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.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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