# 11 / 2016

The Empty Promises of the «Sovereign Money Initiative»

The sovereign money system is a burden and an obstacle for the Swiss National Bank

Die SNB als Spielball von Partikularinteressen

In order to render the costs, risks and restriction of freedom of choice more digestible, the initiators are trying to make their concept attractive to the general public by citing annual payouts of around 10 billion Swiss francs to the federal government, the cantons and the population. But such a bonanza would be accompanied by major risks. The existing system already creates an attitude of entitlement: the federal government and the cantons budget the anticipated annual payouts by the SNB at around a billion Swiss francs as future revenue, and plan their expenditure accordingly. When in 2014 the SNB was unable to make these payouts due to a record loss, some cantons reacted aggressively and thus exerted pressure on the SNB.

You do not need to be a prophet in order to predict how this pressure would increase in the sovereign money system with payouts in the double-digit billion range. If 10 billion Swiss francs a year were to be distributed, this would be equivalent to around seven percent of the current expenditure of the federal government and the cantons. As past experience has shown, a surplus of this nature does not give rise to a reduction of the tax burden, but rather to short-term financing of all sorts of special wishes. So in the future, the SNB would have to solve problems which should in fact be tackled through economic policy: deficits in the pensions scheme, exploding healthcare costs and inefficiencies in the agriculture sector are just a few of the potential problem areas. It would be illusory to believe that the creation of a «Fourth Estate», namely a monetary monopoly, could somehow suppress these demands. On the contrary: new demands would be formulated in the belief that they would be easy to finance.

In the past 20 years, the Swiss National Bank has very effectively fulfilled its primary mandate (to maintain price stability), and thus provided the economy with ideal framework conditions. For the SNB, as a result of the strong pressure in favour of its second objective (to provide a stable economic situation), fulfilling the primary mandate would be pushed into the background to an increasing extent. If it were to give in to this enormous pressure, the Pandora’s box would be well and truly opened. Everyone would claim an entitlement to the presumed gratuitous money from the SNB. Thus the sovereign money experiment would emulate historical examples that have their origins in precisely this issue: if monetary policy is used for financing government duties, this inevitably leads to significant increases in the money supply, and thus to high inflation rates. Experience has shown that a pronounced currency devaluation has dire consequences for the business sector, the population and the entire national economy.

Interfering with the autonomy of the SNB is therefore playing with fire. Here the assurance on the part of the initiators that the SNB is to continue to guarantee price stability is of little comfort. A central bank that is exposed to this kind of pressure can no longer act largely independently of political and economic players. Sooner or later it will no longer be able to fulfil its mandate of providing a stable currency.

Restricted room for manoeuvre

The proposed sovereign money system would prevent the SNB from fulfilling its core mandate of pursuing a monetary policy that is in the interest of the entire country. Because sovereign money is paid out to the government and the population without consideration, reducing the money supply becomes increasingly difficult. If you offer something as a gift, you can hardly ask for it to be returned to you. Although the SNB would still have the possibility to effect short-term credit transactions, reducing money demand (for example due to technological innovations) could prove to be an impossible task.

In the sovereign money system, the SNB would no longer be able to reduce the money supply as it can today by selling foreign currencies or raising the minimum reserve ratio. Instead, the federal government would have to come to its aid with a sovereign money tax in order to take the money out of circulation that was originally distributed gratuitously. This would be difficult to implement over the long term. Here, too, there is a risk of high inflation rates with accordingly high costs for the economy and society.

Departure from decentralised information acquisition

It is not only the restricted scope for manoeuvre for the SNB, but also the fact that a monopoly is to be created with the sovereign money system that will drastically reduce the quality of Switzerland’s existing monetary policy. For both the economy and the population it is important that money supply and demand are harmonised to the greatest possible extent. As sole provider of the money supply, the SNB therefore depends on precise estimates of money demand so that it can provide an appropriate supply. In the sovereign money system, only the SNB would estimate the demand for money, which in contrast to the present-day situation in which this is the responsibility of the banks would be a disadvantage for two important reasons.

On the one hand, according to the law of large numbers the accuracy of a forecast tends to increase in line with the number of players. Estimates by the SNB alone would tend to result in less accurate forecasts, an inappropriate money supply and thus harmful impacts on the economy. And on the other hand, banks do business on site and are constantly in contact with their clients, which enables them to estimate the future demand for money more accurately and in a more timely manner than the SNB, which can only base its own forecasts on historical data. In view of this, a departure from decentralised information acquisition is something that should be avoided.