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Leonid Bershidsky

What If Banks Didn't Create Money?

Swiss initiative would let only the government add to circulation. That's a bad idea worth testing.
Go crazy, Switzerland.

Go crazy, Switzerland.

Photographer: Fabrice Coffrini/AFP/Getty Image

A Swiss initiative to ban private banks from creating money has gathered enough signatures to put the matter to a referendum. This looks like another cranky economic idea that Swiss voters will throw out, as they did last year's proposal to require the country's central bank to keep at least a fifth of its balance sheet in gold. Yet perhaps such an experiment needs to be held somewhere to put to rest all the theoretical arguments about 100 percent reserve banking.

In the current financial system, private lenders create most of the money in circulation: Every time they issue a loan, they set up a matching deposit in the borrower's name, and since banks are only required to hold some 10 percent reserves against such claims, 90 percent of the deposits constitute new money. Central banks only influence the process through regulation. What the authors of the Swiss initiative want is a situation in which the Swiss National Bank becomes the sole creator of money.