Switzerland's Vollgeld Initiative
By Scott Sumner
The Economist reports on a new initiative in Switzerland:
Campaigners in many rich countries want to strip private banks of the power to create money. In Switzerland members of the “Vollgeld Initiative” presented the government with enough signatures in December to trigger a national referendum on the subject. Bank deposits, they point out, make up some 87% of the readily available money in Switzerland, vastly exceeding notes and coins. Since money creation is the main fuel of both inflation and growth, they argue, it should not be in private hands, let alone entrusted to institutions that are prone to binge and purge.
Under the existing system deposits sit on private banks’ balance-sheets. Under the proposed alternative (a variation on “narrow banking”), accounts would be transformed into something much closer to the safe-deposit boxes nestled in Swiss vaults. Customers would pay the banks a charge for storing their cash. Any loans banks make would have to be funded by shareholders or by borrowing of their own, not by deposits.
The central bank, meanwhile, would survey the economy and judge how much cash was required to maintain stable inflation. Rather than tweaking interest rates to influence private banks’ lending, it would simply hand out (or siphon away) the necessary cash itself, to the government, the public, or as loans to private banks.
The system would be safer for depositors, since banks could not lend out and lose their money. That would allow governments to withdraw the implicit protection banks currently enjoy as the guardian of voters’ deposits. Even big banks could be allowed to fail, since the losses would not reverberate through the system so much. That possibility would nudge lenders into behaving more prudently.
The Swiss government responds officially to every issue to be put to a referendum. On February 24th it released its verdict on the Vollgeld Initiative (the actual vote will not take place until next year at the earliest). It is not a fan. As the central bank issued more money, the government points out, its liabilities (cash) would rise without any increase in its assets. This, the government fears, would undermine confidence in the value of money.
I don’t know enough about the plan to take a position, but there are two features that I really like:
1. It eliminates the problem of moral hazard by removing deposit insurance from time deposits and making demand deposits 100% safe, since they would merely represent holdings of base money. To make loans, banks would attract funds by paying interest on non-insured time deposits.
2. The central bank would stabilize the price level by adjusting the quantity of money, not the interest rate target. Zero interest rates will become more common in the future, and hence the Keynesian approach to monetary policy (interest rate targeting) will be increasingly ineffective. There is no zero lower bound problem for changes in the money supply.
Ideally, we’d remove deposit insurance from all deposits, and let banks hold less than 100% reserve backing for checking accounts. But while this initiative is not perfect, it is certainly better than the status quo, where banking is riddled with moral hazard.
A bigger issue is the question of how money is injected into the economy. It should be given to the government, not the public. And the lack of assets on the central bank’s balance sheet would not be a problem. When the money supply needed to be reduced, the government would simply sell bonds and give the money to the central bank, which would extinguish the money.
If newly created money were simply given to the public, then I could not support the plan. That would be helicopter money. Some libertarians are confused on this issue; giving the money to the government is a far more libertarian method than giving it to the public. After all, the central bank is part of the government. If you shifted from giving new money to the government to giving it directly to the public, it would be exactly equivalent to creating a new welfare program and funding the program via government borrowing. Does that sound libertarian?
Whenever a plan sounds like a free lunch, thoughtful people should be skeptical. There should be a clear line between monetary policymakers and fiscal policymakers. I don’t want to give the central bank discretion over what type of welfare regime a country will enact. That’s for the legislature to decide.
PS. This interview contains a wealth of useful information on the initiative.
PPS. Are you a fan of David Graeber’s book on debt? I confess that I have not read the book, but George Selgin and Brad DeLong deliver a one-two punch that will be difficult for Graeber to recover from.