Practical analysis for investment professionals
02 January 2018

The Vollgeld Initiative: A Primer

Over 100,000 Swiss citizens signed a petition to hold a constitutional referendum to end fractional reserve banking. Yes, really! That petition was certified on 24 December 2015 and a vote will be held sometime Sunday, 10 June 2018.

Switzerland, that scion of banking, may vote to end the bedrock philosophy underlying modern finance.

The movement is known as Vollgeld and is inspired by the torch-lighting work of Nobel Prize-winning economist Irving Fisher in the 1930s and the torch-bearing work of the International Monetary Fund (IMF). Though it draws on these antecedents, the Vollgeld Initiative features its own distinct provisions.

In short, Vollgeld backers believe that a full money reserve system will lead to:

  1. Greater control of business cycle fluctuations.
  2. The complete elimination of bank runs.
  3. A significant reduction in net government debt.
  4. A dramatic reduction in private debt.

Opponents counter that an end to fractional reserve banking will crush the financial industry and its ability to facilitate economic growth. They contend that concentrating credit creation authority in the hands of bureaucrats — as Vollgeld does — is a mistake. Moreover, they believe that depositors under Vollgeld will likely earn negative returns on their deposits. Thus the initiative will discourage deposits altogether.

Because this story features many moving parts and opinions, I have curated a reading list to help you keep track of this potentially earth-shaking movement.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Danita Delimont

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor. Previously, Jason was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. He holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

15 thoughts on “The Vollgeld Initiative: A Primer”

  1. Emma Dawnay says:

    Thanks for your post about Vollgeld!

    Here’s a direct link to a summary brochure in English from the Vollgeld official Website (alternatively go to the English part of the website, where it is the first item). As well as giving a summary and the actual text of the initiative with explanations, it covers the system of direct democracy in Switzerland.

    https://www.vollgeld-initiative.ch/fa/img/English/2017_05_02_Referendum_on_Sovereign_Money_in_Switzerland.pdf

    1. Hello Emma,

      Thank you for providing the audience for my article the links.

      With smiles,

      Jason

  2. Skot Kortje says:

    Thanks for this update and summary, Jason. Curious how Vollgeld/Chicago Plan aligns with the evolution of competing blockchain networks that facilitate both the money creation and lending functions of fiat money? Is there a study that examines the implication of nonfractional reserve banking in a monetary ecosystem that includes crypto assets fulfilling traditional finance applications?

    1. Hi Skot,

      You and I think very similarly. I also wonder about the issue that you raise. I am not aware of any research or thought pieces that consider your question.

      Separately, for what it is worth, you may appreciate a piece I authored nearly five years ago about the criteria necessary for an asset based currency that, in retrospect, certainly applies to blockchain currencies, too. https://blogs.cfainstitute.org/investor/2013/02/12/reframing-the-gold-standard-debate-the-fixed-money-supply-standard/ With the meteoric rise of blockchain currencies I would like to add a third criterion. Namely, that the price volatility of the currency needs to be low. This disqualifies most of the blockchain currencies at the moment. Hard to denominate the price of something in a currency whose value fluctuates more than the value of the goods and services that it itself is meant to price.

      Big smiles,

      Jason

      1. Skot Kortje says:

        Thanks for the link to your article about fixed monetary supply, Jason. On this thread: I would think that central banks are recognizing that blockchain technology and crypto assets are going to be transformational in finance and that the fiat currency monopoly will be injected with a new competitive monetary system driven by traditional measures of money in cryptocurrencies. The Bank of England has indicated this already. Perhaps the re-emergence of the Chicago Plan is in some part a reality check for central banks in the face of bitcoin evangelist heresy – that debasement matters. As for stability in cryptocurrencies, it is certainly the wild west at the moment, but we can all agree that monetary policy has been co-opted by the interventionist state for far too long and the moral hazard is now too great. Vollgeld and the emergent blockchain technology are, perhaps, signaling the pendulum will take us back to a monetary system with market integrity. We will see Gresham’s Law at work again.

        Looking forward to your next post!

        1. Hi Skot,

          What an excellent summation of the current state you provided above. A gentleman above provided a history lesson about banking and banking philosophy. I think another interesting moment from banking history that may be worth visiting, and to help inform discussion around the current environment with debasement (look to financial markets for inflation central banks!); hangover effects, including a lack of public trust, from the Great Recession; and the emergence of blockchain technologies is the United States in the 19th century when each bank issued their own currency and their own notes. Eventually people realized one of the factors I mentioned in my fixed monetary supply piece, that currencies need a nearly universal demand curve to ensure liquidity.

          For what it is worth, I am guessing what will happen going forward, is that several cryptocurrencies are likely to emerge that are transnational in nature and that are owned by the blockchain participants. I can even imagine very clever blockchains that layer in opportunities to exit into multiple currencies so as to hedge their overall liquidity risk. As for the banking system and Vollgeld, I have no idea what is going to happen. However, what I do know is that for Switzerland, that scion of banking, to be considering such a measure can directly be interpreted as a vote of “not much confidence” in banking and finance on the part of the public. However this happened is irrelevant, what is relevant is that society grants us a license to operate and a portion of society is saying that they still do not feel a sense of equilibrium with us.

          Yours, in service,

          Jason

  3. In my writings I’ve long opposed calls for banning fractional reserve banking, and I oppose this one for the same reasons.

    Every last one of these proposals starts from the premise that fractional reserve banking systems are inherently unstable. Yet that premise is demonstrably false. We know of many episodes of fractional reserve banking systems that thrived for long periods, without suffering any crises, and often without even witnessing any important bank runs. The experiences of Scotland, from 1772 (after the Ayr crisis–concerning which everyone ought to read Tyler Goodspead’s excellent book) until the 1850s, and Canada from 1871 to 1914 (or 1935, if you prefer) are only the most well-known ones.

    These particular episodes, and the historical record more broadly, also reveal that banking systems that were least hampered by regulation tended to be most stable. I survey evidence in my 1989 essay on “Legal Restrictions” etc., reprinted in in Money: Free and Unfree; those seeking more evidence should read Calomiris and Haber’s Fragile by Design. Moreover, it is not difficult to show precisely how government interference rendered banking systems unnecessarily crisis prone, once one delves into the details of the interventions involved. (In U.S. history prior to the 1990s, for example, restrictions on branch banking alone were a major cause of instability.)

    I have had numerous opportunities to speak to opponents of fractional reserve banking about this alternative view, and in every case, I’m sorry to have to say, what came across to me most clearly was the appallingly limited knowledge of banking history these critics possessed. Indeed, it is not much of a stretch to say that they had hardly any real history at all. Instead, most had substituted in its place a familiarity with (1) the Diamond-Dybig model–though not with any of that model’s very significant shortcomings, both analytical and empirical–and (2) “It’s a Wonderful Life”! No, I am not kidding! (Why they don’t more frequently refer as well to Mary Poppins, so as to better bolster their case, is something of a mystery.)

    Nor am I impressed with arguments, such as one hears from John Cochrane and Morgan Ricks, to the effect that fans of free markets should welcome their calls for 100% reserve banking or something like it, because what they are proposing is really a sort of “deregulation,” in that it would make most existing kinds of bank regulation unnecessary. No doubt it would, but only in the same sense that, say, making automobiles illegal would make most traffic laws and parking regulations unnecessary.

    And here is another place were the 100-percent types go badly awry. Because just as cars are useful, despite the accidents and other problems that their use causes, so, too, are fractional reserves banks. It is further evidence of poor scholarship of that these critics of the most fundamental of bank undertakings–the making of loans financed by demandable debt–appear not to appreciate either the significant social benefits of that activity, or the lack of any close substitutes for it, as eloquently explained in numerous writings by outstanding economists and economic historians from Adam Smith to Rondo Cameron to Anil Kashyap.

    Finally, the “Austrain” theory according to which fractional reserves and “fiduciary media” inevitably give rise to excessive credit creation, below “natural” interest rates, and business cycles, adds another layer of bad economics to the mix, for whether a fractional reserve system does these things depends entirely on what sort of system one is talking about. It is easy to show analytically, moreover, that keeping rates at their natural levels is not a matter of ruling out the creation of bank IOUs unbacked by reserves. Instead, it is a matter of seeing to it that IOU creation corresponds to concurrent attempts by the public to accumulate real money balances. Seen from this perspective, it should be perfectly obvious that keeping banks on fixed (let alone 100 percent) reserve ratios and having them perform as “pure intermediaries” are entirely different things.

    I’m sorry for the longish rant. But really the 100-percent reserve position needs to be called out for what it is: an extremely naive product of superficial understanding of both banking history and monetary theory.

    1. Hello George,

      Thank you for sharing your opinion about the Vollgeld movement and for adding to the conversation.

      Yours, in service,

      Jason

    2. Skot Kortje says:

      Thanks for this contribution to the topic here, George. If the merits of fractional reserves deserve the defense you articulate, would you instead grant a focus of change on the dual mandate? The Employment Act of 1946 and the subsequent Full Employment and Balanced Growth Act of 1978 seem culpable legislation if we are to acknowledge the current system’s disastrous state. I’d be interested in your comments. I think critics of central banks simply want accountability. How to achieve it?

  4. Michael O´Laughlin, CFA says:

    While I think ending fractional reserve banking is a very bad idea, I almost hope this movement succeeds so the world can observe what happens. It would be an interesting experiment…unless you are Swiss, that is.

    I can´t even imagine how one would unwind a fractional reserve system. Surely Swiss banks would not be expected to call-in all outstanding loans above deposit reserves. So do they just not make any new loans until their loan books fall to 100% by attrition. Nice way to create massive bank failures.

    And all these Swiss companies no longer having lines-of-credit, banker acceptances, and other liquidity provisions provided by the banking system?

    Thanks, Jason, for all these quirky stories you seem to uncover.

    1. Hello Michael,

      Thank you for taking the time to share your thoughts with our fellows. You raise very important questions, that I believe may be summarized as, “What the hell are they going to do if this thing passes?” I gave an interview here in the United States two years ago to Marketplace Radio (the most popular business show here in the US with 9 million daily listeners) and that was the nature of the questions in that interview, too. For what it is worth, if you follow some of the links in this post, as well as my previous post, you will see that the adherents to variants of the Chicago Plan do have plans for implementation. Plans and consequences do not always align, of course.

      Also, regarding your point of not being able to imagine a world without fractional reserve banking. No one alive has global experience with a world without fractional reserve banking, because none of us alive have lived under such a regime. It was hundreds of years ago when we last lived in a full reserve environment.

      Last, thanks for your kind words. Out of curiosity, what other stories strike you as quirky? I take quirky as a complement, by the way.

      Yours, in service,

      Jason

  5. News in from Switzerland: The Swiss government has set the date of the referendum for 10 June.

    CFA Switzerland will be hosting a full day conference about this topic on Monday with more than 200 participants already registered. Join us here: https://goo.gl/eGAWo1

    1. Hello Chris,

      Thank you for this detail. It is sure to be an interesting result regardless of the outcome.

      With gratitude,

      Jason

  6. Samuel says:

    Hello from Switzerland,

    Thank you for covering up the subject. I may add just a few things to make it clear. As you may already know it, Vollgeld isn’t technically the same as a 100% reserve system, but the aim of the initiative remain more or less the same: to prevent commercial banks to create money out of thin air. Actually banks could still create money as it’s the case right now, they just couldn’t call it swiss francs (CHF), but “UBS Swiss Francs” for instance. Only CHF would be protected by the law and it would be the swiss national bank task to evaluate how much money supply the economy would need. Each CHF bank account would be backed by the SNB, but they could at any time ask for a loan if they are short of liquidity as long as the request matches with the monetary policy of the SNB.

    That’s where the initiative is still unclear. We don’t exactly know under which rule the money supply would be created. If you read carefully Vollgeld website, they say that the SNB would take indicators as GDP or growth as potential standard for rules of monetary creation. This reminds, of course, monetarist theories of Milton Friedman, just put a number a let the computer do the job.

    In reality, I frankly don’t know if swiss economic growth is strong enough to cover up all the government spending. It’s true that Switzerland doesn’t spend as much as most euro countries (approx 30% of GDP), but there’s a huge gap between canton of Geneva and Zurich for instance. In fact, Geneva publics spending are more than twice bigger than ZH (Geneva is at almost 60%, in other words on France standard).

    It’s no secret that most of countries in the world live beyond their means, but until now, the debt system did absorb inflation. I really don’t know if a system like the one proposed by Vollgeld could work. On the other hand, I really believe that fractional reserve landing system is coming to an end. In our reality potential growth is far too low to sustain our living standards and Governments sizes doesn’t stop to increase everywhere, destroying a big part of the economy, in my opinion. If we continue like this, short terms results will be: higher unemployment, higher social welfare needs and a never ending higher public debt impossible to pay back. All of this, just to to ensure the stability of the currency? In the end, i’d rather try something like Vollgeld. At least, if we crash, everyone will sink, not only the taxpayers and because of this, maybe, the government will act more carefully.

    In the end, the more I reflect on the subject, the more I really think that a free banking system (without any central currency) is the way to go to save our economies.

    Best reagrds

    1. Hello Samuel,

      Thank you for these details. It is exceedingly difficult to get information about Vollgeld in the United States. As I am not a native German or French speaker the resources available in Suisse remain out of reach, too. Therefore, thank you for the additional information about Vollgeld. This is sure to be an interesting vote.

      Yours, in gratitude,

      Jason

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