How Is Money Really Created In The Economy?

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Written By Mohsen Salami

Everyone agrees money doesn’t grow on trees, but where does it come from?

Voters in Switzerland have uncovered the truth and have gone to the polls in a national referendum to change the way the world prints cash.

The Sovereign Money Initiative debunked a major belief.

Governments do not create new money, banks do when they lend more cash than they have deposited in their vaults from savers.

The argument in Switzerland is too much risk is attached to allowing banks to lend beyond their means because the borrowers may default on their debts and leave the banks in dire straits.

Changing the balance of power

Opponents of the protesters point out that the system has been in place for decades and has yet to fail even though the new money sloshing around the economy does not come from economic growth.

“The aim is to give a governmental monetary authority the exclusive power to create money, both cash and current account holdings. Commercial banks would be prohibited from creating account money and restricted to give loans from money they have previously borrowed from customers,” said Mark Joob, of the Swiss Association for Monetary Modernization.

If the protesters had won the referendum, only the Swiss National Bank will generate new money, while commercial banks could still lend backed by their deposits or borrowing from other banks.

A government bail-out for one of the county’s biggest banks, UBS, in 2008 is made voters twitchy about maintaining the present system.

Monetary revolution fails

The Swiss central bank only creates 10% of the nation’s cash – the rest comes from commercial banks.

But the government and banks won the day – in the poll only one in four voters backed the initiative.

“Switzerland would have been hit by a monetary revolution. We talk about banks, but the real concern is the whole economy,” said Martin Hess, chief economist of the Swiss Bankers Association.

Despite the concerns, money supply in Switzerland remains under control of the banks and the prosperous economy depends on the banks continuing to lend money that overstretches their resources.

The worry is banks promise to pay their customers the full value of the cash they hold on account, but if every customer demanded their money at the same time, the bank would not have enough cash to honour the promise.