstances. Hence, banks effectively borrow the money they create to buy risky assets. They do so for two reasons. First, they charge higher interest on the loans they purchase than on the deposits they sell. Second, if their loans default, the banks, whose ongoing operation is vital to the economy, can force taxpayers to cover their losses. This is precisely what happened in the 2008 financial crisis.

Vollgeld would end the bankers’ game of heads I win, tails you lose. Under Vollgeld, every franc in bank deposits must be held in reserve

This article was written by

Laurence Kotlikoff profile picture
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, Head of International Department for Fiscal Sustainability Studies, the Gaidar Institute, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (co-authored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.

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