Category: Finance

The Swiss “Vollgeld” Initiative Revisited

Bloomberg has numerous offices around the world, many of which appear to have quite an independent streak, at least that is our impression. Readers who occasionally watch clips from Bloomberg’s Asia Edition are probably aware of this. One can often see in-depth interviews there with people who espouse views far from the mainstream and who are highly critical of governments and central banking, such as e.g. Dr. Marc Faber or Jim Rogers, to name two prominent ones.

What must be stressed here is the “in depth” qualification – there is a big difference between e.g. CNBC offering 60 seconds of sound bites from Dr. Faber and a 20 minute interview with presenters who are themselves willing to engage in a bit of critical thinking. We are mentioning this by way of introduction, because Kuzman Iliev and Vladimir Sirkarov of Bloomberg TV in Bulgaria seem to be part of this somewhat more off-the-beaten-path tradition as well.

Recently they have done an interview with our friend Claudio Grass, the CEO of Global Gold in Switzerland on the topic of fractional reserve banking. Readers probably remember that there will soon be a referendum on fractional reserve banking in Switzerland, as the so-called “Vollgeld Initiative” (roughly translatable as “Fully Backed Money Initiative”) has garnered the required number of signatures.

The interesting thing about this initiative is that it is actually not led by free market supporters. On the contrary, the proposal comes from a bunch of socialists in close orbit around Karl Marx. It is therefore not surprising that the Swiss National Bank is far less opposed to the idea than it was to the gold initiative. The latter was painted in the starkest colors and said to be practically opening the doors to Hell, as it would actually have limited the SNB’s interventionist powers somewhat (even if not really by as much as it made out).

Warming Up an old Central Planning Idea Loved by Bureaucrats

By contrast to this, the Vollgeld Initiative is a warmed-up version of the so-called “Chicago Plan” originally proposed by the dreadful interventionist Irving Fisher and his colleagues, the forerunners of the Chicago monetarist school. As we have pointed out on a number of occasions in the past, largely thanks to Milton Friedman, the monetarists nowadays “define the borderline of respectable opinion on the political Right” to quote Hans-Hermann Hoppe. In other words, the ideas of the Chicago School represent the absolute maximum of support for the free market still considered acceptable by the establishment.

We agree with many of the views Friedman espoused, but it would be a grave error to overlook his failings. For instance, we decidedly part ways with Friedman on questions of economic method. He was a positivist, and the empirical methods of the natural sciences are simply not suitable to a social science like economics, something that can be shown easily enough. In fact, even in the natural sciences the line between the empirical and conceptual approach appears to become increasingly blurred these days.

Worst of all though, in spite of his well-known support of the free market, Friedman was dedicated to central planning of money (not to mention that he also supported the welfare state and progressive taxation). For reasons we cannot explain, he seemed to think that while the market would be best able to deal with almost everything, money was somehow an exception to the rule. The monetary system required steering by a Soviet of “wise men” (of course, Friedman is also well known for a book he wrote with Anna Schwartz, the topic of which is how the plans of this Soviet totally failed in the 1930s. This book is actually what we would call heaping error upon error – not surprisingly, monetary crank Ben Bernanke is a big fan of it).

In a nutshell, the Chicago plan is all about centralizing the monetary system even further. While we are in perfect agreement with scholars like Murray Rothbard, Hans-Hermann Hoppe, Guido Huelsmann, Jesus Huerta de Soto, Joseph Salerno and many others that fractional reserve banking is essentially fraudulent – it represents a multi-pronged violation of property rights that flies into the face of legal traditions since antiquity – we still think it is less harmful than reserving money creation powers exclusively to a central planning agency.

It is possible to show both theoretically and empirically that a free banking system that tolerates fractional reserve banking does a lot less economic harm than a banking cartel led by a “lender of last resort” with de facto unlimited money creation abilities. As we mentioned above, we are not surprised that the SNB calls the “Vollgeld” initiative “interesting” and offers at best token resistance to it. Since it promises to increase the powers of the monetary bureaucracy, one can hardly expect said bureaucracy to oppose it.

Here is the video of the interview Bloomberg TV Bulgaria did with Claudio Grass on the Swiss initiative. Even though eight minutes is not really enough to fully do the topic justice, Claudio does get the most important points across. To their credit, Messrs. Iliev and Sirkanov happily refrain from interrupting his train of thought with silly and loaded questions. This is a refreshing contrast to what one often sees elsewhere when controversial ideas are discussed in the mainstream media, where presenters often behave as if they thought their main job consisted of assassinating all messengers critical of the system.