On the Swiss Gold Referendum

By: Frank_Hollenbeck

The Swiss gold initiative has come and gone. It can be summarized as much ado about nothing. Even if it had passed, the initiative would have had no real impact on the Swiss National Bank’s ability to print money or conduct monetary policy.

The central bank is currently defending a 1.2 Swiss franc to the euro floor. By pegging its currency, the Swiss central bank has basically opted to follow its neighbor’s excessively easy monetary policy. To keep the peg, the central bank has been purchasing euros by printing Swiss francs. The central bank then returns the euros to the Euro money supply by purchasing European government bonds. It could have just as easily used those euros to buy dollars for gold. In either case, the euros or dollars are returned to the market, and therefore the Swiss action does not influence the respective Euro or US money supplies. We must remember that exchange rates are determined by differences in monetary growth rates and anticipation of what those differences will be in the future.

The Swiss government and Swiss central bank opposed the initiative. This should not be surprising. It is standard government policy to use fear tactics to justify continued government theft.

The Swiss central bank said that the initiative would crimp its flexibility to deal with a liquidity crisis or runaway inflation. Since the central bank could not sell its gold, it claims it would be hard-pressed to provide liquidity in the event of a banking crisis. Of course this assumes that the central bank would keep its balance sheet from expanding, which is nonsense. There is nothing stopping the central bank from printing Swiss francs for liquidity and print even more Swiss francs to buy gold.

It also claims that if it had to conduct open market sales of its assets to combat inflation, the inability to sell 20% of its assets would limit its maneuvering room. This is less than ingenious. There is nothing in the initiative that would limit the central bank’s ability to sell 80% of its non-gold assets. The 20% is a floor not a ceiling! Also we must never forget that inflation is a monetary phenomenon. The central bank is asking for flexibility to handle a problem created by giving the central bank flexibility in the first place.

Also, Switzerland held 40% of its assets in gold between 1936 and the year 2000. Did this more binding constraint in any shape or form limit the central bank’s ability to print money? Relative to gold, the Swiss franc has lost 90% of its value since 1914. Did it in any way seriously limit the central bank’s policy maneuvering room? A cursory reading of the financial press during this period clearly shows it did not.

Despite all the noise, this would not have been Switzerland returning to a gold standard. A true gold standard would constrain a government from using the printing presses to finance government expenditures. A key feature of any true gold standard is convertibly by the general public at a fixed price. Without this feature, we get the watered down Bretton Woods system that quickly failed as a monetary system because it did not constrain the government from creating more claims than available gold.

Although the initiative would have done little to constrain central banking, it is a step in the right direction: similar to Ron Paul’s attempt to audit the Federal Reserve. What the initiate does highlight is the general public feeling that something is rotten in Denmark! Every dollar, euro, yen, that the central bank prints is a tax on cash balances. A tax no one has voted for. It is theft while you sleep. Although central bankers may attend fancy lunches in $1000 Armani suits, it does not diminish the reality that they are nothing more than counterfeiters. The only difference between them and the guy printing currency in his basement is they do not fear the police breaking down their doors.

“By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.” – John Maynard Keynes

Instead of the police, a crowd with tar and feathers may start the much needed banking revolution.

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck's article archives.

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