Strange things happen today in the monetary system. Most central banks lower their interest rates to zero. Even negative interest rates occur. Major central banks operate state financing more or less openly. For example, the ECB agrees printing money or its electronic equivalent – if necessary – to buy up as many debt securities of euro area countries which got into trouble financially. “Whatever it takes.” With these words, Mario Draghi has announced in 2012 that he wants to save the euro at any price. Debts – and the connected political problems – are swept away with a money flood, and the contracts that prohibit state funding of the ECB are put aside. With a few mouse clicks the Swiss National Bank sets new Swiss francs in circulation – out of nowhere – and so many that usually it would take the whole Swiss population’s work for one year. Government bonds pay negatively, that means, who lends money to the state, must pay for it. There is even the idea of “helicopter money” (Milton Friedman). A helicopter lets drop bank notes, or central banks should provide the people and the government directly and freely with money to stimulate the economy. – Disturbing “strangeness” more and more. Something must be wrong, some will argue. – What is happening with our money? Current Concerns will investigate this question in three articles. In the first one, it is about the classical gold standard, the second one about the monetary system of Bretton Woods, and in the third one, with the subtitle “Monetary policy without borders”, about the events of these days – always in connection with direct democracy.
To understand the issues of today, it is necessary to include the history of the Swiss franc. And this includes from the beginning many referendums. - Agriculture and money are areas about which most referendums have taken place in Switzerland, because food and money are basic for the people.
After the founding of the Federal State in 1848 the monetary system in Switzerland worked for more than fifty years without a National Bank which was founded only in 1906. It was one of the first tasks of the newly elected parliament to create the Swiss franc as a common means of payment, namely on the French model as a coin containing 4.5 grams of silver. The Federal Government received the monopoly to mint coins and founded the Federal Mint. A growing number of banks issued own banknotes as a replacement for the silver and later gold coins but were no legal tender. As a result, the money system we know today was being built step by step.
A first important ballot took place in 1872 when the total revised Constitution was voted on. A key point was Article 38: “The Federal Government has the power to establish by legislation general rules on the issue and redemption of banknotes.” The people said clearly no. Why? A large majority favoured a federal system: The various cantonal banks and private banks should still issue their own banknotes covered by gold coins which were indeed distinguished in their appearance – but coordinated in their value. The 20-franc-note corresponded to the “Goldvreneli” (Helvetia Head) of which 56 million units were in circulation. So they could be exchanged easily. There was also a corresponding gold coin for the ten and hundred francs note. The five francs note had its counterpart in the five francs’ silver coin.
In this money system banknotes were merely a substitute for the gold coins and no legal tender. So, the citizen was free to accept or not the banknote of a bank. This system had the advantage that the citizen could control and monitor these banks himself – over the years there were at least 51. It is evident that banks so avoided speculative businesses and put the needs of their customers or citizens in the foreground. If a bank had had a dubious business policy, citizens wouldn’t accept their notes (which means the end for the bank).
This system was so important to the citizens that the Federal Constitution of 1874 expressly forbade the Federal Government to establish a monopoly for the issue of banknotes and to declare banknotes as legal tender. This system worked quite well without National Bank. In 1876 and 1880 it was confirmed in two more votes. Until the foundation of the Swiss National Bank in 1906 it never happened that the private banknotes of a bank were rejected as payment.
You shouldn’t imagine this monetary system working in a way that all major bills were paid with coins or banknotes. So much gold wouldn’t have been there, and it wouldn’t be practical. Above all the invoices in foreign trade were paid mostly with bills of exchange (securities, securitised commercial loans). This technique allowed to offset the debt from the import of goods with the balances from the export with the banks. For this, neither gold nor banknotes were needed. This highly popular payment method was the forerunner of today’s cashless payment system. The classical gold standard or the “gold franc” formed the framework where other methods of payment and also creation of money (book money) of private banks were possible.
Not until 1891 – as the economy grew and the payment transactions became more pretentious – unifying the numerous private banknotes was intruding. The people agreed to an article in the Constitution, which newly gave the monopoly to the Federal Government to issue uniform banknotes for the whole of Switzerland (which it rejected several times before). In this ballot the question of who should issue these notes remained open, however. Should it be done by a national “central bank” or by a private, “joint stock bank”, more appropriate to federalism? Federal Council and parliament clearly decided upon the project of the “Swiss Federal Bank”. This was designed as a pure state Bank – under a legal form, which was similar to that of the Swiss Federal Railways SBB founded at approximately the same time. 1897 in a referendum the people, however, voted against the proposal of the Federal Council and the parliament, so that the way opened up to found the Swiss National Bank SNB as a state-controlled stock corporation. It is a state independent legal person, it’s degree of independence should be determined by legislation. It was founded in 1906. Until today, the cantons hold the majority of shares, and also citizens are involved – but not the Federal Government.
What’s the difference between a state bank, favoured by the Federal Council and the Parliament, and a state-controlled stock corporation, which the people had chosen as a legal form for the future National Bank? Saying “no” to the pure state bank, the people wanted to prevent too much and direct influence of federal institutions on the monetary system. The state-controlled stock corporation is closer to the people. It corresponds to the federalist principle because the majority of stocks is with the cantons and interested citizens are directly involved. They can become shareholder for very little money. They get information posted by the National Bank and have a right to talk at the general meeting. Worldwide, the National Bank is the only bank offering this.
The relative independence from the state applies also in another area. Would the National Bank be established as a pure state bank, the Federal Government would have to stand up for losses, resulting for example from the purchase of foreign currency or other securities. The Swiss National Bank does accounting as any stock corporation according to the principles laid down in the Swiss Code of Obligations. Profits are primarily used to build up reserves, which are intended to cover future losses independently. This provision asks for caution, because – as mentioned above – there is no comprehensive federal or state liability. The distribution of profits to the private shareholders, the cantons and the Federal Government is therefore secondary. – It will not come to bankruptcy as it may happen to a normal stock corporation, because it takes a political decision on dissolving the National Bank.
A few years after it was established the SNB began to issue uniform Swiss banknotes having the same nominal value as the private banknotes already in circulation. A twenty-franc note was still a twenty-franc note, the hundred-franc note still a hundred-franc note and so on. The transition to the federal money was in this way easy. The new notes, given out by the National Bank, were just replacing the gold coins – similar as the private banknotes before. According to the Federal Constitution the notes were no legal tender – “except in emergencies during times of war”. In other words: The people gave the control over the monetary system not out of hand. Should the new National Bank issue too many notes, citizens had the right to reject those. There were enough examples of central banks, which were running the “note press” hot to finance wars or any dubious policy, already at that time. The private banknotes still in circulation in the cantonal and commercial banks were gradually being exchanged.
Today, historians and economists criticise, that the classical gold standard had its weaknesses, especially that the supply of money was at that time not sufficiently flexible. That’s for sure correct. But the system was very stable over many decades – far more stable than the highly flexible money supply today. It was a time with a lot of private initiative, pioneering spirit and numerous business start-ups. At that time the foundations for the current prosperity were laid.
Governments opted for a debt–free budget on all three levels, communal, cantonal and federal, helding up the principle of the “paterfamilias” as it was called at that time. If debts were made, they were fully paid back soon. So, for example, the Constitution of the Canton of Bern of 1869 included the following provision: the fiscal authority plans for four years “a summarising estimate of the annual needs of the state budget” and a “complete amortisation plan of debts.”1
During the First World War, the banknotes could no longer be exchanged for gold coins. The money printing press began to play an increasingly important role in the financing of the war. After the war, some countries tried again to continue the gold standard in a weakened form. The end came in the 1930s. The United Kingdom devalued the pound in 1931 and ended the obligation to convert banknotes into gold. In 1933 the United States devalued the dollar by 41 per cent and banned possessing of gold coins by citizens. This was an affront to the citizens who completely lost control of the monetary system. The final end of the classical gold coverage was initiated with this political bang. The way was free to systematically use the note press and the so-called deficit spending, that is, making targeted debt, to combat a crisis. – John Maynard Keynes, the most influential economist of more recent times, commented: “We have at last free hand to do what is sensible. […] I believe that the great events of the last week will open a new chapter in the world’s monetary history.” Keynes was proved quite right. 1937 Keynes wrote his masterpiece “The General Theory of Employment, Interest and Money” – a book that determined future policy like no other. A new era began, to which lingering inflation and getting into debt – increasingly and in global dimensions – belonged until today.
In 1936, also Switzerland as the last country in which the classical gold standard was still at least partially valid, devalued the franc by 30 per cent. The Federal Council has been waiting quite a long time with this step, what earned him criticism from Keynesian-oriented economists. There were systemic and practical reasons for this. The gold standard had been proven over many decades, and the people had legitimised this system in several referenda. 56 million “Goldvreneli” (Helvetia Head) with a nominal value of 20 francs, in addition coins with a value of 10 and 100 francs were in circulation. These were made out of gold and could not be devalued (or you should have taken the coins in, newly shaped with a reduced gold content by 30 per cent). – The gold coins were worth significantly more than the equivalent banknotes, therefore they disappeared from the payments virtually overnight and immediately. Because the gold coins as payment were not used anymore, banknotes were in fact the only legal tender in Switzerland for the first time. To the population it was demonstrated clearly that a new era had dawned for the money. – The gold coins have become popular collectibles and stores of purchasing power. Thus, the classical gold standard with the obligation to convert banknotes into gold in Switzerland ended.
After the Second World War a new monetary order came up – the monetary system of Bretton Woods, in which the gold played also an important role – but in a completely different manner. In Switzerland, this led to new groundbreaking referendums. •
1 Kölz, Alfred. Quellenbuch zur Neueren Schweizerischen Verfassungsgeschichte. 1996, S. 74.
Schweizerische Nationalbank. 1907–1932. Bern 1932
Schweizerische Nationalbank. 75 Jahre Schweizerische Nationalbank – die Zeit von 1957 bis 1982. Bern 1981
Schweizerische Nationalbank. Die Schweizerische Nationalbank 1907–2007, Zürich 2007
Lips, Ferdinand. Gold Wars. New York 2002
Baltensberger, Ernst. Der Schweizer Franken. Zürich 2012
Binswanger, Mathias. Geld aus dem Nichts. Weinheim 2015
Rhinow, René; Schmid, Gerhard; Biaggini, Giovanni; Uhlmann, Felix. Öffentliches Wirtschaftsrecht. Basel 2011
Linder, Wolf; Bolliger, Christian; Rielle, Yvan. Handbuch der eidgenössischen Volksabstimmungen von 1848–2007. Bern 2010
ww. The Latin Monetary Union was founded in 1865 and was based on the principle, that – inspite of having different names and different minting – the coins were of the same metal value. Switzerland was a founding member. This union continuously worked until the First World War – without a central bank. The French franc, the Belgian Franc, the Greek drachma, the Italian lira and the Swiss franc had all the same gold respectively silver content. This meant that on the one hand, it was possible to comfortably pay with Swiss francs in Athens, Rome, Paris or in Brussels and that, on the other hand numerous foreign currencies were able to circulate within Switzerland. About the same time, a similar monetary union occurred within the Scandinavian countries. These countries had also coordinated the gold, and respectively the silver content of their currencies with each other. Inspite of central banks already existing within these countries, the union – for the most part – did work without them. Due to its terrible wars, the 20th century destroyed quite a stable coexistence and economic activity with a stable monetary order that protected national sovereignty. It wasn’t until 1926 that the Latin Monetary Union was dissolved formally, preceded by the dissolution of the Scandinavian Monetary Union in 1924.
If you want to prevent the setting of cookies (for example, Google Analytics), you can set this up by using this browser add-on.