Banks lend out a multiple of their deposits.
10 million on deposit with 20% ratio means around 50 million lent.
That's a lot of mortgages and car loans.
10 million on deposit means under 10 million lent, because Hans Meier may walk in and take 50k out for a new car.
In case A (banks not giving loans from deposits) there is a total of 1000 CHF in the economy.
In case B (loans with 10% reserve) there is a total of 10'000 CHF in the economy. That's 10 times the money fighting for the goods and services available.
When you hear economists talking about "the economy getting overheated", what it means is that there is all the money circling around, but no goods, at which point it implodes. Imagine you took an investment loan and want to build something, but the raw materials are all sold out.
It is all very confusing and I feel it's great that you're asking these questions and not letting go on an easy answer.
For example, I don't think the following comment is entirely correct:
Isn't it already true today? Deposits = Loans + Reserve
I would actually like to understand how are loans supposed to work in a "Vollgeld" system? Does the Vollgeld system mean no loans?
https://www.vollgeld-initiative.ch/f...th_answers.pdf
I gave it a read and I still don't understand it. They say that the SNB will fully control the money supply, and that money will be like shares are today. So if bank goes bankrupt, your money will still be safe. But if that's the case, and the bank does not touch your deposit, then why would it pay you for making such a deposit? Clearly, it wouldn't, like it does not pay you for keeping your stocks. You pay them for custody! And they can't touch your deposit, then where the hell do they get money for the loans? The only idea I can think of is that I take my money and create a bank, and then use this capital to give out loans. Can anybody explain this?
So 1000 /0.2 (20%) = 5000 to lend
Ignoring risk weighting, reserve, tier x capital ratios, etc and all that jazz.
As I read it, only with 100% reserve. But the SNB charges negative interest rates to park cash so it'd be interesting how the whole system works given lending will be impaired with a tax system that encourages personal debt.
A straight retail bank should pool savers' money and lend judiciously. So 500 families meagre savings becomes someone's mortgage. Bank charges interest to borrower, returns some to the savers.
Bog standard stuff.
Until the lines blur between this and investment banking . Also see ( Glass-Seagall repeal and now ring fencing coming back in the UK .
Again, I don't believe that's the case in full-reserve banking system. Have a look at this:
https://en.wikipedia.org/wiki/Full-reserve_banking
In a way, the current system, where the bank may do some shady stuff with your money, and you only have this "insurance" of up to 100'000 EUR/CHF (which might not get paid if too many banks implode at once), is sick. Much healthier system would be if your digital money would be kept separately by the commercial bank at the custody of the central bank. A bank should not have access to your money, it's obvious to me.
This leaves me still with the question of how loans should work in a full reserve system ? Maybe the customers could invest money into a special account, which would be used for giving out loans, and the customer would be aware that it is associated with risk.
Ignoring regulations and stuff for the purpose of this discussion, a bank doesn't need deposits these days. When the bank gives me a loan of 10k, it books 10k into my account (increase of its liabilities) and simultaneously increases its debtors (its assets) by 10k. The balance sheet is still balanced as it must be, it's just that the balance amount has been increased by 10k.
That's all that's necessary, colloquially (but imprecisely) the total money amount in circulation has just been increased by 10k, this is called seignorage. The debtor owes interest on an essentially imaginary value, obviously commercial banks want to keep it that way.
The Initiative wants to take the power of credit creation (colloquially money creation) away from commercial banks and return it to the central banks, as was the case until the early '70ies while the gold standard still applied.
These kinds of gold-based monetary systems (or based gold and silver) has been in place since the invention of money, until the 1970ies when the fractional reserve system was introduced. Those interested in learning why the proposition is a bad idea should read up on why the Bretton-Woods system collapsed and why the gold standard was dropped 40-50 years ago. If Switzerland were to accept the proposition, and if it remained the only country with such a system, it may be implementable simply because Switzerland is small enough. But if this example finds followers, history is bound to repeat.
I think Guernsey already has this system in place ... since 1817?
Thanks for helping me to understand this initiative .. your explanation is succinct.
Thanks for helping me to understand this initiative .. your explanation is succinct.
Thank you, someone who actually understands how it works.
Question though: The initiative wants to take the power of credit creation away from banks and back to the Central Bank. So, would it not be possible to have a system where the central bank was the one carrying out the credit creation on the intermediary banks account, which was then passed on to the individual from the intermediary bank? Essentially, taking it from the commercial bank's balance sheet and transferring it to the Central Banks balance sheet? Is that possible?
My summary from this document is that today money is created by the banks, to their benefit. With Sovereign Money, it will still be created, but for the benefit of the country as a whole.
This is probably no coincidence. If you check old bank notes, they feature all attributes of a bond except interest rate and maturity. Since the Guernsey notes were interest-free, they may have been indistinguishable from money if they didn't expire.
Norwegian Central Bank: "The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing" https://www.norges-bank.no/en/Publis...17-04-25-dnva/
Deutsche Bundesbank: "sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return. This means that banks can create book money just by making an accounting entry" https://www.bundesbank.de/Redaktion/...s_created.html
Standard & Poor's: "Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation” – credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around." -Paul Sheard, Chief Global Economist and Head of Global Economics and Research, Standard & Poor’s ( http://positivemoney.org/wp-content/...s-aug-2013.pdf )
That quote is on the creation of the credit only, nothing more happens or is supposed to happen. Of course in reality there will more but that's out of scope.
If 10k isnt paid back? No biggie.
If billions arent paid back?
Then we get a financial crisis, circa 2008.
To be clear, this is one of the reasons for this initiative. The financial crisis was caused by banks 'creating' and lending far too much money, that could never be paid back. That meant that later on, the central bank had to step in to rescue the banks, who had made obscene profits in the meantime. So, the central bank paid out to cover the mistakes of the commercial banks. This initiative would remove the ability of commercial banks to do something like that again, since they themselves would be required to pay interest on their borrowings from the central bank, and the central bank would have far more power to rein in irresponsible lending.
Thats the theory, anyway.