The Swiss Referendum on Sovereign Money

While money and banking plays an extremely important role in the economy, economics textbooks teach the opposite. According to the quantity theory of money (QTM), money plays no role in the economy at all; it is a veil which covers the workings of the real economy. An increase or decrease in the money supply will cause an increase or decrease in the prices, and will have no long run real effects on the economy. According to QTM money is neutral: we must look beyond the veil of money to understand how the economy functions.

The truth is that the standard theories of money and banking are themselves a veil which covers the reality of how the system works. This veil was penetrated briefly following the Great Depression of 1929, which was completely incomprehensible according to standard economic theories of the time. To explain the Great Depression, Keynes invented a new economics, in which money was not neutral. He argued that shortages of money would lead to unemployment and recessions, while excess would lead to inflation. At the same time, leading economists such as Irving Fisher, Frank Knight, Simon Schultz and many others realized the crucial role played by excessive credit creation by banks in precipitating the Great Depression. In 1933, they came up with the Chicago Plan which takes away the power to create money from the banks and gives it back to the government. The Banking Act of 1935 created deposit insurance and many other regulatory measures to control banking, but did not implement the Chicago Plan. Keynesian insights about money and Chicago insights about banking were gradually forgotten. The eerie resemblance of the Global Financial Crisis of 2007 to the Great Depression led two IMF economists to dust off the bookshelves of history and re-visit the Chicago Plan. Since then, it has been gathering momentum in terms of public awareness, but has been mostly invisible in the dominant media and politics which are controlled by big finance. However, the Iceland Government recently published a report which proposed a variant of the Chicago Plan. Most recently, on 1st December 2015, the Swiss public created a successful petition with 112,000 signatures to ensure parliamentary hearing on the proposal for Sovereign Money, which is a core element of the revised Chicago Plan. Since powerful interests have been blocking and opposing the Chicago Plan, it is up to the public to learn about the issues and create a movement for change. In this connection, interested readers may look up “Corrupt Banking System explained by twelve year old” on internet for an entertaining and informative detailed video of explanation. We provide a very brief explanation of the central issuesswissrefvollgeld below.

In the fractional reserve banking system, banks are only required to keep a small fraction of cash against the demand deposits outstanding against them. For example, in order to create grant a loan of 10,000,000 to Mr X, Mozoon bank only needs 5% of the amount, only 500,000 in the form of cash deposits. The bank grants the loan simply by creating an electronic entry in its accounts. In advanced economies, money travels electronically between financial institutions, and cash reserves are little needed. When necessary, they can be borrowed from many sources; especially the Central Bank is under obligation to cover cash shortfalls of banks. At 10% interest on the loan, Mozoon Bank will make a cool profit of 1,000,000 based on its meagre cash reserves of only 500,000. Where did this profit come from? It came from the money created out of thin air by Mozoon Bank and then lent out to the borrower at 10% interest. Because Pakistan is financially primitive, banks keep larger reserves (nearly 30%) and cannot leverage their cash deposits to the extent possible in more advanced economies.

The conventional wisdom, taught in textbooks of monetary economics, is that the government creates money, not banks. Furthermore, banks are financial intermediaries: they lend money which they gather as deposits. The reality is that the banks invent the money that they lend. This means that the banks, and not the government, are in control of the money supply in the economy. Bank creation of money acts in ways that are opposite to Keynesian prescriptions, and de-stabilize the economy. According to Keynes, when the economy is in a recession, the government should expand the money supply. In a booming economy with full employment, the government should cut back on money supply to prevent inflation. However, banks lend less in recessions, reducing the money supply. They lend more in a booming economy, adding to inflationary forces. Following the Global Financial Crisis, theories of Hyman Minsky called the Financial Fragility Hypothesis have become very popular. Minsky adds details to this crude picture, and show that banks systematically de-stabilize economies, leading to crises and crashes. The empirical record showing more than 200 banking crises over the past thirty years bears out the theories of Minsky. The Global Financial Crisis, like most others, was caused by excess money creation by banks, which fueled the fires of speculation, leading to a crash.

The solution to this problem is the proposal for Sovereign Money which has been detailed in the Iceland Plan, and will now be up for discussion in the Swiss Parliament. Instead of fractional reserve, banks must keep 100% reserves, preventing them from creating money. Instead the Central Banks will create money in the right quantity designed to stabilize the economy according to the Keynesian prescriptions. IMF economists Benes and Kumhoff have shown that this radical reform of money and banking will bring multiple benefits. It will eliminate banking crises, increase growth, eliminate debt, and create more fiscal space for development projects. It will also decrease the massive inequality which allows a tiny minority to control the political and economic system. The present system enslaves the majority in chains of debt only because a large number of deceptive claims about its benefits are widely believed. If we learn the truth, it can set us free.

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4 comments
  1. @ more than 12,000 members: Why do you deny Frederick Soddy is due?
    Why do you deny ?,

    “There never was an idea stated
    that woke men out of their stupid indifference
    but its originator was spoken of as a crank.”
    — Oliver Wendell Holmes, Sr.
    (1809-1894) American Poet

    .*** BUT, why not read and challenge a Noble Laureate for Physics and challenge ? ******Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy
    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”
    http://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt

    Why do you deny?
    “So elaborately has the real nature of
    this ridiculous proceeding been surrounded with
    confusion by some of the cleverest and most
    skillful advocates the world has ever known, that
    it still is something of a mystery to ordinary
    people, who hold their heads and confess they
    are ” unable to understand finance “. It is not
    intended that they should.” Frederick Soddy (The Role Of Money)

    Why do you deny ?
    Frederick Soddy has in one book answered….all concerns.
    Why do you not challenge ?

    For any nation to be a Monetary Sovereignty….
    .. it must be the sole creator of its sovereign currency.
    …it must have the ways and means to control its sovereign currency for quality and quantity.
    …it must under modern money systems be fiat since its money is transferable “thru thin air”.
    …it must understand that it is the guardian of the value of the currency , if it wishes to be capitalistic; otherwise that nation will be totalitarian. As a guardian (recording and exchanging) it does not own the value of the currency it creates.
    …it must use that currency knowing that it must also return it back to the community (the rightful owners).
    …all transactions using sovereign currency must be “REAL”, meaning backed by 100% of issued sovereign currency. All that has been issued backed by “reserves” must over time be converted to loans from the Central Bank, the sole issuer of the currency.In order to prevent “systemic failure” it must make available the currency as loans at a fixed rate and duration in amounts deemed necessary to allow the private banking system to be solvent.

    ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),

    Read and challenge:
    Frederick Soddy writings, namely “The Role Of Money”
    (Entire book as a free download) http://archive.org/details/roleofmoney032861mbp

  2. Sovereign money will only make the situation worse. I have explained to the author why this is so and challenged him to refute me. So far his only response has been to “change the subject” like every other economist.

    My simple proof is on my home page at moneyasdebt.net

    My debate about this subject with Steve Keen, AMI and Positive Money is located in my blog http://moneyasdebtblog.wordpress.com

    None of them could refute me either. But it makes no difference because they have an IDEOLOGY.

    • The Islamic Version of the Iceland Plan has no interest [0% interest rate], so the problems you discuss do not arise. FIRST, investments are financed by money CREATED from scratch by the Central Bank — they DO NOT come out of savings of depositors, as in the financial intermediation model you assume. Second, there are TWO types of banks available to depositors: DEPOSIT banks which safekeep money at zero interest, and INVESTMENT banks, which provide PARTNERSHIP in businesses — investors are paid OUT OF PROFITS. Central Bank can finance investments on ZERO INTEREST, since it is not a profit making entity. There are no debts and no interest. So your demo does not apply

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