Introduction: Swiss Exchangge Rate Policy in the 1930s

Excerpts

1. Introduction

The last group of countries to leave the gold standard were the gold bloc countries: France, Netherlands and Switzerland who left in September 1936, five years after the UK (with the Commonwealth and Scandinavian countries) left in September 1931 and over three years after the U.S. (together with Canada and a number of Latin American countries) departed in April 1933. According to Eichengreen (1992), these countries endured contraction three years longer than the rest of the world.

Recent political science literature describes the political as well as the economic circumstances of countries that abandoned their gold parity in the interwar period. There was a positive correlation between departure from gold and democracy, cabinet instability, and weak central bank independence; authoritarian regimes, those with more stable cabinets, and those with strong central bank independence were more likely to stay longer on gold (Simmons 1994).

In this paper we reexamine the experience of Switzerland in the 1930’s. The Swiss case is interesting because Switzerland was a key member of the gold bloc. There was a vocal debate within Switzerland at the time on the case for and against devaluation. Proponents argued that devaluation would stimulate net exports and revitalize the economy while opponents worried about lost credibility for a country long viewed as a bastion of financial stability and probity, triggering capital flight and consequent losses to Switzerland’s important banking sector. Switzerland was a democracy, with a central bank whose board members were appointed (but could not be dismissed) by the government, and with no operational supervision from the government.

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We ask the following questions. What were the issues at stake in the political debate? How much if anything did the delay in the franc devaluation cost the Swiss? What would have been the costs and benefits of an earlier change in exchange rate policy? More specifically we ask what would have happened if Switzerland had joined the British and the Scandinavians and devalued in September 1931 or if not then, but when the US left gold in April 1933?