Swiss Reject Gold Referendum

Daniel Drew,  11/30/2014


The Swiss didn't think it was a golden opportunity. It was more of a golden liability.

Today, the Swiss voted against expanding their central bank's gold reserves from 7% to 20%. The majority vote was 77%.

Switzerland has a direct democracy, and they have no shortage of popular initiatives and referendums. Any Swiss citizen can launch a popular initiative, and if they collect 100,000 signatures, they must have a vote about it. A referendum is opposition to legislation that has already been approved by the Federal Assembly. This requires 50,000 signatures.

It's funny to imagine a scenario like this in the United States because the Federal Reserve has so much unconstrained power. We can't tell our central bankers what to do. They are the money gods, and we are the subjects. They do things differently in Switzerland.

This is a disappointing result for the gold bugs, who think all "fiat currency" is evil, and gold is the only honest currency around. But when you really think about what it means for a currency to be a "fiat" one, you'll see that this potential law to require the central bank to have 20% of its assets in gold is not any less "fiat" than requiring it to hold Francs or Dollars.

Gold is just one metal among many. Why gold? Why not platinum? Why don't we just barter our goods? What makes a currency good or useful? Some societies have used shells and rice as currency. Now we have bitcoin. Any currency can sound completely crazy or obviously rational. There are definitely some qualities that are helpful when choosing a currency, like divisibility, fungibility (equality of each unit), and verifiability (to avoid easy counterfeiting). However, the choice of which currency to use is primarily a societal decision.

If everyone in the world woke up tomorrow suddenly believing that copper was the only acceptable currency, then it would be so. Every other type of currency would become worthless and useless. The selection of a currency is not a completely arbitrary decision, but it is still quite arbitrary.

Ultimately, the success of a currency depends on the human power supporting it. If you were the last human on earth, all of your money would be worthless. It's an interesting thought experiment. It's a common expression to say something is worth whatever someone will pay for it. But that expression is usually a comment about the price of something - not the currency the price is based on. However, the concept applies to money as well: A currency is only useful if someone is willing to accept it. If someone doesn't want to accept your gold, then it's not very useful is it? And that is the biggest risk of any currency.

If you go to the grocery store and try to pay for your food with gold, the cashier will probably not accept your gold coin. Like anything else in the market, currencies have competition. The more competition a currency has, the less reliable it becomes. It would be more efficient if everyone used the same currency, but they don't. People have choices, and they make arbitrary decisions with their freedom to choose. That means money is relative. You may love gold, but if you can't even buy a loaf of bread with it, what's the point? The Swiss seem to understand this concept.