Recently new referendum vote is being prepared. Over 100 000 signatures were collected to put the question about creation of money in the spotlight. To be precise, referendum will ask whether the ability to increase monetary supply should be exclusive to Swiss central bank (SNB). Right now both the central bank and commercial banks are doing it. The problem mentioned is of utmost importance and the referendum results can affect the whole world as we know it.

Creation of cashless money.

First, let’s recap how commercial banks are creating money. Fraction Reserve System is the key! FRS tells how big percentage of the deposit must be hold as a reserve. In Poland it is 3.5%. The rest can be used for loans for clients. From the deposited 100 EUR bank can use 96.5 EUR for another’s client credit. Meanwhile, whole deposit of the 100 EUR is still being accessible for the first client who originally deposited it. Interest rates and provisions from artificially created 96.5 EUR are taken by the bank of course. This is reiterated many, many times.

For those who doesn’t know the procedure I add Mike Maloney’s video. It’s a must watch clear explanation of the topic.

                                                 

Implementation and referendum result.

There is still a long way before the signatures turn into referendum and Swiss will be voting on this matter. Government has still up to 3 years to implement possible majority ‘yes’ vote into legislation. Custom says that politicians should not put pressure regarding the referendum question on the electorate. The known practice is different when it comes to anything that touches competencies of banks. It is Switzerland after all. Media battle about that is going to be there anyways and it plays big role. Gold reserves and parity has been a victims of a strong propaganda in the past.

Let us hypothesise. In the event that referendum end with a ‘yes’ the whole financial configuration would have to be remodeled. Full reserve system disables access to cheap credit slowing down economic growth in the short term. ‘Bail in’ procedure would be unnecessary as clients’ money ont heir deposits would stay untouched therefore, being available at request. This would limit occurrences of speculative bubbles that is a straight way to bad allocation of capital.

Implications.

It is Fraction Reserve System that banks are making humongous money on. Thanks to that economy hurls itself forward with anxious acceleration but those drag-racing moments always end with a tragedy in flames. Particularly this mechanism is responsible for capital transfer from the middle-class to the top 1%. Status quo is further cemented by banks. Their profits made on middle-class are spent on lobbying circles around government perpetuating the cycle.

It is crucial to understand that banking system has a vital role in the world economy. It provides capital to individuals and companies making it a healthy part of a development of any country. This has nothing to do with massive theft from the people producing goods and services and this is what Switzerland will soon put up a fight against.

Definitely it is a step in the right direction. Banks themselves don’t need the Fraction Reserve System to function. They will do just fine without using ‘leverage’ – with obligatory 100% deposit reserves. It will have no bad effects on online banking, investment banking also will be continued from the dedicated sources. Keeping money in the bank will be entailed with costs. Those costs will stem from securing the deposited capital and insuring its safety. This system is stable, fair and immune to any financial calamities. Consequentially we will get economy which is growing but without being juiced with speculative bubbles. Growth without spectacular meltdowns, another Black Monday or the Great Depression.

Summary.

We can spend many hours on complementing this noble initiative but most probably it will not gather enough momentum to make a change. Media will use all their powers to be the prophet of incoming financial Armageddon. Of course they will try to spin it in a form of ‘help’ that installs ‘common sense’ in minds of ‘lost’ nation on the brink of a ‘total disaster’. Unfortunately due to lack of financial knowledge of average Swiss it will be hard to comprehend consequences of the choice ahead. Substantive discussion will disappear in the flood of meaningless gibberish and any voices of opposition marginalised.  This is exactly why the initiative will not affect the CHF rate. In my opinion so fundamental change cannot be introduced with democratic methods. It requires the right people able to explain the problem and yes, - another crisis making everyone ask the right questions. Without those even the strongest democracy in the world will fail.

Independent Trader Team