A Swiss national flag flies over Lake Geneva
© Bloomberg

Switzerland will have a referendum on whether to stop private banks from creating money.
FT.com, December 2

“Stop banks from creating money”? That sounds like killing the goose that lays the golden eggs. Aren’t private banks the reason why Switzerland has always been so rich?

They don’t mean creating money in that sense.

What do they mean then?

They mean it literally.

That’s not any clearer.

Think about it this way. Do private banks have their own money printing presses so that they can mint coins and print banknotes at will?

Of course not. That would be counterfeiting. Only the central bank can do that.

Right. But you don’t have most of your money in physical cash, do you?

No — are you crazy? It could get stolen, or I’d lose it, or my dog would eat it. Most of it is in the bank. Exactly. Most of what we think of as “money” is really a bank deposit, not cash. The UK has £70bn of notes and coins in existence — but more than £1.5tn sitting in deposits.

OK, so most money isn’t physical. Welcome to the modern world. Now are you going to explain what this Swiss initiative is about?

It’s all related. As you say, of course banks don’t have their own printing presses. But what if they can create electronic money at will?

That would be crazy. Just like physical counterfeiting, except they could forge much more money in much less time. And without getting ink on their fingers.

Well, that’s what this Swiss referendum is about.

Wait — you’re not trying to tell me banks are actually doing this, are you?

That’s just what I’m telling you. Where do you think the deposits come from?

Er, I never thought about it. I suppose when people go to the teller and deposit a cheque or a wad of cash, it all adds up over time.

A bit hard to make £70bn add up to £1.5tn, even with a lot of time.

I see what you’re saying. So where do the deposits come from?

Deposits are created from the loans banks make to customers.

You’ve got that the wrong way round, no? Banks lend out the deposits they get.

No.

No?

No. The bank decides whether it wants to make you a loan. If it does, then it simply adds the loan to its balance sheet as an asset and increases the balance in your deposit account by the same amount (that’s a liability for them). Voilà: new electronic money has been created.

Just like that, at the stroke of a pen?

These days, it’s more with a click of the mouse, but you have the right idea.

Well, I never. I obviously realised that when I deposit money in the bank, they don’t store it in their vaults. I mean, I get how fractional reserve banking works — the banks hold deposits that are much larger than what they keep in reserve. But I assumed the amount of deposits customers put in determines how much the banks can lend out.

That’s what most people assume. But it’s the other way round. The Bank of England is trying to educate people about that, actually, which is a good thing.

I’m not so sure it is.

Why wouldn’t it be?

Well it depends who you educate. It would be reassuring if big shots who decide policy get it right.

Which they worryingly often don’t seem to do.

Right. Good on the educators then. But what if ordinary joes like you and me cotton on to this scam?

What scam?

That private banks just create money at will.

You mean you agree with this Swiss initiative now?

How could I not? If banks can just print electronic money, that’s just as destabilising as printing notes freely. How can anyone keep the economy on an even keel if the money supply is a free-for-all?

It’s not a free-for-all, just a free-for-all-licensed-banks.

Even worse. If anyone could explain this in simple language, it would cause a revolution.

The BoE has a nice educational video.

Forget them. What do the campaigners want instead?

To make electronic money issuance the prerogative of the state, like with physical cash. State e-money.

People would keep deposits in the central bank, and private banks would only offer investment products or deposits backed fully by central bank reserves. It’s often called “narrow” or “limited-purpose” banking.

Is it only the Swiss?

There are campaigners in the UK, too, and it is under consideration in Iceland. Even some banks offer 100 per cent reserve-backed accounts. The FT’s Martin Wolf has endorsed the idea.

Why hasn’t it already happened then?

Maybe because money makes the world go round?

It certainly makes my head spin.

martin.sandbu@ft.com

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