Politics during crisis – crisis in politics?

Direct democracy as an instrument to handle crises

by Dr rer. publ. Werner Wüthrich

There is good reason, why medical issues are still in the centre of the debate around the corona crisis. But more and more politicians and commentators voice their concerns about the time after the pandemic and wonder how the economic problems and debts will be managed and which societal changes we will have to face. They compare the current situation with historical crises such as the world economic crisis of the 1930s. 

There are troubling statements: The IMF warned against “times which could become as bad as the Great Economic Depression of the 1930s”. The outgoing president of the European Central Bank, Mario Draghi, published an article in the “Financial Times”. In order to preserve employment and in view of the already high debts of many states he suggests to “use the money printing machine” or rather its electronic equivalent, just like one would do during a war:
“Wars – the most relevant precedent – were financed by increase in public debt. During First World War, in Italy and Germany between 6 and 15 per cent of war spending in real terms was financed from taxes. In Austria-Hungary, Russia and France, none of the continuing costs of the war paid out of taxes.” (“The Financial Times” from 25 March 2020).

Breaking taboos

In the Swiss newspaper “Neue Zürcher Zeitung” of 11 April 2020, the financial commentator Peter A. Fischer wrote: “Just before Easter the British Central Bank made the surprising announcement that they would authorise the government to request money of any amount. This measure was meant to make sure the markets keep functioning. The Bank of England emphasizes this loan was to be repaid in total at some time. This means that for the first time in this crisis a Western central bank broke the taboo of directly financing the state.” Fischer calls this move a taboo being broken. Relying on the money printing machine becomes more and more acceptable. There is nothing new about this kind of politics, though.
“Money gluts”, in connection with soaring debts, has been around for decades – even in “good” times. The US FED and the European ECB for instance may not directly supply money to their governments, but they spend billions to buy their debts (the Treasuries in the US, for instance) and pay with the money printing machine. – Even prior to the pandemic this kind of monetary politics was both common and controversial practice because the EU treaties prohibit such financing of states. Mario Draghi had announced at the beginning of the crisis that the ECB would spend 750 billion Euro to buy state debts from European governments – more than ever before.

Constitutional Court of Germany:
Casting doubts on the legitimacy of the ECB’s monetary policies

The Federal Constitutional Court of Germany (Bundesverfassungsgericht) has ruled on 5 May 2020 that the ECB’s policy to buy European government bonds was against the German constitution and prohibited the German Central Bank to participate in this programme, unless the ECB council could plausibly demonstrate within three months that the ECB’s monetary policy aims were in proportion to the associated risks (losses for private bank customers, risks of real estate or stock bubbles, low interest loans for non-viable enterprises etc.). The sentence is related to ECB government bond purchasing programmes predating the corona crisis. The constitutional judges in Karlsruhe have thereby challenged the European Constitutional Court for the first time, the highest court in the European Union, which had legitimised this practice. (see press release number 32 of 5 May 2020; see also the journal “Finanz und Wirtschaft” of 9 May 2020).

War as a justification

Mario Draghi claims that his policies were justified because it had happened before, in war financing. This automatically raises the question, how today’s arms race and wars are financed. In view of the ever rising amounts of debts of the war waging countries, most notably the USA, the likely answer would be: probably in the same way as during First World War. Well – if the Central Bank money printing machines are already busy financing wars and arms races, the additional “corona crisis” might tip the balance of the global monetary system. There are historical precedents for this, too. – The virus has already succeeded in stopping the huge military drills of the NATO countries which had been planned to take place along the Russian border in recent weeks.

The political alternative

Switzerland has always pursued a monetary policy of good housekeeping and continues to do so. There are enough reserves available which need to be replenished after the crisis. From this position I argue against the IMF and Mario Draghi and refer to an example from Swiss history.
The way Switzerland dealt with the economic depression of the 1930s differed from that of most other countries. Government and parliament kept close contact with the citizens who participated in the measures to counter the crisis using their rights of direct democracy. Many people thought about strategies how problems could be solved, and difficulties be eased or overcome. In hindsight it is not surprising that these years were a heyday of direct democracy in many respects. Numerous referendums helped to strengthen a spirit of cooperation among the people and the will to find constructive solutions to the problems.

Policy of the “good house-keeper”

The policies of the Swiss government in the 1930s has been referred to by commentators as “policy of the good housekeeper”. Government made sure to make ends meet with their tax income even in those difficult times and avoid debts as much as possible. The famous economist John Maynard Keynes suggested exactly the opposite. Government and parliament had to rescue banks and the textile industry, had to support small businesses and the farmers – all of that with plummeting revenues. How did they pull off this feat? Several referendums showed the direction and they are worth being reviewed here.

People’s participation unites

When tax revenues started to plummet in 1933, the government had initially planned to reduce the wages of federal employees. Both Social Democrats and trade-unions collected more than 300,000 signatures in a short time – ten times as many as required for a referendum. More than 80% of the electorate did vote. The plans of the government were rejected by 55%.
In 1935 the trade-unions again collected more than 300,000 signatures for their crisis initiative in only three months which was meant to counter the economic crisis with new laws, rules and programmes – similar to the US president Franklin D. Roosevelt’s New Deal which was financed by debts and the money printing machine. The initiative contained a controversial sentence, though: For at least 5 years no referendum was to be allowed on the subject. This was probably the main reason, why this popular crisis initiative was rejected by a large margin of 58% despite economic hardship. However, with 42% its approval rate was quite high, and it did influence the politics in the years to come.
Liberty, democracy, and people’s rights were valuable. All together five people’s initiatives were launched in the 1930s all of which aimed at putting limits to the emergency legislation (see “Emergency Law and democracy”).
In 1935 another people’s initiative was voted on which aimed to establish an economic corporate state model like the one introduced in Austria at the same time. The 600 professional associations which existed then were supposed to form seven branches (“Kammern”) and elect an economic council. A clear majority of voters said “No”.
However, there was a consensus in 1935 that the liberal economic constitution of 1874 had to be revised. Parliament composed a draft which was ready to be voted on by 1939 (only after the war the vote took place). It maintained economic liberty but provided for many exceptions from it. Strikingly it contained elements from both people’s initiatives rejected earlier: For instance the federal government was to be invested with the authority to neglect “the principle of freedom of trade and commerce if necessary” (a phrase from the crisis initiative) while countering a crisis and also the authority to declare decisions of professional and branch associations to be common binding law (from the initiative “For an economic corporate state model”).

Alternatives to the welfare state:
private initiative and self-help

At the same time parliament revised the legislation for cooperatives and many new cooperatives were founded, dedicating themselves to sel-fhelp, private initiative, and autonomy. One example for a special cooperative founded at that time shall be described in more detail: “Farmers’ supportive banks” were established in seven cantons. These agricultural cooperatives were in fact not run by farmers. In the Canton of Zurich the cantonal bank, other banks and rich private investors helped farmers overwhelmed by debt who found nobody else to support them. Noteworthy, too, is the WIR cooperative, which was founded by 16 small business owners in 1933. They created an economic circle and issued their own cooperative money, called the WIR. It has served not only for making payments among the members but also for interest free loans with WIR money created by the central office. It worked – and continues to do so to this day. Over the years more than 60,000 small businesses have participated (a quarter of all small and medium-sized businesses). In its heyday the central office offered interest-free loans for more than 2 billion Swiss francs in WIR (1 WIR-Franc = 1 Swiss franc). The WIR-Bank of today has developed from the former co-operative. To this day it offers loans both in WIR and in Swiss francs.
A similar example from Austria can be mentioned. In Wörgl, the municipal president Unterguggenberger issued municipal money as a complementary currency in 1932/33, in order to reinvigorate economic life of the town and to finance infrastructure maintenance projects. He succeeded in convincing his fellow citizens of the idea and they supported it. It worked, too, but only until the Austrian National Bank and the government in Vienna prohibited it after some months. The insisted on the state monopoly to issue money – unlike the WIR cooperative who not only were granted concession by the federal government but also received a bank license.

Continuous fight against unemployment

Discussion about the best way to fight unemployment continued after the vote on the crisis initiative. Switzerland kept maintaining the gold standard for quite some time. In 1936 the Swiss franc was devalued by 30%. The Social Democrats launched another people’s initiative with 280,000 signatures in 1937, under the “National job creation programme”, which they suggested should be financed by reserve assets of the national bank. However, in 1938 the German army marched into Austria and Federal Councillor Minger emphasised in the national defense: “To this day an isolated attack against us by a great power was unthinkable, but now we have to take such an attack into consideration as a possible scenario and should be aware that in such a case we would stand on our own.” Parliament drafted an amendment to the initiative and assigned 400 million francs, half of which was spent on job creation and the other half to buy fighter jets. The Social democrats agreed to withdraw their initiative and the people voted on the amended version of the parliament on 4 June 1939. It was accepted by an impressive 70%. Only a few weeks later the Second World War began.

How successful had this unusual
concept been to fight the economic crisis?

Like people in all other countries the Swiss were mostly concerned about employment in the 1930s. The unemployment number rose in Switzerland from about 13,000 to 93,000 in the years prior to 1936. This was equivalent to an unemployment rate of 6% (only 2% in women) and declined again after 1936. This was much less as compared with most other European countries and the USA, the latter experiencing an increase to more than 20%, like Germany, from the beginning of the crisis (see Halbeisen 2012, p. 138).
Most federal budgets were in the black. In 1939 – before the war – the federation had a debt of only 1.5 billion francs, which was – considering the value of the currency at the time – much less than most other countries (Halbeisen 2012, p. 1106). The country was consolidated internally and well-prepared for the much more difficult times ahead. So, a different approach was possible, contrary to what most economists suggested then and still suggest today. During the Second World War debts could no longer be avoided. They rose to about 100% of the gross national product. Less than 4% of the debt was financed by a loan from the central bank – much less than during the First World War (Halbeisen 2012, p. 1108). Luckily for Switzerland, almost no fighting activities took place in the country.
These events illustrate how countries may differ in their political culture and in their budgeting. The same is true today – even within the euro zone (a fact which will be crucial for the future of the euro). The money printing machine – in the way and proportion Draghi suggests – is certainly no solution.

Heyday of direct democracy during the crisis

Strikingly, direct democracy saw a heyday during the great economic depression of all times. At no time before or after had so many signatures been collected for peoples’ initiatives. Voter turnout was above 80 per cent on several occasions. Even during the war the debates continued: in 1943 – the year of the battle at Stalingrad – three peoples’ initiatives about economic issues were started and two about social ones. Many citizens started to contemplate about “time after” and how Switzerland could be turned into a better place. The Social Democrats drafted their programme “New Switzerland”. This included the people’s initiative “economic reform and the rights of labour”. It called for a “more systematic and planned” economic policy and suggested key branches such as big banks and assurance companies should be taken over by the state and run as a public service.
The SP was not alone. The entrepreneur Gottlieb Duttweiler (founder of Migros, today the biggest retail company and the biggest employer in Switzerland) had a vision, too: He transformed his stock corporation into a cooperative in 1943 and gave every customer a share as a gift. At the same time his political party, the Landesring (National circle), started a people’s initiative with the title “Right to work”. Duttweiler wanted to strengthen economic freedom and at the same time connect it with more ethical volition. “Social capital” was his battle-cry. The young farmers became active as well and started the people’s initiative “Ground is not for gambling”. Their message was that agricultural ground should belong to the farmers who groom. But there was more: Again in 1943, the Merchant’s Association started a people’s initiative on pensions, which paved the way to the national old age and survivors’ insurance in 1948 which operates to this day. The Catholic conservative association KKV started their peoples’ initiative “For the protection of families” in the same year. It put many aspects of family policies on the right track – to this day. Financial support for families with children was improved, the pension scheme was made more just and more equal, an insurance for mothers was initiated (subject to many more peoples’ initiatives in the years to come) and a lot more. That way an atmosphere of departure was created before the war had even officially ended.

The people pave the way towards the future

Between 1946 and 1949 numerous initiatives were voted on – firstly, about the new economic constitution (which parliament had drafted before the war). It passed and remains valid to this day. Several other initiatives from the war years were voted on. These were referendums about crucial economic and social questions. Most of them were rejected. But all of them would later influence politics in one way or another. In 1949 and 1951 there were three referendums about the Swiss franc – one about the gold backing and a peoples’ initiative of the liberal socialists. All referendums put things on tracks and created necessary conditions for the social market economy in which we live today. Another remarkable vote took place about the peoples’ initiative “return to direct democracy” which passed in 1949. Thereby emergency legislation was democratised. Parliament has been authorised to make urgent decisions on the federal level ever since. But within a year these decisions have to be legitimised by referendums – facultative or obligatory ones. (see “Emergency law and democracy” for more details).
As explained above, direct democracy had its heyday during the biggest crisis. For many initiatives and referendums more than 300,000 signatures were submitted and voter turnout often was higher than 80%. Such figures have never again been achieved to this day, although the population has doubled in size since then. Cooperation between government, parliament and the people worked perfectly. Politics reflected the will of the citizens, who often differed in their political opinions just like in other countries. But the referendums had a unifying effect – despite all differences – and had a big impact so that the great difficulties could be overcome. It is certainly worthwhile to look at the significance of direct democracy for crisis management and for a liberal economic order in more detail. I encourage readers to study my book “Economy and direct democracy in Switzerland” (Wirtschaft und direkte Demokratie in der Schweiz) which was recently published by Zeit-Fragen.

And what about today?

While there are still good enough reasons why medical issues around the pandemic are in the forefront, debates about political ways out of the crisis have already started. Many questions about the “time after” are open – not only about economic and financial consequences. Ueli Maurer (minister of finance in the federal government) has voiced his concerns (“Neue Zürcher Zeitung” of 29 April 2020). And Swiss National Bank president Thomas Jordan had to announce a loss of 38 billion francs in the first three months of the year due to turbulences at the global stock markets.
The events of the 1930s may not resemble the current ones exactly, conditions are different. But the examples from our Swiss history are encouraging because they illustrate how direct democracy has stood the ground especially during crisis and may contribute to a new atmosphere of departure and considerations “how to make Switzerland a better place”. It is certainly worthwhile to continue cultivating direct democracy. Our grand- and great-grandparents have left a precious heritage to us.    •


Sources:

  • Halbeisen, Patrick; Müller, Margrit; Veyrassat, Béatrice. Wirtschaftsgeschichte der Schweiz im 20. Jahrhundert. Basel 2012
  • Wüthrich, Werner. Wirtschaft und direkte Demokratie in der Schweiz: Geschichte der freiheitlich-demokratischen Wirtschaftsverfassung der Schweiz. Zurich 2020
    Publisher: Zeit-Fragen 2020, hardcover, 397 pages. ISBN 978-3-909234-24-0; Pice CHF 36.–Orders to Genossenschaft Zeit-Fragen. Postfach. 8044 Zurich; E-Mail: redaktion@zeit-fragen.ch; abo@zeit-fragen.ch

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