Switzerland finds itself on the brink of a historic vote this weekend, as the country takes to the polls for the Vollgeld referendum. Essentially, the Vollgeld initiative intends to change the way that money is created in Switzerland.
Capital Creation Being Challenged
At the moment, as with the rest of the developed world, commercial banks in Switzerland can issue credit without having to source it from a central issuer and only access the credit after the service has been extended to and confirmed by the customer. So, in doing this, commercial banks are basically creating money as they issue it to customers before it has central bank approval.
The intention of the Vollgeld referendum is to remove Swiss banks’ ability to do this and to confine the creation of capital to the central bank only. In this new environment, in order to offer credit to customers, the bank would first need approval from the SNB.
Although this might seem like a logical and more responsible way for banks to operate, many economists are warning that a “yes” vote in the referendum (In favour of reform) would cause a great deal of economic uncertainty and make credit more limited and expensive in the country. Furthermore, the SNB would undertake responsibility for all money creation in Switzerland which, many argue would politicise its role.
Polls Suggest Vollgeld Failure
While the fear over the impact of Vollgeld is real, the initiative is widely expected to be turned down in the referendum. Such a drastic change is highly unlikely to be welcomed by the public at first pass. Given that the public have only just been introduced to the potential for this change and that the general understanding of the issue is still low. It is far more likely that the electorate opts to stick with what it knows, and maintain the status quo which is backed up by recent polling results.
However, it is worth noting that polling results are not as reliable as they should be and the events of the last few years (Brexit vote, Trump election) show that there is a need to be cautious around these events. An associate professor of Harvard Business School, John Leslie, makes an incredibly salient point on the topic saying that most predictions and around votes are simply based on computer generated outcomes given by an algorithm. However, as the majority of algorithms are created by humans, there are still inherent biases within these programs which can create flaws and so they are not infallible, as we have seen.
Banks In Question
The role of banks in issuing credit is a topic which is always hotly debated and so even if this referendum fails, it might prove to be an important step on the path to reform in Switzerland, and potentially on a broader scale. One thing that has become clear over the course of recent voting events is that, where the decision rests on a topic that has an anti establishment theme, the outcome becomes less predictable. Support for such movements has risen greatly over recent years as people have become dissatisfied with the status quo in the wake of the global financial crisis. Banks have become heavily demonized and any measure which seeks to curtail their power and limit their ability might gain greater support than expected.