11 June 2018
The referendum on the Swiss sovereign money initiative (Vollgeldinitiative) of 10 June served as an important reminder that the modalities of the production of money are not set in stone. Its failure should not be seen as confirmation that central banking and money do not require some fundamental rethink. The initiative’s objective to suspend fractional reserve banking and provide central bank money to everyone was not its most radical proposition. It was the legalisation of cryptocurrencies and envisaged money competition. The referendum offered a true change in the architecture of money with likely important broader impulses for the international monetary system.
The sovereign money initiative envisaged to have bank sight deposits fully reserved with central bank money and thereby vest in the central bank the sole ability to create money. This targeted restoring a historical though in many countries controversial objective of centralisation of the production of money that was superseded with the emergence of commercial banks and fractional reserve banking. It would have de facto granted citizens an account with the central bank and proposed the money to be in digital form. The initiative offered private media of exchange like bitcoin and cryptocurrency legal certainty through an amendment of the Swiss constitution. It thus combined centralisation of money creation by the state with competition with private monies.
The history of central banks is one about the organisation of the production of money and direct dealings with the public. The beginnings of the SNB in 1907 followed an acrimonious debate to end the previous decentralised canton-based banks of issue system. Several earlier attempts to establish a central bank were defeated by referenda in 1876, 1880, 1897 attributed in large part to concerns about the undue concentration of monetary power in a single institution. The SNB discounted bills of exchange, the principal central bank instrument during the 19th century, directly with banks and non-banks. In 1913, about half of all deposits at the SNB were with non-banks and private deposits at the SNB increased considerably in times of crisis, for example 90-fold during World War I from 1913 to 1918.
The adoption of digital money would have made Switzerland one of the first countries to offer a central bank issued digital currency. The initiative would have been consistent with the fungibility between coins, notes and central bank reserves that are held in digital form.
The legalisation of private media of exchange would have converted Switzerland in probably the first country where private monies would be subject to constitutional backing. The initiative declared that it aimed to foster competition among monies. This corresponded to Austrian libertarian economist Friedrich Hayek’s idea of money competition based on entry and exit threats as holders of monies would discard monies perceived as unstable thereby giving incentives towards orderly money issuance.
The money competition idea projected a new vision about money. While commercial banks are the main producers of money today, deposits cannot serve as media of exchange. The idea of competing official and private monies shifts money competition from commercial bank deposits towards money as medium of exchange where the public would be able to decide between holding different media of exchange to undertake certain or all transactions. It would undoubtedly open proliferation of cryptocurrencies including the possibility for big retailers and other large commercial entities to introduce their own currencies. Switzerland would have become the benchmark for digital currency ecosystems and monetary policy ideas based on money competition.
The Swiss sovereign money initiative changed debate and perception about money. The dominance of commercial banks, increasing importance of non-bank financial institutions, new financial technology and advent of cryptocurrencies have been changing key conditions for money, monetary stability and monetary policy itself. While the effects of the stated objectives of the initiative remained unclear, the interaction of past and modern concepts confusing and uncertainty of the impact of change probably deterred many from supporting it, it was an early expression of how popular interest could shift the boundaries of the production and allocation of money. The failure of the initiative will unlikely mark the end of a new thinking about the architecture of money.