| (please don't hesitate to correct me if I'm wrong)
Say there are 3 customers at a single bank. Customer 1 = Investor, has 100 cash and deposits it into a bank account Customer 2 = Borrower, borrows 100 from the bank Customer 3 = Restaurant, provides a service for Borrower. Borrower pays a 100, and Restaurant deposits it to it's bank account. This is how the "sovereign money" travels: Investor -> Borrower -> Restaurant But the customers see the following account balances Investor : 100 Borrower : -100 (owes the bank 100) Restaurant : 100 If now Investor and Restaurant both want to withdraw their money the Bank would be in trouble. The bank only has 100 "sovereign money" on their books. Investor and Restaurant won't care who owes the bank, they want their money. But the solution for this would be easy, Investor must be given the choice if he wants to allow/disallow the bank to loan out his deposit. Similarly how it works with long positions at a brokerage firm. |
But in the end, that doesn't matter. The process is multiplicative, with a diminishing return.
Presuming that 10% reserve, when the restaurant deposits that 90, it can then serve as a reserve for the restaurant's own bank to lend out 81 which will then be deposited in someone else's bank. Now there is: the original 100, the 90, and the 81 all deposited as funds. 100 magically becomes 271, with the corresponding debt offsetting it. Rinse and repeat.
The reserve requirement is the only real brake on runaway inflation. With a 10% reserve, the theoretical maximum amount of money that could be created is 9X the original deposited amount. The formula for the multiplier is: 1 - (1 / reserve%). Of course, that's the theoretical maximum. It never goes quite that far.
But of course, then there's the interest that must somehow be paid. Interest is the only reason we have banks in the first place. It is why people deposit their money in banks, and it is how banks make their money. No interest, no banks, and (consequently) no loans. Since most money is actually created through loans, there is not enough money in the system to pay off the loans and the interest. The only way to pay back that interest is if loans continue to be made and the money supply perpetually expands. This is why we have central banks and government monetary policies.
Keep in mind, that this is all a simplification of the process. There are many layers to it, especially when the central banks get involved. Witness the Fed system in the US with the lending windows, T-bills, the role of government debt, etc. But it all boils down to the same thing when you strip the layers away.
If the sovereign currency referendum passes, the Swiss will inevitably have to deal with this problem. Their central bank will be forced to expand the money supply electronically in the form of loans made to banks, with an ever shrinking reserve. I just don't see this referendum making any difference whatsoever, except to centralize all debt.