Have you ever thought about where money ultimately comes from — not in the sense of how you personally manage to accumulate some, but rather, how money arises in the first place?

If you've never given careful thought to questions like these, don't feel bad. Very few people have. That's unfortunate, since it leaves the experts who do understand these matters — high-level bankers — in a highly privileged position in relation to the rest of us.

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Commercial banks create money and debt

It is commercial banks, in fact, that create money and bank debt in equal measure, through double-entry bookkeeping operations, whenever they make loans to borrowers.

You probably think that banks only make loans to borrowers after first taking in money as "deposits" from "savers," to whom the banks pay a modest interest rate for entrusting them with their savings. In this model, banks subsequently "lend out" those saved deposits at a somewhat higher interest rate to "borrowers."

This is actually what the proponents of the Swiss "Vollgeld Initiative" want. They say only the government, through the publicly-owned Swiss central bank (SNB), should be able to create money and put it into circulation.

Vollgeld proponents want money creation to work exactly in the way that most people believe it works, with commercial banks limited to lending out money that had already been created and put into circulation by the central bank.

Less power to commercial banks, more power to the central bank?

The Swiss National Bank (SNB) is opposed to the Vollgeld proposal. In a statement on the SNB's website, after listing a number of concerns about Vollgeld's possible economic impacts, Thomas Jordan, the Chairman of SNB said: "Adoption of the initiative would represent a tectonic shift in our proven monetary and economic system, which has developed over a period of many years. Sovereign monetary is an unnecessary and dangerous experiment which would inflict great damage on our country."

One key concerns of the SNB is that they fear it could reduce the availability of loans to borrowers, and thereby slow the economy. Another is that it would require decisions by government about the purposes for which new money would be spent into existence by the central bank, and in this sense foster "central planning."

Vollgeld Initiative proponents say the SNB has misunderstood or misrepresented the impacts of the changes it proposes.

Currently, more than 90 percent of all money in circulation worldwide is created as electronic "book money" recorded in commercial bank spreadsheets as a consequence of the banks' making loans. This "book money" is not created by the central bank, and it is not central bank money.

How money creation works now

Money is created by commercial banks whenever someone signs a mortgage loan agreement, runs up a credit-card debt, or borrows to buy a new car. New loans create new deposits by means of double-entry bookkeeping entries in the banks' ledgers.

In a very real sense, the banking system is part of the state apparatus — but its core function of making loans, including the privilege and responsibility of deciding for what purposes, and to whom, to make loans, has been left in the hands of private-sector bankers.

Deposits are what you and I think of as "money in the bank." The more loans the commercial banks make on a net basis each year (i.e. the difference between new loans made and old loans repaid), the more deposits they create in exactly equal measure. That's how the money supply grows.

No more money creation by commercial banks?

The proponents of the "Vollgeld Initiative," want to end commercial banks' privilege of creating new money because, they say, this privilege is often abused, with banks lending far too much money into existence for non-productive purposes, leading to enormous debt bubbles and consequent financial crises — which result in taxpayers' having to bail out irresponsible banks.

Instead, the Vollgeld Initiative says, commercial banks should only be allowed to lend out money that is already in existence. That money would be created by the central bank, and then deposited by savers in savings accounts, or lent to commercial banks by the central bank for on-lending to borrowers.

The central bank is part of the state, and belongs to the public. It operates under special rules and cannot go bankrupt. Since the Vollgeld proponents want all money to be created exclusively by the publicly owned Swiss National Bank, there would be some scope for the SNB to create some money to fund government projects, or for distribution to citizens, whenever the SNB deems that the money supply needs to be expanded to enable economic growth. The money supply would no longer expand due to commercial bank lending.

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Mortgage over-lending

Under the existing banking system, banks are especially prone to mortgage over-lending, because houses are seen as "safe" collateral for loans. This leads to bidding wars between people looking to buy houses, with steep rises in house prices, or "housing bubbles." Eventually, over-indebtedness gets too extreme. Real estate prices to stall and then fall. The bubble pops.

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When that happens, many borrowers go "underwater," as they owe more in mortgage debt than what they can get by selling their house. Construction of new houses goes down, unemployment goes up, and many people stop being able to keep up with credit card payments or other debt.

Read more: Bundesbank warns of German real estate bubble

Since the loan-books of most banks in most countries are freighted very heavily with mortgage loans, a downturn in housing prices can threaten the solvency of the entire banking system. That's the essence of what happened on the eve of the 2008-2009 financial crisis, and it could happen again.

The Vollgeld Initiative proponents believe that if commercial banks were no longer be allowed to create money, or lend money into existence, as they do now, then they would not be in a position to fuel housing bubbles or other such inflationary phenomena. Moreover, insolvent banks could safely be allowed to go bust, rather than have to be rescued with taxpayers' money.