Today Switzerland is set to hold a referendum to decide whether to ban commercial banks from creating money. The aim of campaigners is to limit financial speculation by forcing banks to hold 100 per cent reserves against their deposits.

If the referendum result goes the way of the campaign group, the Vollgeld Initiative and the concept known as the sovereign money initiative comes to fruition, Swiss banks will no longer be able to create money for themselves, rather they will only be allowed to lend money that they have accumulated from savers or other banks.

The current fractional reserve banking system works like this: Banks lend money that they don’t actually have and then command interest on the non-existent money. This is akin to x offering to loan y a sum of say, £100,000 that the former hasn’t got. The way around this conundrum is for x to then lodge the sum with another financial institution who happens to be in on the scam. Y then pays x interest on the money that x has never been in the position to lend in the first place.

Asset bubbles

Consistent with the proposed Swiss model, the idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fisher as a way of preventing asset bubbles and curbing reckless spending.

If the Vollgeld Initiative succeeds with its campaign on Sunday, the fractional reserve system will be replaced by a bill which will give the Swiss National Bank (SNB) a monopoly on physical and electronic money creation.

Since the establishment of the SNB in 1891, the bank has had exclusive powers to mint coins and issue Swiss bank notes. But over 90% of money in circulation in Switzerland (and arguably the world) currently exists in the form of electronic cash which is created out of nothing by private banks.

In modern market economies central banks control the creation of bank notes and coins but not the creation of all money. The latter occurs when a commercial bank offers a line of credit. Iceland, whose bloated banking system collapsed in 2008, has also touted the abolition of private money creation and an end to a practice in which central banks accept deposits, make loans and investments and hold reserves that are a fraction of their deposit liabilities. Fractional banking means that money is effectively produced from thin air.

The grand illusion

The entire financial system and the laws on which it is governed that many believe to be an exact science is, in reality, based on a gigantic illusion. This illusion is rooted in the 1882 Bill of Exchange Act. Money is essentially created the moment a loan document from a bank or any other financial institution is signed. Having created a financial instrument as a result of a signature, the bank or financial institution then lends the money created in the form of a bill of exchange which in effect becomes a promissory note. The customer then gives the power of attorney within the signed document to the bank to then lend the said customer the money that has just been created from the resulting signature.

By removing the requirement of governments’ to insist upon the amount of gold being equal to the amount of currency in circulation (gold exchange), the said governments’ created a debt based economy (Fiat currency). So by not basing money on anything material whatsoever, banks are able to create limitless amounts of it.

The origins of the promissory note stem from the promise to pay a physical sum of silver (subsequently gold) in exchange for the promissory equivalent (sterling was originally based on sterling silver).

The purpose was to prevent individuals from having to carry large sums of silver around with them. A silversmith would simply weigh the silver and give the owner a promissory note which could then be cashed in at a later date to be spent on goods and services. Up until the 1930s, governments’ were required to have in their possession an amount of silver or gold equal in value to the amount of promissory notes issued. The requirement was subsequently removed from the 1930s onwards. This gave banks the right to create money out of nothing. The legacy continues today. Will Switzerland be the catalyst for a paradigm shift in this state of affairs?

Daniel Margrain

Daniel Margrain

Daniel graduated in 2001 with an Upper Second Class Honours degree in Human Geography and Social Policy. He has a masters in Globalisation, Culture and the City at Goldsmiths, London. He is a massive fan of musician, Neil Young. His favourite book is Murder In Samarkand by Craig Murray. His favourite album is Van Morrison's Astral Weeks and his favourite film is Giuseppe Tornatore's Cinema Paradiso. Daniel's interests include politics and current affairs and social and urban theory.
Daniel Margrain

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5 thoughts on “Is the existing banking system coming to an end?

  1. In the year 1717, with Queen Anne on the throne, a retired academic called Isaac Newton returned Britain to the Gold Standard. There followed two centuries of unparalled prosperity.

    The gold standard and full reserve banking are the cornerstone of a sound economy, as over 3000 years of history have proven. Fiat money is how the powerful and corrupt are stealing the world, by paying for real goods and sevvices with nothing at all. Time to kill it dead.

  2. Good luck getting this enacted in the UK, with its political class consisting of mostly ex-bankers and bankers-in-waiting, with a smattering of lawyers thrown in.

    Very much (self-) interested in the status quo as that is where their fortune lies.

    In societies like the UK and USA which are now massively over-financialised and totally dependent on the chronic expansion of debt in order to fuel consumption, having largely given up on real wealth creation via production (the UK more so than the USA in actuality), expect nothing more than more ‘laissez faire’ (we don’t do industrial strategies any more as we are ‘post industrial’ apparently) and increasingly usurious lending practices – then implosion, and transition to a permanently atrophied southern-European style economy, as happened to other post-colonial states such as Italy, Spain and Portugal.

    Meanwhile, in China…

  3. Nice article. My only slight quibble is with the claim that the existing bank system, sometimes called “fractional reserve” is rooted in the 1882 Bill of Exchange Act. It is widely thought that the existing system started with the London goldsmith bankers in the 1600s who made the amazing discovery that their lending was not limited by the amount of gold in their vaults: they could simply write out receips for gold and lend those out. Those receipts were widely accepted as being “as good as gold”, i.e. they served as money.

    However I suspect that earlier bankers, e.g. Florentine and Venetian bankers tumbled to the latter trick, but I haven’t researched that topic.

  4. Shame the Vollgeld referendum failed to change banking as we know it. But this is just the start people all over the world are now aware of what banks do when they create money and many are uneasy about it. Referendum’s like this are raising awareness.

    The 1844 Bank Charter Act is the last real pieces of legislation in the UK regarding how money is created.

    Basically, banks were forbidden from printing their own notes, only the Bank of England was allowed to do that. The banks however were not content to leave it at that.They got around the ban by creating cheque accounts. Borrowers could still borrow money from a bank, have an account set up in their name and given a chequebook on which they could draw money or make payments. This is the same as printing notes. The Gov allowed this deception to operate. This form of money was also called “fountain pen” money for obvious reasons. This lasted until recently. Cheques have faded from use but the banks carry on the practice by simply creating electronic money into borrowers accounts. This has become electronic money printing. The end effect is exactly the same and private banks still continue to print money as they have always done. We need a parliamentary debate about this and new legislation to return us to where we should have been in 1844.

  5. Canada created its “public” government owned bank in 1938 and had a sound economy until 1974. The cost of WW2, massive infrastructure and social reforms was paid with little debt and interest cost. Then in 1974 when the international bankers convinced, one way or another, the Government of the day, and all Governments since to break the Bank of Canada act and borrow from private sources. The rich have got richer and the rest not only poorer, but deeply in debt. Money should only be created by our “public” central bank only for the creation of public infrastructure and private productive investment.

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