Switzerland
will hold a referendum to decide whether to ban commercial banks from
creating money. What does it imply for the global economy and the
gold market?
Switzerland is a fantastic country. It will conduct a second referendum on
monetary policy in the recent history, after the Swiss people held a
referendum in 2014 for the Swiss Gold Initiative requiring the central bank
to increase its gold reserves to 20 percent.
This time the Swiss decide whether the Swiss National Bank should be the
sole institution to be able to create money. It would mean a ban on the
creation of money by commercial banks. In other words, Switzerland will hold
a referendum for ending fractional reserve banking and implementing a
one-hundred percent reserve system.
What would this imply for the global monetary policy and the gold market?
Well, it is hard to say. On the one hand, if the vote passes, commercial
banks will no longer have the power to create money through lending, which
would strengthen the stability of the Swiss financial system and end, or at
least reduce significantly, the severity of the business cycle. Therefore,
the safe-haven demand for gold would decrease.
On the other hand, a 100-percent banking reserve, also called sovereign
money, does not imply a return to sound money backed by the gold. It means
that the Swiss National Bank would be the sole institution to manage the
supply of fiat – electronic or paper – Swiss francs. The SNB has a relatively
good reputation, however, the new monetary system could encourage the Swiss
central bank to fill the void (as a reminder, in modern monetary systems
commercial banks create about 90 percent of money) and to increase the pace
of monetary pumping. In other words, money creation solely by the state does
not guarantee financial stability and the lack of inflation.
Moreover, the ban on the creation of money by commercial banks would shake
the entire modern financial system based on fractional reserve banking, which
would increase the safe-haven demand for gold in the transition period. Also,
with sovereign money the Swiss franc could probably become the most stable
currency in the world (if it survives the transition period and the SNB
conducts restrictive monetary policy), which would undermine the U.S. dollar
and strengthen the yellow metal.
The take-home message is that the Swiss will hold another important
referendum on monetary policy, i.e. they will decide whether to ban
commercial banks from creating money. The impact of passing the vote on the
price of gold is ambiguous, as it would depend on the SNB’s monetary policy
(the pace of monetary supply and the exchange rate interventions) and the
severity of the collapse of current financial system based on the fractional
reserve system.
P.S. No date has been set for the referendum yet. We will monitor this
issue and its impact on the gold market closely in our Gold News Monitor.
If you enjoyed the above analysis, we invite you to check out our other
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Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
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