On Sunday, the Swiss voted down in a referendum a proposal known as sovereign money or Vollgeld/Monnaie Pleine). This proposed to do away with ‘fractional banking’ and make the central bank the sole authority for creating money. In the modern banking system, notes and coins — currency — (along with some special reserves) are created by the central bank. But this ‘monetary base’ only represents a small part of the total money supply in an economy. Instead, the majority of money is created by commercial banks when they lend to consumers and businesses. When banks make loans to households, companies and other financial institutions, they create money deposits (because these loans then appear as deposits for the borrowers in the bank.
But the amount that banks have to keep as reserves to meet these depositors’ demands for cash and as a buffer against any collapse in the value of the assets offered by the…
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