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The Sovereign Money Initiative in Switzerland

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by Mark Joób

Mark Joób

Mark Joób, PhD, is Professor at the West Hungarian University, Faculty of Economics and Researcher at the Institute for Business Ethics, University of St. Gallen, Switzerland. He is member of the managing committee of the Swiss Association for Monetary Modernization (MoMo).

The Swiss Association for Monetary Modernization wants to solve the most severe malfunctions of the present money system by a fundamental reform. On 3rd June the association officially launched the Sovereign Money Initiative. The aim is to give a governmental monetary authority the exclusive power to create money, both cash and current account holdings. Commercial banks would be prohibited from creating account money and restricted to give loans from money they have previously borrowed from customers.

Now, which are the malfunctions of the present monetary system?

1. Money is created as debt.Today, money comes into existence by debt creation when commercial banks borrow from central banks and when governments, producers or consumers borrow from commercial banks. Thus, the money supply of the economy can only be maintained if the private or public economic actors get into debt. Economic growth requires a proportionate increase in the money supply in order to avoid deflation that would paralyze business, but an increase in the quantity of money involves a simultaneous increase in debt. This way, economic actors run into danger of excessive indebtedness and bankruptcy. It is not necessary to say that overindebtedness causes serious problems to societies and individuals in the face of the ongoing debt crisis.

2. The money supply is under private control.Only a small fraction of the money circulating in public has been created by central banks. Central banks issue coins and banknotes which in most countries account for just between 5 % and 15 % of the money supply. The rest is created by commercial banks in an electronic form as account money when granting loans to customers or buying securities and goods. Therefore, commercial banks de facto control the money supply. Commercial banks principally bear the credit risk for the loans they grant, which should induce them to carefully examine the creditworthiness of their customers. However, commercial banks decide which customers are granted loans and which investments are made according to their interest in maximizing their own profits. Whether an investment is socially desirable is not the decisive criterion for commercial banks. This way, investments serving the common good but not being profitable enough are not supported by the banking system and have to be financed by government spending that depends on tax revenues and public debt creation. Instead of financing long-term investments in the interest of society as a whole, commercial banks with their credit business support short-term financial speculation and over the last two decades have actually established a gigantic global casino beyond any public control.

3. Bank deposits are not secure.Bank deposits refer to account money which in contrast to cash is not legal tender although it is handled as if it were legal tender. Account money is a substitute for money, just a promise from the bank to disburse the corresponding amount of money in legal tender if requested by the customer. In the present fractional reserve banking system, usually only a very small proportion of account money is backed by legal tender. Banks hold only a few percent of their deposits as cash and reserves at the central bank. That is the reason why banks are reliant on the trust of their customers. In the case of a bank run, when too many customers demand cash at the same time, they would run out of cash and such a shortage of liquidity can lead to sudden bankruptcy. Hence deposit insurance systems have been established to avoid the loss of bank deposits. In the case of chain reactions and large-scale bankruptcy as in 2008, however, government bailouts of commercial banks may be necessary, eventually with the assistance of the central bank as lender of last resort.

4. The money supply is pro-cyclical.Commercial banks grant loans by creating account money in order to maximize their interest revenues. The more money they issue, the higher their profits – as long as the debtors are able to pay. In times of economic growth, banks most willingly grant loans so as to profit from the boom, while in times of economic decline they restrict granting of credit in order to reduce their risks. This is how commercial banks induce an oversupply of money in booms and an undersupply of money in recessions, thus amplifying business cycles as well as financial market fluctuations and creating asset bubbles in real estate and commodities. Such asset bubbles may cause heavy damage to society and to the banking system itself when they burst. Again, the 2008 mortgage-triggered banking crisis after the burst of the US real estate bubble is the most illustrative example.

5. The money supply fosters inflation.Besides its pro-cyclical character in the short term, in the long term the money creation of commercial banks induces an oversupply of money that leads to consumer price inflation as well as asset price inflation. An oversupply of money arises if the increase in the quantity of the money in circulation exceeds the growth of the production of goods and services. The long-term oversupply of money results not only from traditional granting of credit to governments, corporations and individuals but also from credit-leveraged financial speculation of hedge funds and investment banks. Due to inflation, consumers usually face an annual loss of purchasing power, which means that they have to increase their nominal income in order to maintain their level of consumption. Since the ability to gain compensation for the loss of purchasing power by increasing one’s nominal income varies among individuals, inflation causes a redistribution of purchasing power to the disadvantage of those individuals who are not in the position to effectively advocate for their own interests.

6. The privilege of creating money is a subsidy to the banking sector. Since money is debt, it carries interest. Therefore, interest has to be paid on all the money in circulation and virtually nobody can escape paying interest. Interest is primarily paid by customers who take loans from commercial banks and thereby ensure the money supply. Secondly, everybody who pays taxes and buys goods and services makes a contribution to the interest payment of the original borrower, because taxes have to be raised partly in order to finance the interest payments on sovereign debt. Furthermore, corporations and individuals providing goods and services must include the costs of their loans in their prices. This way, by using money, society pays an enormous subsidy to the commercial banks, though the banks pass on a part of this subsidy to their customers as interest payments on deposits. Interest is a subsidy to the banks because the account money they create is handled as legal tender. The magnitude of the subsidy society pays to the banks is reflected in the disproportionately high salaries and premiums of bankers as well as in the disproportionately large banking sector.

These are the negative monetary effects the Swiss Sovereign Money Initiative (“Vollgeld-Initiative”) wants to alleviate. On June 3rd the supporters of the initiative officially started to collect signatures in order to launch a referendum on the establishment of a sovereign money system in Switzerland. They want electronic money to be declared legal tender and remain in the possession of the bank customers by changing the Swiss constitution. The initiative also wants the central bank to have the exclusive power to issue electronic money as it has the monopoly over the issuance of cash today. This way the monetary system could serve democracy and the common good with the possibility of reducing national debt and financing the social safety net.

In a sovereign money system the unnecessarily complicated two-level banking system would be replaced by a single-level system, in which money is no longer backed by reserves, but money itself is the reserve. This way, a transparent, well ordered monetary framework could be established instead of the existing bad framework that governments attempt to straighten out with evermore complex regulation consisting of the fractional reserve system, deposit insurance and equity rules (Basel I-III).

The sovereign money concept aims to establish a sovereign public authority with total control over the money supply, both cash and electronic money on current account holdings. This monetary authority would represent a fourth separate and largely independent section of the state besides the legislature, the executive and the judiciary. The monetary authority would be bound by law to expand the money supply according to the growth potential of the real economy. The money created by the monetary authority would be transferred to the Treasury and would come into circulation by public spending; thus, it would benefit the public purse and contribute to the reduction of national debt.

Public revenue would be especially high in the moment of transition to the sovereign money system when the money owed to commercial banks becomes owed to the monetary authority, which would significantly reduce public indebtedness. In the transition period, commercial banks would be given a bridging loan from the monetary authority so as to avoid a credit crunch.

A great advantage of the sovereign money system is that money would be issued debt-free by the monetary authority and would therefore not carry interest – unless, in a following step after being created, it is lent by its owner as an investment, for example to a commercial bank. Debt-free money issuance would considerably alleviate the current social and ecological problems arising from interest, such as forced economic growth and redistribution in favour of capital. Commercial banks, on the other hand, would not be allowed to create electronic money any more. They would become what they are supposed to be today: financial intermediaries which can only grant loans from money that they have previously collected, i.e. borrowed from customers or earned by income.

The sovereign money system faces some problems. The goal of establishing public control over money creation could be thwarted by the emergence of new financial instruments, especially bank-created securities, taking over the function of money. This is a serious danger to a sovereign money system, in particular with regard to the interbank market. Financial regulations would be needed to prevent the emergence of near monies which would impair the monetary authority’s control over the money supply, for instance by prescribing a minimal holding period for financial instruments.

Another problem that needs to be resolved in a sovereign money system is how to secure the independence of the monetary authority. Since governments generally seek to increase public revenue in order to enlarge their scope of action, they would be tempted to put pressure on the monetary authority to issue more money than the potential of the real economy and the principle of sustainable development in a given situation allow. In the same way as the independence of the judiciary is guaranteed today, the monetary authority’s independence from short-sighted political interests could be secured by an adequate institutional arrangement, which simultaneously warranted transparency in monetary decision-making and democratic accountability of those who rule the monetary system. The leaders of the monetary authority could be elected by the Parliament. A central aim of the sovereign money concept, after all, is to restore democratic control over the monetary system.

See also:

And web sites

From: pp.6-7 of World Economics Association Newsletter 4(3), June 2014

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10 responses

  • Darko says:

    Amazing article Mark! I am a member of the Committee on Monetary and Economic Reform in Canada and we are trying to do the exact same thing here in Canada. We had a massive lawsuit against the Bank of Canada and are still fighting to make it happen. Keep fighting for justice everyone, we can do it!

  • Art Powell says:

    Money creation by bankers, central banks or individuals
    Posted on March 1, 2018 by Art Powell | Edit

    That the Swiss are going to have a referendum on changing the way in which they create money is great news. That the referendum is certain to fail is even greater news.

    (First link and second link.)

    As regular readers of Economics 102 will know this blogger is extremely committed to reforms in how we create money. You will also know that I am strongly opposed to state control over the economy. I also believe there is an urgent need for reforms in the way we produce and exchange goods and services. There is a 99.99 percent probability of economic turmoil as the economy continues its downward decline and without major changes there will be a lot of human suffering.

    CurrencyThe Swiss proposal is that the creation of money be restricted to the central bank rather than the current fraction reserve process in which money is created when banks make loans. The authors of the proposal should be lauded for recognizing that there are big-time problems with money based on debt and that charging interest on money created makes our economic problems even worse.

    My problem with the proposal is that it wants all money creation to be in the hands of the central bank. The central bank would have direct control over lending. “The money created by the monetary authority would be transferred to the Treasury and would come into circulation by public spending; thus, it would benefit the public purse and contribute to the reduction of national debt. ” Money creation and this type of spending would also mean a lot of economic control by the government.

    The essay about this proposal lists private control as one of the problems with the current system. Control is a major economic issue and I can see where a lot of people are strongly opposed to anything but “public” control. However “public” control is just control by different people with slightly different interests from the bankers. They will still be acting in their own interests – such as getting re-elected. I want an economic system in which control and decision-making is by individuals and I believe the way to get this with a true competitive market economy which we do not have. I also figure the current system is marginally better than money creation in the hands of a government agent.

    The authors also point out there is a need to “secure the independence of the monetary authority.’ This is a serious concern as the people who control money creation get to determine which economic projects go ahead and by whom. There are very few prime ministers of any political leanings who would allow that kind of power into any hands but their own.

    There is an alternative to money creation by a central bank and that is to combine money creation with a guaranteed annual income scheme. This would solve the problems of lots of people without jobs and it would put primary economic decision-making into the hands of all of us as individuals.

    This guy has written extensively about this on this weblog and in an e-book Funny Money: Adapting to a down economy. The book is available free by following the link on the sidebar.

    Any changes in how money is created, whether to a central bank or to an income scheme, would hit the profits and power of bankers. Expect them to be more than just vocal in their opposition if either becomes a serious threat.

    I figure economics is largely about relationships and to be satisfactory relationships need to be based on a more or less equal two-way exchange. I also believe money should be considered a tool to facilitate the exchange of goods and services and it should encourage good relationships rather than be an instrument for exploitation. To maintain good relationships money should not give power to some people over others. I fear that giving a central bank the sole right to create money would make it easy for governments to exploit their citizens.

    There are lots of serious problems with the fractional reserve way of creating money and there is an urgent need for reform. The big question is what the reforms will do to the way in which we exchange goods and services and how we relate to each other.

    The author of this comment has a weblog Economics 102 at

  • City Pump says:

    This may be of interest:
    The debate, at St Paul’s Cathedral London with Michael Sandel, will tackle citizenship and the free movement of capital and people.

  • Mike G says:

    @Art Powell: I think you mis-interpreted the proposals. The Central Bank creates required money, but is not in control of lending. The benefits of creating new money (seigniourage) go to society, not into the bonus pool of private banks. The amount created can match that required: if the economy grows 2%, then 2% new money is created. Not 10%, with the rest going into financial markets or property. Private Banks continue to perform the lending function, deciding where it goes: but they can only lend out what they have. What they can’t do, is lend new money into whatever direction makes them most profit. See 2008 crash for details. A competitive market cannot fix the advantage that Banks have in their ability to make up money at no cost. No non-bank can compete with that. It is a structural problem, not a market problem. The people who control money creation are, today, the local bank managers in Private, completely unaccountable, profit seeking, banks. This is not better than Democratic control. I agree with your later points, but the structural rules on money creation are the problem.

    • Ray says:

      @Mike G. In practice, if the economy grows 2% and the central bank creates 2% new money, who exactly receives this extra 2% ? Is this a government deficit (new money transfered to public servant or government contractors) or is it some other mechanism ?

      • Michael Cayton says:

        Please read my article “Time for Real Monetary Reform,” in the May/June 2015 issue of ‘Challenge’ magazine, which prefigures this ‘Sovereign Money’ initiative. Regarding the increase in the money supply (commensurate with the increase in real output), the money could be viewed as interest earned by currency holders in proportion to their average deposits (central bank deposits) and so distributed. Or, because it represents seigniorage, pure and simple, and hence should accrue to the entire nation, it could be used to purchase government debt, or to finance tax rebates.
        The main point of the whole idea is that commercial banks could and should be in the business of intermediating between borrowers and savers and NOT in the business of creating money. The money they lend should come from those who wish to invest in the lending business, just as is currently the case with mutual stock funds. (The government should no more guarantee the money provided to banks for lending than it should guarantee the money invested with mutual stock funds.) The government’s practice of giving banks the power to create money GUARANTEED by taxpayers, represents an unfounded implicit subsidy to the banks, which is no more justified than would be government guarantees on money invested with mutual stock funds. Money creation and intermediating between borrowers and lenders are conceptually quite different. And in today’s world of electronic money there is no reason in today’s world of electronic money to allow such intermediaries to carry out monetary creation as part of their intermediation.

  • Brian V says:

    This thing sounds like a complete disaster.

  • CLIFFORD says:

    This is an important debate.

    I can only support Mark’s ideas. Attempts to rescue the real economy after the financial crisis has increased bank profits with no impact on real growth. Banks were not investing in the real economy the money that they had created but rather speculated on real estate etc.. preparing future bubbles.

    I like the idea of separating money creation from financial intermediation.

    Jean Clifford

  • Glenn Davie says:

    I have been thinking about this problem for a long time. The problem with calculating how much money the govt spends into the economy can be abused and how do do calculate the real inflation rate
    What might be 2% for one person might be 4% for another and some government spending will actually create a real sustainable increase in gdp and some projects will be lemons.
    What if peoples savings in the banks were backed by gold or silver if inflation was going up and the money supply was increasing too fast which would cause an increase in savings or deposits which would increase the demand for gold in the bank which would push the price of gold up so the value of your savings will go up with the amount of gold your original deposit was backed by. Plus the bank could create money off the back of the gold and lend that out and that is how you will earn interest on top of your deposit which is also increasing in value as the price of gold goes up.
    The amount of money the banks create off the back of the gold will be limited once they have a store of gold in the banks. Also this method creates competition between government created money from nothing and gold backed money.
    Can anyone see a problem with this, it seems win win. Govt creates money and spends it into the economy, peoples savings are protected from inflation, plus competition is used to keep the govt in check.

  • Rai says:

    Totally agree. This is why the economic gap has been growing, and poverty hasn’t disappear on the globe. We have to be aware that poverty has been intentionally produced using this ridiculous monetary system. The world is ours. Our world must not be controlled by only a few financial capitalists who don’t care ohter people’s lives.
    I support you!!!! – from Japan.

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