I wonder about the translation, is "real money" an accepted economic term for this concept? Because "Voll" as a prefix usually means complete or whole, rather than "real", as in "Vollmilch" (whole milk) and "Vollkorn" (whole grain). (Source: I'm German.)
Seems wrong to me as well. I think the point of the translation is to say "non-fractional reserve" money, for which "real" is a defensible but not fantastic shorthand. "Fully backed" might make sense.
Also, I think Vollgeld comes from an abbreviation of vollwertiges Geld (full-fledged money), and seems like an appropriate translation of 100% money and sounds good, as well.
German as in language, not German as in the country. Vollgeld as a term also appears in German economic discussions (though mostly on the left, not so much in the mainstream).
Sadly unfair, I would also like to earn X and hold 2% reserve, ie. have 50x money to my disposition. My investments yielding 1% would effectively have 50% return. Magic.
> Contrary to common belief, most money in the world is not produced by central banks but is instead created by commercial lenders when they lend beyond the deposits they hold for savers.
Sounds like an attempt to keep the loan-deposit ratio (LTD) at or below 1, so that the bank is only lending money that it actually holds in the form of deposits.
I'm told by a lot of experts that this is a bad idea and it will hurt the entire industry and contract the economy, but I'm wondering if it's possible to put a soft lock (like a semi-fixed-deposit) on portion of a customers deposits and use that to finance lending. As a customer, I personally wouldn't mind being able to put soft locks on parts of my savings in return for a higher interest rate (preferably through an online interface).
I'm told by a lot of experts that this is a bad idea
That probably means it's a good idea ;)
Full reserve banking isn't quite what is being voted on here, but if it were to be implemented it wouldn't be so different to what Switzerland already has.
I have a Swiss account with UBS. Interest payments on my accounts are effectively zero. Not quite zero but so close it makes no odds. I am happy about this because the SNB is actually trying to force interest rates negative - like most banks, UBS is shielding me from negative interest rates (i.e. direct confiscation of savings) using its own profit margin.
However, the issue remains that I get no yield on my money. Or, no, wait, actually I do, because my banks also offers many different kinds of investment funds with high degrees of liquidity, transparency about what they do, their performance and their different degrees of risk. So I put a big chunk of my money into these sorts of funds (and yes yes, I know, there are better funds out there, I don't only use UBS).
I think this approach is better for two reasons:
1. It's always clear how much of my money is effectively risk-free deposits, and how much is "working at risk".
2. It divorces retail banking services from investment services. For instance if I happen to like a banks customer service, e-banking portal, mobile app, credit card offerings or whatever, I can benefit from those, without needing to take it as a bundle with perhaps riskier lending practices.
The low risk funds I use are mostly short-medium term loans to Swiss business, but I could invest in mortgage funds if I wanted to.
It seems to me that if all banks in Switzerland had to go full reserve, then it'd mean relatively little change for people like me. Some bank customers who don't explicitly invest their money would now have to, if they didn't want to lose yield, but inflation in Switzerland is quite low so I suspect some people would be happy with just knowing their money is where they left it and is going to stay there. Investment isn't for everyone.
> > I'm told by a lot of experts that this is a bad idea
> That probably means it's a good idea ;)
This is just pure contrarianism. Experts also say it's a bad idea not to have clean drinking water, reliable electricity, and seatbelts in cars.
And believe it or not, there is a huge amount of data on what kinds of policy in banking work and what don't, leading experts to conclusions like these. We're not talking about a few naysayers, either. The Swiss National Bank themselves, who will be put in charge of all lending if this is implemented, say this is a bad idea.
The dubious reliability of much advice presented in the media as expert advice is one of the impending themes of our time. Expect skepticism about "experts" (defined as the sort of people who we tend to be told are experts when debating matters of politics, wealth or health) only to increase in the coming years.
The Swiss National Bank themselves, who will be put in charge of all lending if this is implemented, say this is a bad idea
The Overton window of acceptable thought in central banking is laughably narrow. Central bankers should really be the last people who are listened to on changes to how the monetary system works - they will always argue for minor changes to the status quo.
> This is just pure contrarianism. Experts also say it's a bad idea not to have clean drinking water, reliable electricity, and seatbelts in cars.
Difference: There's scientific evidence for the experts opinion in all these cases. Economics? That's more or less just crystal ball reading with a scientific shim on the top.
The line of thinking here deserves expounding. The discipline of economics is very important, but there needs to be some care about trusting the opinions of economists.
The opinions of an economist are worth very much, because listening to them sets up situations were it is easy for someone with an economics degree to push an agenda. But economists do have a lot to offer with observations like "this is very similar to the [suchandsuch incident] of [1887] in [Somewhere]", which is worth listening to. The limitations that surround economic 'experiments' are so severe it should be treated more like history and less like physics. Thomas Piketty with Capital in the 21st century is a great example of what I'm thinking - more history and data than theory, but some theory to provide structure to the data.
If science has a measure of quality, then that quality is the accuracy of its predictions. That ties in very closely to the ability to conduct experiments and collect accurate data. Economics as applied is a highly political process, which hampers both the perceptions and reality of how fair the experiments are.
Oh, it has plenty of predictive power, it's just not evenly distributed. When economists weigh in on contemporary politics, there are usually a lot of assumptions that doesn't quite make it into the soundbyte (and I don't want to pin this solely on the press, there are plenty of economists that are happy with this situation, as long as "their side" gets a boost). This, however, is the case for all members of the "political" sciences.
So what? You're making the classic erroneous assumption of believing more economic activity is inherently good.
A society that spends all its time and effort on bad investments like building statues and blowing them up again, is a society with a problem, yet by the metrics used by conventional economics, it'd be doing great! Full employment! Tons of production! GDP increasing!
My build-statues-and-blow-it-up example was deliberately exaggerated for clarity and effect. In the real world malinvestment tends to look like asset bubbles, the construction of houses that nobody needs, "airports to nowhere" (like the cases of that happening in Spain) and so on. It may look like beneficial economic activity when you're zoomed all the way in, but when the free money dries up, suddenly it becomes clear that maybe strippers shouldn't be allocated two houses, or maybe airports should be built near population centers, and so on.
Anyone who can print money from nothing can essentially override the judgement of wider society about how best to allocate resources. Note that resources can also be allocated towards savings, but that tends to suppress economic activity, so people whose job performance is judged by measuring economic activity invariably end up attacking savings. Hence the frequency with which central banks try to push down interest rates.
I got that it was an exaggerated example, but sadly I’m 90% sure that you could make a kickstarter project to do just that and probably get it funded.
Of course at that point people are actually treating the entertainment value as an asset rather than the statue and explosives themselves so maybe that’s also completely reasonable.
GDP might be a flawed measurement for the reasons you mention, but it's worth keeping in mind that for all it's flaws it has a very high correlation with "general goodness", almost regardless of which measure you choose.
I don't think there's much consumer demand to have their money locked up for 25 years like a typical mortgage a bank offers its customers though. Someone's got to do the maturity transformation, and it's not like the economy is safer if that's done by pension funds and/or an aftermarket for mortgage-backed securities instead of the banks actually making the lending decision...
I would have a lot of interest in getting my money paid back over 25 years with 7% interest. Getting it paid back with 0.01% is a problem and it is essentially caused by allowing Banks to loan on margin..
The problem I see with this law is that as a Swiss law it can not have the intended result. But globally reforming banking this way would probably be very effective at fixing the absurd state of global economics.
Yeah, that's normally called a Certificate of Deposit "CD" and locks in the money for a period of time 6 months, 1 year, 4 years at a certain interest rate.
No, because bank lending is not dependent on customer deposits or bank reserves - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:
Repeat After Me: Banks Cannot And Do Not "Lend
Out" Reserves
Tom Woods and Bob Murphy address this on their Contra Krugman podcast.[1] Basically the scheme would ban fractional reserve banking.[2] So banks could still loan money, but they would have to use money sources other than checking accounts.
They are wrong. This was not about fractional vs full server banking. They are also wrong about what how fractional reserve banking works. The Swiss initiative (that I voted on an rejected) was only that the central bank would have to full control, it did not force 100% reserve banking.
Woods and Murphy follow the Rothbardian school and that is a minority even among Austrian Economists. If you want to see a more modern Austrian-Chicago critic on that, I would recommend George Selgin.
Are you saying that individual Swiss banks are currently free to make up their own reserve requirements? In the American system, as I understand it, the Federal Reserve (the US central bank) sets reserve requirements which the banks must follow. I thought this was how the Swiss system worked also.
If the Swiss central bank already sets reserve requirements, what would this proposal do?
> Are you saying that individual Swiss banks are currently free to make up their own reserve requirements?
No, but bank lending is not made from customer deposits or bank reserves - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
Eliminate the reserve requirements, which would no longer be required because banks would not hold client’s on-demand deposits on their balance sheets at all. They would be held on the central bank’s balance sheet.
Was the last global financial crisis not caused by idiotically lax lending conditions, made possible by - amongst other things - the fact that loans were far too abundant and cheap? And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?
If the loan supply was significantly tightened, this would be "bad for the economy" in the sense that there'd be less economic activity. However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.
> Was the last global financial crisis not caused by idiotically lax lending conditions
No. It wasn't.
The housing market began collapsing in certain states as early as 2006 and many banks had problems then. The wider crisis only happen once the central bank totally misjudged the monetary conditions and let demand collapse.
They were talking about high inflation fears in 2008 when it was clear that NGDP was dropping like a stone (look at FOMC meeting in November of 2008). The real 'Great Recession' meaning the large bank failures and the even most of the housing problems outside of the original crisis states only happened after that.
The effect of bad house lending was visible from 2006 but that should not effect all other industries unless the broader monetary system fails.
> And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?
That is how the monetary system has worked for 200 years. Its hard to explain crisis by this alone.
> However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.
You can not just assert that economic activity is wasted without having a story why that should be true. The investment are driven by individuals who want to improve their lives, not dig holes and fill them up.
Because borrowing money is often a good thing. Most people borrow money when they're younger, because their earning power is smaller, and they know they can repay it in the future. E.g. to finance their education. Most new businesses start off by costing their owners tons of money and not earning them anything, but again, some of them end up being an overall economic success.
Sure, if you're rich enough, you can self-finance your education or your new business, but if not, a loan is what you're looking for.
I think you mean borrow. Loan would be the opposite.
You're arguing that loans are useful. Nobody is arguing the opposite. Yes, loans are useful, but when the people making them have nothing at stake because they are creating the money from nothing, you get a lot of low quality lending to low quality investments that are unlikely to pay back (put another way, are bad investments).
> I think you mean borrow. Loan would be the opposite.
Thanks, fixed.
> You're arguing that loans are useful. Nobody is arguing the opposite.
Like everything else, making it harder to make loans will decrease the amount of loans. It's not exactly a sliding scale converting between "the amount of reserves necessary" vs "the amount of loans available", but that's the basic model.
So arguing that we should go from a certain amount of fractional reserves, to effectively 100% reserves, will have the side effect of cutting down the amount of loans by a lot.
So the discussion needs to be "how much risk are we willing to tolerate, for X amount of loans".
However, I see most people in this thread (including your parent comment) who are saying something like "loans are bad". I'm trying to make the case that, quite the opposite, loans are inherently a good thing, it's the risk that's bad, but you can't cut down one without impacting the other, so you have to consider the tradeoff.
Maybe I misread your comment btw, but you're talking about digging holes in the ground and filling them up being a bad thing - I agree! But I just don't think that's what most loans are doing, certainly not the 90% of them that we would be killing! (I'm totally guessing on the number, but I think it's >50%?)
I'm happy to agree that loans are neutral but "inherently good" is pushing it.
Loans on things that generate more income for a socially-positive purpose can be good things but often loans can cause enormous problems of their own (see: student loan debt spiraling out of control because there is so much free money available to buy an education now).
They're not creating money from nothing, hence fractional. And to the extent they don't have anything at stake, it's because they get bailed out, which is a different concern altogether.
> They're not creating money from nothing, hence fractional.
No, banks do create money through loans - lending occurs first, then reserve requirements are met afterwards. See for instance this research paper from Standard & Poor's:
Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves
> And to the extent they don't have anything at stake, it's because they get bailed out, which is a different concern altogether.
The two things are directly linked. If people want to gamble on a bank deposit like any other investment, that's fine. The less sound banks will need to offer higher returns on money than the more sound banks in order to compete. The problem lies when the government (implicitly or explicitly) backs the deposits - without this backing, people wouldn't care nearly as much about the issue.
The problem as mentioned in [1], is that banks don't necessarily do productive credit creation. They can create money just for people to buy assets, and not to invest in research and development. I think that it is the main idea behind removing them the possibility to create money, so as to reduce loans which inflate assets and create crisis.
Both exist currently. There are "on demand" deposits (current accounts, checking accounts or whatever you want to call them) which are considered "money" (and added to physical money to get the M1 money supply). And there are other deposits (like saving accounts) which are investments. The distinction is quite blurred nowadays, you are not getting any interest on them anyway, but if the initiative had passed banks would only keep in their balance sheets the investment-like deposits and not the money-like deposits (which would be transferred to the central bank). Edit: to be clear, current accounts and savings accounts are quite different now from the point of view of the bank: fractional reserve requirements apply only to the former, allowing for "money creation".
So presumably the banks would have offered accounts that were as close as they could be to current accounts while still counting as savings accounts according to the regulators. The impact of the law would have depended on exactly how similar the regulations allow these saving accounts to be to current accounts.
I suspect most people would have moved their money to "savings" accounts and things would continue as before.
It's hard to know how things would have been implemented and how the different parties would have behaved, but I suspect it's clients that would need to be convinced by banks and not regulators.
Taking UBS as an example, the interest rate offered on the current account is 0%. The interest rate offered on the savings account is 0.01% (and it comes with some restrictions, withdrawals above CHF 50'000 p.a. require a three-month notice).
Even if they were otherwise identical, why would anyone put their money in the "risky" savings account instead of the "safe" current account? Interest rates paid to depositors would have to rise to make saving accounts attractive.
No. If I lend you money, I have a correspondingly smaller amount of money. Nothing is created from nothing.
On the other hand, banks are allowed to lend more money than they actually have. Remember that a lot of money exists purely as numbers in a bank ledger. When the bank gives you a loan, they make a note in one place that you owe them X and then they simply increase the number associated with your bank account.
When people withdraw money from the bank, they are given notes from the branch’s own stock of notes. If the notes get low or run out then they are restocked from the central bank.
> If I lend you money, I have a correspondingly smaller amount of money. Nothing is created from nothing.
In the simple case, yes. But let's say I run a bar, and decided to open a tab for customers so they don't have to pay right away. I'm effectively loaning them money (extending them credit), so I've effectively created "money from nothing" in the same sense, though on a much smaller scale, of course.
Banks do not lend more money than they actually have at all.
Banking is a simple business - you raise money by taking deposits, issuing bonds, borrowing from other banks, etc. then you keep a reserve (say 10%) and lend out the rest. That's why it's called "fractional reserve banking" because they must reserve a fraction of the money they have raised.
The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.
>The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.
The two million dollars gets created at a different stage, either through a government bailout, quantitative easing, or other (generally) inflationary methods but it absolutely does get created "out of nothing" at some point in the cycle. (There is also the FDIC which, while technically insured by the banks, in practical terms is backed by an implicit government guarantee that the funds will be there even if all the FDIC banks fail.)
Sure, central banks can create money. I was addressing the idea that private banks “lend out more money than they have” thus “creating money out of nothing”.
No they don't. If I have £5 and lend it to you, we haven't created any new money. You have £5 now but I don't have it any more.
If a bank just writes £5 in your bank account, they've created that £5. There is no corresponding £5 that has been removed from somewhere else, unlike when you or I extend a loan.
>If a bank just writes £5 in your bank account, they've created that £5. There is no corresponding £5 that has been removed from somewhere else, unlike when you or I extend a loan.
If they loan me £5, but I leave the £5 in my account, then it counts as loan, but it also counts as a deposit. So their loans can never exceed their deposits.
I still don't think you get it. Nobody is saying their books don't balance. We're saying the money they lend to you is conjured out of thin air.
I wouldn't be able to give you £5 that I don't have just because I also write myself a note saying you owe me £5. For me to lend it to you, it would have to come from somewhere. With banks that's not the case.
The proposal is to prevent money in current accounts from being lent. If you had £5 in your current account, this money would be effectively yours. However, if you had £5 in your savings account, you would be effectively lending the money to the bank who would in turn extend a loan to another client.
This would give the central Bank more control over monetary policy using the franc, but would also probably decrease demand for the franc, and slow down Swiss economic activity.
I would imagine banks would start issuing non-reserve-backed loans in other currencies, and it would make lending just marginally more expensive (exchange rate is now an extra barrier to getting a loan).
I was under the impression that central banks regulated the banks to control the creation of money, if this passed wouldn't they just print what they would have allowed anyway.
Since banks can borrow deposits from other banks, the central government has essentially no control over the lending of an individual private bank (there are also capital ratios, but that's a soft target since banks can increase their capital without receiving any more deposits). Since central banks are mandated to hit a target interest rate by injecting more money into the economy every time the interbank lending rate starts to rise (i.e. every time the banking sector in aggregate wishes to lend out in excess of its loan deposit ratio), they are also unable to limit the quantity of money in the economy without abandoning their interest rate target.
In the medium term, central banks exert some control over the level of money in an economy by raising and lowering target interest rates to change the cost of expanding the money supply to people borrowing from private banks. And of course they also have the power to change policies which directly or indirectly affect bank lending. But they don't, under current institutional arrangements, have any direct control over the amount of money created or destroyed by net changes in bank lending.
I wish this article would take a more scientific tone. It seems assert a lot of things about what are "likely" and "could" happen, in economics, which I understand to be a non-objective non-science.
I'd be content if they threw in little tidbits about "No economists can accurately predict recessions and thus economies are very poorly understood. One theory is..."
Yeah because the history of monetary economics is full of radical changes that caused no problems and were easily reversible.
I'm sorry but that is a totally naive perspective. And as somebody from Switzerland maybe putting your lives savings on a 'might work but has no explainable advantages'-initiative is idiotic and that's why people affected by this absolutely destroyed it.
Well sure. The history of economic experiments is that they do end up eventually getting reversed. After a period of death and destruction, revolution, economic collapse, starvation and dictatorship.
If there´s one lesson we really need to get over to the Economists from Computer Science it´s that they have to stop experimenting with the production system.
If only there were world simulations where economic crashes have much lighter consequences, where economists could literally run A/B tests of their theories.
Of course, for those to be possible you would need a vast connection infrastructure spanning the globe, and many millions of people willing to participate (perhaps because the world simulations are clothed in cultural common places and so are disguised as "fun"), and something of value that they are willing to trade in earnest. Then you could run all sorts of fun economic experiments there and prove theories via A/B tests.
I wonder if the idea will catch on. I hope it's not held back by a perception that those world simulations are not serious enough for real science to be done.
I agree - I´m in favour of adopting a scientific approach. There is no scientific evidence in favour of full reserve banking, which is based on even greater misconceptions of how banking actually works than the mainstream theories.
Central banks are necessary to provide the lender of last resort functionality.
Meanwhile, there are several scientifically based simulations of the banking system out there, that could be used as a basis for developing a testable system to experiment on - this is completely within current technological capabilities to achieve.
If actually read the books by the inventor of the 'lender of last resort' called Walter Bagehot. He wrote on of the most famous monetary books 'Lombard Street: A Description of the Money Market (1873)'.
Modern central banks constantly refer to how they 'follow Bagehot' but actually don't.
In this book he actually makes it quite clear that the 'lender of last resort' is only need in England because he says 'Getting ride of the Bank of England would be as hard as getting ride of the monarchy' (turns out its even harder).
He specifically point out in his books that a better solution would be for England to adopt a banking system like the Scottish had where the 'lender of last resort' was not needed because banks can create their own liquidity.
'Lender of last resort' was his idea how to restrict and give a clear set of rules to the central bank so it would stop causing so many crisis that were all avoid in the free banking system of Scotland.
Inflation of the money supply allows governments to finance war[1]. Reducing inflation would have the opposite effect. It would lead to greater savings, which would lead to lower interest rates, which would lead to more investment, which would lead to more productivity, prosperity, and wealth.
The Swiss Government going on a war-declaring spree using loans from private banks is not a credible threat to the Swiss economy.
Massive instability in the lending market and a higher average cost of borrowing because of frequent short term credit crunches as the money supply is delinked from borrower demand is.
I'm not a finance expert, but my intuition is that the market is already good at smoothing out this kind of instability. This is what market makers [1] do and there is no requirement that a market maker needs the ability to make money.
Borrowing costs may be higher because this proposal removes some "free" money that banks can currently lend out. But maybe interest rates will stay the same and instead checking account fees will rise. This could induce some checking account holders to move some of their money to term loans to the bank which the bank could then lend out. It is not clear that interest rates have to rise.
> the money supply is delinked from borrower demand
The money supply available to meet borrower demand need not be created. It already is partially provided by people lending their money for a term to the bank. This proposal merely says that the bank may not use checking account money to meet borrower demand, i.e., it may not represent to a checking account holder that his money is available when in fact it has been lent out to someone else.
We've tested the ability of the market to smooth out instability caused by attempting to artificially fix monetary aggregates. We got high and wildly fluctuating interest rates and record levels of unemployment. And that was a looser policy regime than the one being proposed.
Market makers do not sit around with huge piles of uninvested cash waiting for the day that loan demand to exceed its supply on loanable funds, and consumers with interest-free deposit accounts are not exactly the ideal people to make markets. And of course when loan demand exceeds the amount of cash available to be loaned at that point in time interest rates rise. That's Econ 101.
The problem with the proposal is as you have just explained, if it would work well it would be the same as now without being clear why it is better.
That is why I and everybody I know voted against it, nobody could explain why it would be better. The only explanation was that if it was implemented perfectly it would cause additional problems.
Switzerland is an unusual place; for a while it had negative central bank rates, because in its traditional role as financial haven so much foreign capital has been coming into the country that the central bank wants to keep the value of the currency down.
Switzerland is not going to be short of capital. The interesting question is, would it have positive or negative effects elsewhere? e.g. if it had been in place when lots of Hungarians took out disasterous CHF-denominated mortgages.
Switzerland has negative central bank rates since 2015. So does Sweden. The European Central Bank rate is at zero, and Japan's rate has been slighly negative for a couple of years. We are living interesting times.
The exact day it passes, the Swiss banking stocks would likely crash because their ability to be in control and pass the risk to the central bank (as the lender of last resort) is a big portion of their value.
But, what happens in the long run to the Swiss markets? I would suspect it’s not good either, it mirrors how the money worked while on the gold standard too much for my taste in that rapid responses to recessions becomes much more complicated.
Absolutely that is what 100% reserve people don't understand.
The money supply under the gold standard was highly flexible.
Banks depending on demand (or velocity) automatically raised or lowered their reserves.
Meaning that if velocity is slow, banks would automatically lend more and create stable monetary conditions. Basically what central banks now do by having a bunch of burocrates look at statistics.
The money derives its value from something central (wether it's the gold holdings of the country or the printing press) rather than being decentralized.
No they wouldn't because the law doesn't go into effect. The state would first have to debate how it would be implemented and they would not implement something insane.
Eventually they would announce how it would work and the SNB would probably just copy the way it is doing now, with a different way of accounting.
