Monday, 29 February 2016

The Swiss government and Vollgeld.

The Swiss government (surprise, surprise) sees eye to eye with the Gnomes of Zurich when it comes to monetary reform. That is, both of them want to “get back to business as usual chaps” rather than see any fundamental reform of banks and the monetary system.

In particular, the Swiss government rejects the idea that private banks should be barred from printing / creating money. The Swiss government’s reasons (according to this Economist article) are as follows.

Central bank liabilities.

First up is this. “As the central bank issued more money . . . its liabilities (cash) would rise without any increase in its assets. This, the government fears, would undermine confidence in the value of money.”

The answer to that is that while base money does appear on the liability side of central banks’ balance sheets, that money is certainly not a liability in the normal sense of the word. That’s because:

i) Taking the UK as an example and as regards £20 notes, while those notes say that the Bank of England “promises to pay the bearer £20” (presumably in gold), you’ll get sweet nothing from the BoE if you turned up and asked for gold or anything else in return for your £20 notes. So in what sense are BoE notes or dollar bills any sort of real liability of the relevant central bank?

ii) The extent to which central banks really are independent of government is always debatable, and whether they are nominally “independent” doesn’t make a VAST different there. Anyway, if you classify a central bank as simply an arm of government which is perfectly legitimate way of looking at it, then base money is no sort of liability of “the state” (i.e. central bank and government combined) and for the simple reason that the state can grab chunks of that money off the private sector whenever it wants via tax. That’s very different to the debt you owe your bank in respect of your mortgage: you can’t just grab £X off the bank with a view to reducing the debt you owe your bank by £X.

Indeed, the main “asset” possessed by most central banks is simply bits of paper issued by their treasury saying in effect “we owe you $X”. Those bits of paper are commonly known as government debt.

But government and central bank are, to repeat, both part of the state apparatus. Thus central bank so called “assets” are about as real as an IOU issued by your right hand pocket, and put into your left hand pocket in exchange for cash loaned by your left hand pocket to your right hand pocket.

Incidentally, the fact that some central banks are nominally in private hands is irrelevant. The important point is: what RULES do those banks have to abide by? To illustrate, the Bank of England is owned by the UK Treasury solicitor, according to the second paragraph of this Wiki article. But I rather doubt the “Treasury solicitor” whoever her or she is, takes one penny from the millions of pounds of profit made by the BoE every year. The Treasury solicitor will simply get the standard salary appropriate for bureaucrats with the skills and experience of the Treasury solicitor.

Money like liabilities.

Second, the Swiss government claims that “There would need to be heavy-handed rules to make sure that banks did not create “money-like” instruments.”  There are several answers to that as follows.

1. There are all sorts of strange “instruments” circulating as money in the world’s financial centres, but for the vast majority of transactions (buying a house or car or doing the weekly shopping) it’s pretty clear what constitutes money and what doesn’t.

2. Economists have never claimed there is a sharp dividing line between money and non-money. To illustrate, you are free to try issuing your own money in the form of IOUs written on scraps of paper, and good luck to you. And for another example, you are free to try using bottles of whiskey as money: that might work in the case of a whiskey drinker to whom you owe money (you might be able to give him the bottle of whiskey to settle your debt to him). But otherwise, bottles of whiskey are such an inconvenient form of money that they aren’t counted as money, and quite right.

In short, it is not the aim of those wanting to ban privately issued money to ban ALL FORMS of privately issued money. For example it is not normally their aim to ban local currencies like the Lewis pound or the Bristol pound in the UK. The aim is to ban about 95% of what is normally classified as privately issued money, that is money issued by commercial banks.

Moreover, banks have to obey numerous “heavy handed” rules AS IT IS. Put another way, banking will probably always involve a game of cat and mouse between banks and regulators, regardless of whether we ban privately issued money or not.

Also, the accusation “heavy handed” is a joke when you consider that the Dodd-Frank regulations consists of about ten thousand pages and counting.

Bank funding costs.

Third, the Swiss government claims that “The government also worries that the change would hobble Swiss banks, including multinational giants such as UBS and Credit Suisse, which would face mammoth restructuring costs.”

The simple answer to that is “Modigliani Miller”. Messers Modigliani and Miller were two (Nobel laureate) economists who set out some very good reasons for thinking the cost of funding a bank (or any other corporation) is not influenced by its capital ratio. The arguments for and against MM are complicated, and this is not the place to go into them, but suffice it to say that Google is 90% funded by equity, and Google is not exactly a failure, which rather suggests that high or very high capital ratios are not a big problem.

Bank insolvency.

Fourth, the Swiss government makes the bizarre claim (according to The Economist) that “Even once the new system is in place, a bank could still become insolvent or suffer a liquidity squeeze…”. Well sorry but insolvency is to all intents and purposes impossible in a “no privately issued money” system. Reason is that under that system, lending entities are funded just by equity (or something similar) and equity is not a debt. That is, a bank which is funded just by equity owes nothing to anyone. How can it possibly become insolvent?

Last time I looked at the state of sundry banks closed down by FDIC, it was apparent that not a single one would have been insolvent had it been funded just by equity. The worst ever failure was a bank in Chicago whose assets declined to just 10% of book value. That is (roughly speaking) nine out of ten of its borrowers turned out to be totally bust with no assets left for the bank to grab. That’s an extreme scenario which must have involved criminality, far as I can see.

Having said that, THERE ARE variations on the “no privately issued money” theme which do retain a bit of privately issued money, and in which lenders can thus become insolvent. Personally I favour root and branch reform: i.e. simply ban anything resembling money issuance by money lenders and that makes insolvency as likely as Zurich being bit by a large meteorite.


Fifth, there is the claim that “Even though it did not accept retail deposits, Lehman Brothers still collapsed, and nearly brought down the global financial system as it did so.”

So what’s the implication supposed to be? Are they saying that because a bank doesn’t have short term liabilities in the form of retail deposits, that therefor it doesn’t have any short term liabilities? If so, that claim is plain wrong.

A traditional bank almost by definition (regardless of whether it has retail depositors or not) borrows short and lends long. That’s an inherently risky strategy. ANY bank can judge the risks incorrectly there. Lehmans did, as did Northern Rock, as did hundreds of banks thru history.

It’s time we disposed of that sort of nonsense, particularly if it leads to recessions that last longer than the second world war, which is what the 2007/8 bank crisis sparked off.


  1. This was an expected defense by the Establishment to keep the private banks going.Swiss banks have been found guilty of money laundering,rate fixing and tax evasion.In the case of UBS we also had a $10 billion bailout by the state and a foreign wealth fund.Hardly a system worth defending.The rest as you say is biased propaganda to protect vested interests.

    1. Your phrase "vested interests" reminds me of something said by Milton Friedman on the question as to why a "no privately issued money" system has never been implemented. He said "The vested political interests opposing it are too strong, and the citizens who would benefit both as taxpayers and as participants in economic activity are too unaware of its benefits and too disorganised to have any influence.”


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