# 11 / 2016

The Empty Promises of the «Sovereign Money Initiative»

Potential tidal wave of regulation

Suppression of the Swiss franc by foreign and alternative currencies

In the past few years, the banking sector has been subjected to an increased quantity of stringent state regulations. The initiators argue that this flood of regulations could be restrained in a sovereign money system because various regulations would become superfluous. While it is a fact that some banking regulations such as the federal deposit insurance on sight deposits, state guarantees and even some of the regulations of the Basel Committee on Banking Supervision (BCBS) could be repealed, these would be replaced by far-reaching interventions that would affect not only the banks, but also the entire economy and the population. This would mean that a local flood would be replaced by a global tidal wave.

In view of the conceivable flight from the Swiss franc, we would have to anticipate the establishment of other currencies – e.g. the euro – in Switzerland. In the view of the initiators this scenario is unlikely because in Switzerland there is no euro payment transactions system as such and this would result in currency risks, and no one would give preference to the «unstable euro» over the «stable Swiss franc». But firstly, the presumed stability of the sovereign money Swiss franc clearly has to be relativised as outlined above, and secondly this is not the sole reason for deciding for or against a given currency. The population and business sector could attach greater value – as they do today – to the additional benefits of interest payments than to the minor residual risk of a bank run, and thus give preference in the future to the common European currency over the Swiss franc. Employees and employers could then agree on salary payments in euros, and companies would also accept the latter currency as is already the case today in border regions. Euro payment transactions would set in and the currency risk would also be reduced following the loss of confidence in the Swiss franc. But this would contradict the proposed constitutional wording, because the SNB would no longer be able to fulfil its constitutional mandate, namely to pursue a currency policy in the overall interests of the country.

The initiators are harbouring the expectation that in the event of a positive decision in Switzerland, other countries would soon follow suit and switch to a sovereign money system. If the federal government does not also want to commit to the principle of expectation, it would have to intervene in the market with numerous regulations in order to take the euro out of circulation again and force the Swiss population to return to the Swiss franc. But even if the expectations of the initiators were to be fulfilled, namely that other countries would introduce sovereign money shortly after Switzerland, and thus that the euro would no longer represent an alternative, due to the changed framework conditions we would have to anticipate that other alternative currencies such as WIR money or Bitcoin could experience a strong surge in demand. The initiators are not baulking at this possibility and are trying to sell the fact that the libertarian wording of the initiative expressly permits the creation and use of other currencies. But as already noted, this only applies as long as the SNB is able to fulfil its mandate. As in the example of the euro, the federal government would have to intervene with regulations and prohibitions as soon as demand for the alternatives reaches a certain level. So the initiative in no way facilitates competition among currencies. As soon as a given currency gains acceptance among the population thanks to its more attractive qualities, the government would have to either greatly restrict or completely prohibit its use in order to prevent an infringement of the Federal Constitution. This is not exactly what a libertarian project looks like.

Creation of Swiss francs abroad

If sovereign money has suppressed the other currencies in Switzerland due to prohibitions and restrictions, other options become available. Here, for example, the creation of Swiss francs abroad is conceivable. Although the initiators regard this as possible in theory, they consider it as irrelevant in practice because few people are likely to hold sight deposits in Swiss francs outside the country. This static view ignores the dynamic that would accompany a changeover to sovereign money. As the SNB noted in a letter to the initiators, it is by all means conceivable that, under changed conditions, Swiss franc deposits abroad could be used to an increasing extent for domestic transactions. In order to prevent this, the government would again have to intervene, for example by carrying out capital flow controls, and pass on the associated costs to the economy and the population. Regardless how clients in the sovereign money system behave, i.e. whether they turn to alternative currencies or to Swiss francs created abroad, the government would have to immediately intervene. The consequence would be a massive tidal wave of regulations.

Targeted measures instead of a sledgehammer approach

While the present-day system may not function perfectly, it nonetheless works fairly well. Switzerland has not experienced a bank run since the collapse of Spar- und Leihkasse Thun in 1991. It has been able to absorb bankruptcies in the banking sector without undue difficulty, and was also not hit too hard by the financial crisis. Should a bank nonetheless have to declare bankruptcy in the future, clients’ deposits are insured up to 100,000 Swiss francs through federal deposit insurance. Instead of adopting a sledgehammer approach, it would be better to resort to measures wherever they make sense. In the past few years, the density of regulation in the financial sector has increased sharply. In the future, what is required is not more, but better, regulation. (Various studies have shown that the current flood of regulations in the banking sector can have a negative effect on its stability, and that fewer but better regulations are more expedient.