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Could the Swiss Vollgeld referendum offer an opportunity to truly take back control?



Switzerland has a reputation as a rather quiet and cautious place, sitting apart from the noisy events of the continent surrounding it. It may therefore come as a surprise for us in Britain to learn that Swiss voters will be spending their Sunday making an unprecedented decision which could open up the way for a transformation of the money and banking system the world over.

This Sunday, Switzerland is holding a referendum on whether to strip private banks of the power to create money, in the form of the Vollgeld Initiative. Unknown to most of the population, 90 per cent of Switzerland’s money is created by private banks ‘out of thin air’ when they lend.

But why does this matter to us in Britain? The answer is that a similar amount of the UK’s money is also created in this way, as we, like most other advanced economies, share this same banking framework. You could be forgiven for not knowing this, as it is something not even most MPs are aware of. It wasn’t confirmed by the Bank of England until 2014, and even in Switzerland various bankers have said that they weren’t aware they were creating money until the Vollgeld Initiative brought it to their attention!

Switzerland’s Vollgeld referendum raises a crucial question that has been ignored since the last crisis – should private or public interests be in control of creating almost all the money a country uses?

Under the current regime, our money is essentially privatised, in the hands of commercial banks who are able to create as much of it as the rest of us are willing to borrow and pay rent on. The Vollgeld Initiative would see this replaced with a Sovereign Money system, in which the power to create money is entrusted solely to the central bank – a public institution whose mandate is decided by a democratic government.

The existing arrangement, where commercial banks have an unchecked power to create money, has not fared Britain too well. As former chair of the Financial Services Authority Lord Turner explains, “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

Despite the lessons of the last crisis, little has changed. Left to their own devices, banks have continued to direct money primarily into speculation and other unproductive ventures. In the decade since the crash, 55 per cent of money created by UK banks has gone towards mortgage lending, 18.7 per cent went to the financial sector, 6.1 per cent was lent as consumer loans, 6.2 per cent to real estate companies and around 1.5 per cent to insurance companies and pension funds. Meanwhile productive lending only accounted for 10.4 per cent of money created by banks, and just over 2 per cent went towards public services.

The fact that money is created and allocated in this way poses a threat to financial stability by creating new asset bubbles, and increasing private debt levels. But also because too big to fail banks are reluctant to lend to industry, the real, productive economy on which we rely has been left starved of funds. If Britain really wants to sort out its productivity crisis, we will need to redesign our dysfunctional money and banking system.

Tied up with the question of who should have the power to create money is therefore the question of what this power should be used for. There’s no shortage of areas crying out for investment, from the global green investment gap, estimated at $0.7 trillion annually, to the need for an extra 250,000 homes a year to keep up with demand in England alone, or action to boost wages, which in the last decade have grown at the slowest rate since the Napoleonic Wars.

Money should be recognised for what it ultimately is: a tool to facilitate social outcomes. Currently, it’s being used to make social and economic problems worse – it must be reclaimed to serve the public interest.

How exactly we should take back control of the power to create money – whether we should opt for a full Sovereign Money system or pursue a number of more incremental reforms – is still up for debate. Encouragingly, there is also growing movement around Positive Money in the UK calling for money creation to work in the public interest, comprised of experts and activists drawn to this issue from a varied range of perspectives.

Regardless of the outcome of Sunday’s vote, the Swiss have done the world a service by putting such an important issue back on the agenda. The questions have been set – it is now up to us to respond.

Fran Boait is executive director of Posi


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