Tomorrow the Swiss will hold a referendum on the subject of “Vollgeld” (nouns are capitalised in German), which, if successful, will end fractional reserve banking in Switzerland. Private banks will no longer be able to create money. I hope they are successful.
You can read about it here:
If you have access to the Financial Times, Martin Wolf also has a piece in favour of it from this week. While I do not agree with him on all things, I do on this, and I salute him for standing up against opposition from the “mainstream” financial, legal, and economic communities.
I was first alerted to the problem of fractional reserved banking during my freshers’ week of university, but did not come back to it until this year when I read part of Dr Jesus Huerta de Soto’s book on the topic. Banking may be broken down into three separate categories (two really being the reverse of each other).
A) Deposit banking
B) Investment banking
C) Loan banking
By (A), I mean that the customer comes to the bank and asks him to store his money for him (and also potentially to use his account to make payments to third parties at the customer’s direction) – no more, no less. By (B), I mean the customer leaves money with the banker to invest for a term. In effect, this is a loan to the bank: the customer understands that he loses access to the money during the term of investment and runs the risk of losing some or all of it. He accepts this on the understanding that, if successful, he will make a profit on this venture. It is essentially a kind of gambling, and the bank is acting as the customer’s agent: a skilled customer with the right connections could cut out the middleman and do this for himself. By (C), I mean the bank gives a loan to the customer, usually secured by a kind of charge (e.g. fixed or floating; a charge by way of legal mortgage over land would be an example of a fixed charge).
Fractional reserve banking occurs when these three separate concepts are mixed. The money deposited under (A) is used for investment purposes for a different customer. Where a deposit contract specifies that this is not to be done, the transgressing banker will be liable for breach of contract, for breach of trust (where a fiduciary relationship exists), and potentially for misrepresentation in contract law and the tort of deceit where the banker never had the intention of obeying the terms of the deposit contract and made a knowing false statement of fact in order to induce the deposit customer to enter the contract. Where criminal laws penalise fraud, the banker could also be liable for criminal sanction in the deceit scenario. There were times when fractional reserve banking was illegal and where such breaches were scandalous. As late as the twentieth century, bankers in Spain were tried for misappropriation of deposit money.
I hope you will consider the gravity of fractional reserve banking and support the Swiss in your thoughts and prayers on the eve and day of the referendum. Earlier polls suggested it would fail, but if it succeeds, it will be a first blow against an aspect of the globalism and financial technocracy that is responsible in part for the economic problems of our era.