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Political Economy: Swiss Exchangge Rate Policy in the 1930s

Excerpts

3. Political Economy

Switzerland in the 1930s more and more felt itself to be a democracy under pressure from the powerful authoritarian regimes that surrounded it, Fascist Italy and Nazi Germany. The debate about democracy and its vulnerability affected policy-making. One of the most obvious problems of exchange rate policy in a democracy is that it cannot really be subjected to extensive public or parliamentary debate, because a broad ranging debate would inevitably trigger speculative pressures (in the absence of tight currency controls). Exchange rate alterations thus were generally handled outside the parliamentary arena: Britain, for instance, announced the suspension of the gold standard on a Sunday as a decision of the cabinet taken at an extraordinary meeting on Sunday afternoon, September 20, 1931.

In Switzerland, too, the eventual decision to suspend the 1929 law specifying the rate at which the franc could be converted into gold was taken by the government, using emergency fiscal powers granted it in January 1936, and some critics subsequently challenged its constitutionality on the grounds that the January 1936 measures had been conceived of explicitly as required for the defense of the existing currency parity (Giacometti 1937). In both the British and the Swiss cases, experts in the central bank had convinced some parts of the government that there was no alternative to devaluation, but in each case the head of the central bank distanced himself from the decision. The British devaluation was undertaken when Governor Montagu Norman could not be contacted, as he was on board a transatlantic ship; and the President of the Swiss National Bank told the decisive meeting of the government that he was opposed to the step. In each case, the central bank wanted to be sure that the primary responsibility lay with the politicians.

In the debate that had occurred before September 1936, some interests in Switzerland might have been expected to favor a devaluation. In many countries, including the United States, the agricultural lobby had seen such a step as a way of increasing agricultural prices, and thus tackling the problem of rural indebtedness. This argument – associated with George Warren, a Cornell agricultural economist – was probably decisive in shaping Franklin Roosevelt’s approach to the issue. Swiss farmers sometimes saw their interests in an analogous manner.

The hotel and tourism business had been badly affected by the world depression, and then by the imposition of currency and exchange controls by Germany’s neighbors. Again, a devaluation might have made the Swiss industry more competitive. 

Finally, manufacturers, particularly those in export industries, might have seen the competitiveness argument as central. The economic price of maintaining the increasingly over-valued franc rate at the time was thought to lie in the effect on demand of the high price of Swiss exports, which may have cost Swiss jobs. Trade arguments dominated most of the public discussion of exchange rate policy in Switzerland during the Great Depression, but they were complicated by commercial policies very different to those of the classic adjustment debates of the Gold Standard era: in particular, the existence of high levels of trade protection, and of quota systems and of widespread exchange control altered the assessment of trade consequences of currency changes.

Yet there was a surprisingly broad consensus for maintenance of the existing parity. In May 1933, a meeting devoted to preparing the Swiss position in advance of the London World Economic Conference produced an agreement between the SNB’s President and representatives of the banking community, the business elite, farmers, but even the socialist trade unionist Max Weber, who two years later became the most outspoken proponent of devaluation. (Müller 2003, 71)

The largest and most powerful Swiss exporters at the time, pharmaceutical and chemical companies such as CIBA, engineering firms such as BBC and Sulzer, and textile machinery firms such as Rieter, as well as the highly influential business pressure group, the Vorort, very publicly expressed their hostility toward devaluation.5 In part, they argued that a parity change would only increase the cost of imported goods and raw materials, since important trading partners were in the gold bloc (in the west), or were subject to exchange controls (in central Europe). Higher imported food prices might lead to higher wage demands. Some considerations about the character of Swiss export markets also weighed powerfully. The great Swiss exporters did not deal in price sensitive staple products, but rather in specialized exports where the demand was quite price inelastic. Moreover, by the middle of the 1930s, a great part of Swiss trade was with Germany and other central European countries, and was managed through administered clearing agreements with artificially set exchange rates, so that a Swiss parity change relative to gold would have had little impact. Thus paradoxically, the interests that might have been expected to demand a different policy from the government clearly and unambiguously supported the status quo, and argued that a devaluation might have contractionary rather than expansionary consequences.

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By contrast, there were clear interests that seemed to be mobilized against devaluation. Savers had lost substantially in the inflation of the First World War, and savers’ associations had engaged in fierce polemics against the Swiss National Bank. Policy-makers were very conscious of this pressure. Soon after the British crisis of 1931, an internal document of the SNB spelt out the logic of resisting any pressure to devalue. Devaluation would increase the cost of imports, and lead to a general rise in prices. Switzerland as “a country of rentiers would suffer untold damage.

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One of the most visible anti-devaluation lobby groups came from the banking community, which consistently made clear its opposition to any devaluation proposal, as did many prominent figures in the Swiss banking world (Perrenoud 2002). The Swiss Bankers’ Association also joined international efforts to solidify creditors’ rights by the employment of a gold-clause. The major argument made in public by the bankers was that a devaluation would damage the reputation of Switzerland as a financial center, and in 1933 the leading Swiss bankers actively supported the SNB’s initiative to create an Association for Stable Money: Vereinigung für gesunde Währung.

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Indeed, immediately after the sterling crisis in September 1931, the Swiss franc looked relatively secure, and the major speculative attacks against the remaining gold standard countries affected the U.S. and France. But it became increasingly clear that the flood of short term deposits that had moved into the Swiss financial system during the crisis years was not necessarily tied to Switzerland, and that an outflow would weaken both the banking system and the currency, or in other words provoke exactly the same combination of banking and currency crisis that had brought down central Europe in 1931.

The outflow might originate in security or large scale political worries, but of course it might also be set off by worries about the stability and the credibility of Swiss policy. Policy-makers were aware of the bind that they were in: the situation was becoming increasingly fragile, but any action they might undertake held the risk of being destabilizing rather than stability-promoting.