Historical Narrative: Swiss Exchangge Rate Policy in the 1930s

Excerpts

4. Historical Narrative

The position of the government and the SNB shifted quite significantly between 1931 and 1936, over the course of five years’ battle to defend the franc, as the extent of the vulnerability of the Swis s banking system became clearer. Policy-makers were in a bind in that a change in policy might have been desirable in order to avoid a crisis, but on the other hand could not be justified and explained politically except in crisis circumstances. Thus Switzerland – and the Netherlands – remained on gold until there was an obvious “crisis”, generating exceptional politics and exceptional opportunities, in the aftermath of the French Popular Front victory in 1936.

In the first place, the issue of the currency regime became highly politicized in Switzerland, as elsewhere in Europe. In particular, it was caught up in the Swiss “Kriseninitiative”: the referendum pushed by the trade unions and the socialist party for an expansionary work creation program which might be expected to touch off uncertainty about the franc, which was rejected in a vote on June 2, 1935.

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The SNB was hesitant in the face of these demands, and argued that a credit expansion would only produce an illusory boom or “Scheinkonjunktur”. 9 Until the Kriseniniative failed, the left did not want to touch the devaluation issue, but afterwards it became a plausible policy option.

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The main argument made by the SNB shifted to the idea that a devaluation would be a breach of property rights. In April 1936, in a letter addressed to the economic Department, the SNB Direktorium, it explained that: “The currency is a means of the economy, but not a means for economic policy as it is the standard by which all economic goods are valued ....

Not only the short term contract, but an order that spans decades must be protected from arbitrary change of the standard of value. The state would be the first to suffer from the abandonment of the principles of property rights.” The SNB actually took an increasingly ambiguous approach to the devaluation issue. In public, it presented itself as the unflinching defender of orthodoxy and of the old exchange rate.

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In private, however, the SNB’s leading officials were quite skeptical, above all because they did not believe that the government had the political nerve to implement the fiscal deflation that would be needed to convince the markets that Switzerland really intended to stay on gold.

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By the end of September, a major speculative attack developed against the French franc. It was clear that given the past record of the shift of speculation from one country to another that if there were to be a French devaluation, there would immediately be enormous pressure on the remaining gold standard countries, i.e. the Netherlands and Switzerland.

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On Thursday, September 24, Bachmann had been summoned to a meeting in the Finanzdepartement attended also by the French Economics Minister Spinasse, who had flown to Basel from Paris and who announced that on Friday, the French government would accept a motion to devalue the French franc by around 30 percent. The SNB Direktorium on Friday morning voted to maintain the Swiss currency despite the French devaluation. On Saturday, the Bundesrat met and asked Bachmann whether the current parity could be maintained. Bachmann said that he could not exclude the possibility of being forced into a later devaluation, and with that the Swiss government agreed to a devaluation of the Swiss franc. The decree established new bands within which the Swiss franc could move (with the franc being valued at between 190 and 205 milligrams of fine gold), rather than determining a new parity.20 Bachmann, however, reported to the Bank of England that he had been consistent in his opposition to devaluation.

The devaluation was followed by a rapid recovery of the Swiss financial system. Indeed, already at the Bank Council meeting of September 28, which considered the devaluation, Vice-President Ernst Weber reported that the big banks had said that the decision was correct. The share prices of the major banks rose very rapidly (and more rapidly than other Swiss share prices, which also rebounded after the devaluation): in the month after the devaluation, the share price of the Bankverein increased by 50 percent, that of the Credit Suisse by 43 percent and that of the Bankgesellschaft by 47 percent. The General Manager of the Bankverein (Swiss Bank Corporation) even wrote to a leading British financial official that “There is no doubt that the Federal Council took the right course in joining the movement for a monetary re-alignment with the leading currencies.”