Should Swiss issue sovereign money, digital money?

Trust Swiss to keep coming up with some or the other referendums.

Thomas Jordan, chief of Swiss National Bank in a recent speech mentions this ongoing discussion in Switzerland on SNB issuing sovereign money. We thought all money circulated by governments/central bank is sovereign but some Swiss think otherwise:

What specifically does the Swiss sovereign money initiative propose? At the heart of the initiative lies the separation of money and credit. Under the current regime, as we have seen, there are two types of money: central bank money created by the SNB, and bank deposits, which are created by commercial banks in their interactions with the general public and the entral bank and represent a claim on central bank money. Under the Swiss sovereign money initiative, bank deposits would be converted into central bank money – what the proponents of the initiative call ‘sovereign money’. Customers’ sight deposits would be transferred from commercial banks’ balance sheets and kept as separate sovereign money accounts. Sovereign money would be issued by the SNB through allocations of central bank money to the Confederation and cantons, or directly to the public. Banks would ultimately be payment agents for the SNB. Any loans they granted would have to be financed through savings deposits, debt certificates or equity.

Proponents of this initiative believe that the introduction of sovereign money would create safer money, a more stable financial system and higher revenue from the note-issuing privilege (or ‘seigniorage’) for the general public. Opponents, however, claim that the measures demanded in the initiative are both inappropriate and ineffective for achieving these goals. The Federal Council and parliament have recommended the electorate reject the initiative, and have not offered a counterproposal. The SNB shares the Federal Council’s view.

Jordan points to several limitations with the move:

First, the switch to sovereign money would be a move away from the historical distribution of responsibilities between the central bank and commercial banks. In this tried-and-tested, twotier system, commercial banks compete with one another to supply households and companies with credit and liquidity, while the central bank acts as the bankers’ bank and conducts monetary policy. With the introduction of sovereign money, the SNB would be landed with a difficult role in lending. The initiative calls for the SNB to guarantee the supply of credit to the economy by financial services providers. In order to carry out this additional mandate, the SNB could provide banks with credit, probably against securitised loans. Depending on the circumstances, the SNB would have to accept credit risks onto its balance sheet and, in return, would have a more direct influence on lending. Such centralisation is not desirable. 

Second, sovereign money limits liquidity and maturity transformation as banks would no longer be able to create deposits through lending. Sovereign money thus restricts the supply of liquidity and credit to households and companies.

Third, it would be naive to hold out too much hope on the financial stability front. Investors and borrowers will always make misjudgements. A switch to sovereign money would thus not prevent harmful excesses in lending or in the valuation of stocks, bonds or real estate. Also, while the sovereign money initiative targets traditional commercial banks, let us not forget the role played by ‘shadow banks’ in the global financial crisis of 2008/2009.

The Swiss sovereign money initiative would likewise have a number of problematic consequences for our monetary policy. The initiative requires that the SNB manage the money supply, an idea we abandoned some 20 years ago. 

Another problem for monetary policy would arise from the mechanism for issuing sovereign money set out in the sovereign money initiative. Sovereign money would be created ‘debtfree’, rather than through the SNB’s market operations, i.e. purchasing securities or granting secured loans. It is by no means the case that the SNB’s monetary policy goals only ever require an increase in the money supply; they can also require a reduction, but it is far from clear how the money supply could be reduced if money were to enter circulation ‘debt-free’, as a sort of ‘gift’.

Finally, a more general and significant objection to the sovereign money initiative is that the acceptance of the initiative would plunge the Swiss economy into a period of extreme uncertainty. Switzerland would have an untested financial system that would differ
fundamentally from that of any other country.


More on Sovereign money here.

3) What are the fundamental advantages of sovereign money?
Sovereign money in a bank account is completely safe because it is central bank money. It does not disappear when a bank goes bankrupt. Finance bubbles will be avoided because the banks won’t be able to create money any more. The state will be freed from being a hostage, because the banks won’t need to be rescued with taxpayers’ money to keep the whole money-transaction system afloat i.e. the “too big to fail” problem disappears. The financial industry will go back to serving the real economy and society. The money and banking systems will no longer be shrouded in complexity, but will be  transparent and understandable.

4) What will happen to banks after a sovereign money reform?
After a changeover to sovereign money, the banks will continue to offer all the normal financial services (giving credit, enabling transactions, wealth management etc.). However, there will only be central bank money in our current accounts at the bank. This electronic money has value exactly like today’s coins and bank notes have value. The banks can only work with money they have from savers, other banks or (if necessary) funds the central bank has lent them, or else money that they own themselves. Banks won’t have an unfair advantage over all other market participants any more, as they won’t be able to create money any more.

Then the big question about issuing digital CHF. In a way it is a similar proposal as Sovereign CHF:

A simple way to envision digital central bank money for the general public is in the form of sight deposits with the SNB. Unlike the situation today, not only banks, but also households  and companies would be able to open an account with the SNB. There might also be other forms of digital central bank money for the public, e.g. digital banknotes which would be issued rather like private cryptocurrencies. From an economic perspective, however, the features of the different forms of digital central bank money are largely identical. Therefore, when I speak about digital central bank money, I will continue to use the example of money held at the SNB in the form of a sight deposit account.

Implementation throws up a number of practical questions: How would eligibility for digital SNB money be defined? Would residence in Switzerland be the decisive factor? What account holder due diligence would the SNB have to carry out as part of compliance? What services might account holders expect? Would deposits generate interest and, if so, at what rate? In addition, would it be possible to invest all of one’s assets at the SNB, or would there be an upper limit? Depending on the answers to these questions, the economic impact of broader access to digital central bank money could vary greatly.

He says that the image of commercial banks ‘creating money out of thin air’ is misleading. Not really sure about this.Yes, good banks restrict themselves but bad ones pretty much create money out of thin air via fractional reserve banking. By the time their game is figured by depositors/investors, it is too late. This creation of so called bad money in turn has the ability to knock out good banks as we have seen in the crisis.

All this bank and central bank mismanagement had led people thinking of all these different options. But these options are fairly complex in their own ways..


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