Posted on by Art Powell

The Swiss are going to hold a referendum on a proposal to change the way in which money is created by transferring this function from private banks to the central bank. The more I think about this the more I see it as an attack on banks by people who do not really understand what money is and how the financial system functions, or should I say by people whose understanding of money is different from mine.

I believe there are some serious problems with the current fractional reserve way of creating money and anything which might lead to reform is to be encouraged. However, I would like to see some debate rather than letting those who would tell the rest of us how to live win by default. I want to see a libertarian reform in which decision-making is by all individuals rather than a select few.

Here are two links to information about the referendum. One, two.

Money is a tool to facilitate the exchange of goods and services and is backed by the agricultural surplus of which we have a huge amount although its continuation is somewhat precarious. The fractional reserve way of creating money gives great power to bankers who create money each time they make a loan. The Swiss critics are right about that. Money represents purchasing power for people who hold it and those who create money can decide to whom they will transfer that purchasing power. Transferring the money creation function to the central banks would be transferring power from one small group to another. I am not certain bureaucrats would be any better at making decisions in the public interest than private bankers.

A more libertarian approach would be to combine monetary reform with a universal income scheme and to call money agricultural surplus credits. This is explained in my just released ebook Funny Money: Adapting to a Down Economy. The book also talks about the problems with fractional reserve banking. (You may get a free copy of this book from Smashwords until March 19, 2016. See previous post.)

In reforming the way in which we create money two other factors need to be considered. The total amount of money available needs to be flexible up and down as the quantity of good and services exchanged varies. If it is not flexible we should expect inflation or deflation, both of which rob people of their savings. The Swiss proposal says the central bank would use its statistics facilities to help in this.

The other concern is interest. I believe the charging of interest on loans is a Ponzi scheme which leads to periodic financial crises. This too is in the book. I did not see anything in the proposal to indicate how interest would be handled. It could be the people who crafted the proposal do not see that interest is a problem in money creation.

I fear that not too many people truly understand how money works in the economy and how the fractional reserve way of creating money is a serious problem. Reforms are needed although I can not see that transferring money creation from one small group to another small group will be a satisfactory reform.

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Filed under: banks, money, Economics | Tagged: Economics, money, money creation, referendum, Switzerland |