The significance of direct democracy to secure social peace (part 5)

People’s rights as a instrument and guide in the economic crisis

by Dr rer publ Werner Wüthrich

A brief resume at the beginning: Part 1 of this series of articles (CC 14 of 2 June 2015) showed how tensions between the workers and their organisations and the political leadership in Switzerland increased during the last years of the First World War and how finally the general strike was proclaimed in November 1918. After this national crisis many referendums had contributed to establish social peace.
    Part 2 (CC 15/16 of 16 June 2015) advanced to the roots of our economic constitution and stressed the significance of direct democracy for a peaceful economic development.
    Part 3 (CC 17 of 30 June 2015) showed how, after the First World War, the Federal Council and parliament too often circumvented the people’s rights in the economic field via emergency law, and how the population resisted.
    Part 4 (CC 19 of 29 July 2015) dealt with the 1937 peace agreement between the associations of employees and employers in the metal industry and its significance for Switzerland.
    Part 5 will show the significance of people’s rights as an instrument for crisis management and the preservation of social peace during the severe economic depression of the 1930s. That crisis also originated in the US.  

On 25 October 1929 the fall in prices  at the New York Stock Exchange triggered a global economic crisis that was to last for many years. Switzerland was also severely affected. The national income fell by 20 per cent. The number of unemployed people rose to 120,000 by 1935 – about 7 per cent of the workforce, an extraordinarily high number for Switzerland. Only 30 per cent of workers were insured against unemployment. The main burden of unemployment benefits lay with the communes and cantons. Quite a few people were even suffering from hunger. Cities established  soup kitchens and shelters. The extent of the global economic crisis put all previous crises in the shade. Production of major industrial countries declined by 30 to 50 per cent. In 1932, the total world trade was only one-third of that of 1929. Switzerland was already strongly export-oriented and therefore severely affected, even if the unemployment rate of 7 per cent was low by international standards. Fewer and fewer tourists visited the country. The wages and tax revenues of the Confederation decreased. Everybody wondered, what comes next and what is to be done?

Debate among economists: Three trends

Given the desolate economic situation in many countries, the classical liberalism that left a lot of freedom to the economy was  more and more called into question. Apart from the communist planned economy in the Soviet Union, three major trends could be observed – liberalism or neo-liberalism (as of renewed liberalism), a mindset oriented at the English economist John Maynard Keynes’ ideas and a policy that wanted to attach greater importance to professions or corporative associations as collectives.
Liberal economists argued that the unexpected crisis made it necessary to reconsider the regulatory framework for the economy and make it stable for the crisis. Some issues should be corrected, new crisis-proof rules were needed, and the state had to be able to enforce them. However, they kept to the core respectively to the principle of a liberal economic order. At the annual meeting of the Association for Social Policy in 1932, German economists like Alexander Rüstow, Walter Euken and others found the term “neo-liberal” for this renewed kind of liberalism, which is often used differently today – namely, as the epitome of an unbridled capitalism. The Association for Social Policy, which had been founded in 1873, held regular meetings and names of many famous scientists such as Max Weber and Walter Sombart have been linked to it.
John Maynard Keynes argued a bit differently than the liberal economists. In his opinion, economy needed a fixed guide. The state had to take the lead and intervene vigorously. Undesirable developments – such as the high unemployment rate – had reached such a degree, that nothing would work independently and only the state was able to help. It should adopt a planned and systematic approach – for example by means of job creation programmes. The state should behave counter-cyclically, that is, in times of crisis the state should strengthen the demand by greater spending and thus boost the economy. For this purpose, it was appropriate to incur debts and make comprehensive use of the money printing press. Keynes shaped the image of a government that directs the economy as a helmsman, plans workplaces and secures social justice. The epitome of this policy was the programme of the US President Roosevelt, who fought the massive crisis with his New Deal Policy in the US, where unemployment temporarily had increased up to 25 per cent. (G. Braunsberger, Keynes für Jedermann, NZZ 2009)
The difference in approach lies in the view of man. Liberal economists such as Wilhelm Röpke had more confidence in the people and believed they were able to organise independently, to seek new ways for themselves and follow them autonomously. In his view public intervention in excess was harmful and would paralyse people’s initiative and their research and entrepreneur spirit. The people in their individuality were so diverse and their opportunities in the social network so immense that no government in the world would be able to grasp the complex events to their full extent. A large-scale, centralised “fine-tuning” of economy from above – as was often attempted by “Keynesians” – was therefore simply impossible and would not do justice to the people (von Hayek). It would often do more harm than good. Following the recipes of Keynes included the danger that debts would rise to uncontrollable amounts and the monetary system would be going to pieces. Nevertheless, it was necessary to define conditions and adopt clear rules and then adapt them on a small scale to the needs of the population (Wilhelm Röpke). Similarly, a strong state was required to put them through. Similarly,  a certain social balance and a “safety net” were required as well. On the other hand, the government was to remain humble and refrain from intervention in order to increasingly give people the chance to be active, to unite and to seek new ways. Even during the crisis, it was necessary to rely on the positive forces among the people.

Decline and renaissance of liberal economists

During the 1930s, liberal voices became ever quieter among economists until they ceased almost entirely. The German “Verein für Socialpolitik” dissolved in 1935 in order to forestall the inclusion into a National Socialist organisation. (It was re-established after the war and still exists today.) John Maynard Keynes dominated the field of economists and policy advisors almost completely. His thinking has had great influence until today. The issue of government debt, however, has grown into an almost insolvable problem in many countries in the course of decades.
In 1938 a very small group of liberal economists from various countries met in the Walter Lippmann Colloquium in Paris and discussed ways to revitalise liberalism and to renew its content. The Germans Wilhelm Röpke, Alexander Rüstow, Walter Euken and the Austrians Ludwig von Mises and Friedrich August von Hayek also took part. Their credo was that liberalism needed new rules and a strong state to implement them. The discussion was also about a new name. “Social liberalism” and “positive liberalism” were proposed. Just like six years before in the Association for Social Policy, they agreed on the term “neo-liberalism”. (Thomas Sprecher, Monatshefte 2013, p.84). Time for the new liberalism was to come after the Second World War – in different variations. In addition to the people mentioned before, there were Alfred Müller-Armack and Ludwig Erhard in Germany who shaped the social market economy and the economic miracle of the post-war period with their ideas, and their thinking is now called “ordoliberalism”, “Freiburg School” or “Rhenish capitalism (social market economy)”.

Countering the economic crisis by popular initiatives

In Switzerland the discussion about new economic policies suitable in times of  crisis had begun at the beginning of the thirties. It was less theoretical but more practical and oriented towards a solution, corresponding to the directdemocratic model. To what extent should the federal government actively steer the economy from above and plan economic processes? Was it increasingly vital to seek solutions that weighed individual freedom less and put more weight on the collective – as  in the time of the guilds? Or should the state continue to be modest and limit itself in the liberal sense by setting clear rules and giving the people space for self-help and initiative? In short: It was about fundamental issues of economic policy and ultimately about reforming the articles in the Federal Constitution concerning the economy. In directdemocratic Switzerland it goes without saying that activists would soon interfere with popular initiatives. That was indeed the case: A total of four initiative committees in the 1930s and during the Second World War submitted their proposals on how to reform the economy articles in the Federal Constitution.
In the recent history of Switzerland, there was seldom a point in time, in which the population was kept busy so intensely with the question of what a “wise policy” or “wise police laws” should be like in order to bring the ruined economy back into balance. Thomas Bornhauser had invented this term in the 19th century. (See part 2 of the series of articles from 16 june 2015)

Popular initiative of the trade unions to “combat the economic crisis” (Crisis Initiative)

In 1934 the Social Democrats and trade unions called for a policy according to the Keynesian model. With their people’s initiative they wanted to bestow the federal government with far reaching competences in many areas and transfer numerous responsibilities on it to combat the crisis “in a systematic and planned manner” (National Councillor Obrecht, president of the Social DemocraticParty). The Social Democrats had a “plan of work” in their programme. The economic policy of the Federal Council and parliament was to be fundamentally changed. According to this plan, the authorities should ensure stability of prices and wages, guarantee a minimum income, initiate job creation programmes, promote agriculture, industry and tourism, regulate the capital market and control the export of capital as well as cartels and trusts – there were many more claims, as well. Additionally the federal government – as the popular initiative said – could deviate from the principle of freedom of trade and go into debt. The measures would be limited to five years and had to be renewed thereafter.
This popular initiative was unique in several respects: it was launched on 15 May 1934, submitted as early as on 30 November of the same year, with a record-high of 334,699 signatures (50,000 signatures were required). It was brought to vote by the Federal Council and parliament after only six months, on 2 June 1935, without submitting a counter-proposal. The voter turnout on that day amounted to a record high of 84.4 per cent, which shows how much the people were worried about the economic crisis. However, from the perspective of  the people’s rights, it was problematic. The Federal Assembly would have enacted the many laws (which would have been necessary to be implemented) as “final” i.e. under exclusion of the referendum. Switzerland’s economic system would thus have lost its directdemocratic character, which had made it possible so far to harmonise the laws largely according to the needs of the population. The economic constitution would have got a “dirigiste character”. (Alfred Kölz, Neuere schweizerische Verfassungsgeschichte, 2004 p. 754). In addition, the federal government would have run into high debt and the administration would have to be increased massively to cope with the many tasks at least. Parliament and also the population were widely divided – more than in case of any other initiative.
On 2 June 1935 almost everyone went to the polls. 57.2 per cent voted No. In 18 of the 22 cantons, there was a negative majority. The wish hold on to direct democracy in economic matters as well, has probably been the decisive factor that the initiative was clearly rejected. But the Yes-share of over 40 per cent was high. Many had probably been guided by the hope that the government would work it out in the end.

Corporative state instead of parliament and people

However, the Crisis Initiative of the Social Democrats and the trade unions was not the only one. There was a second initiative almost  that would also have put the Constitution on new grounds with resepct to the economy. In 1934 catholic-conservative circles and young liberals launched a popular initiative that wanted to set up a self-regulatory corporative economic order which in some respects differed from the liberal economic concept. Since its initiators were from all different political camps, they were unable to agree on a joint text, they chose the form of a “general proposal” (initiators only set the agenda and the exact wording is left to the parliament) and worked out each of them various  constitutional drafts.
The movement was impaired because Frontists were also involved, representing anti-democratic views in many respects. For the Young Liberals, who had already prepared a draft, this was reason enough not to submit the 30,000 collected signatures, so that they were not named along with the National Front. The popular initiative was launched anyway. The National Front, being the well-known organisation of the Frontists, was no mass party and was in decline already in 1934. It participated merely in order to raise its reputation but without submitting any own concrete proposal. It did not succeed. In 1935 it had only one single National Councillor and was constantly losing members. In the Second World War their meetings were forbidden. (Walter Wolf, Faschismus in der Schweiz, 1969; A. Gebert, Die jungliberale Bewegung in der Schweiz 1928 bis 1938, 1981).
In 1935, the Catholic Conservative Party presented its constitutional draft: corporative associations as a collective should regulate pending issues instead of the parliament. The then 600 professional associations should be grouped in seven industry associations:
1. Agriculture, 2. Industry 3. Manufacture 4. Trade, Banking and Insurances, 5. Inns, 6. Traffic and 7. Self-employed professions. They would send delegates to the Swiss Chamber of Commerce which would be authorised to adopt laws instead of the parliament. (Kölz 2004, p. 755) The initiators were supported by the Catholic Social Doctrine: Pope Pius XI advised simultaneously to the advent of the communist parties in Europe that a policy of social justice should be pursued which reconciled work with the capital. He, too, saw the solution in a corporative economic order. Hence, the encyclical „Quadragesimo anno“ read in 1931, “Just as the unity of human society cannot be founded on an opposition of classes, so also establishing the proper order of economic life cannot be left to a free competition of forces.”
The trend towards a corporative state could be observed all over Europe then and those ideas were discussed in most Swiss parties. Even the constitutional draft of the Liberal Youth Movement of Switzerland included an “economic council”, which, however, was equipped with only consultative powers. Even in the ranks of the Social Democrats, such voices could be heard. The parliament, elected by the people, and the people’s rights would have become less important.
The corporate economic model would have changed the liberal economic order in its core and led to an authoritarian state. That view was expressed by Federal Councillor Schulthess when he spoke up in the Council of States on 11 October 1933: “Corporations, as some imagine, lead (...) to dictatorship and political conformity; and if one wishes for such a  corporative order, one has to accept the omnipotence of the state as well.” Even the workers wrote to the Federal Council, stating that a corporative body would smell of “facism which we do not want.” (Cit. in Kölz, 2004, p. 766)
The popular initiative of the Catholic Conservatives was rejected on 8 September 1935 by 72.3 per cent of the votes. In the catholic Cantons of Valais, Fribourg, Appenzell Innerrhoden and Obwalden it was adopted – but only with narrow majorities.
The proposal to form corporative associations and to involve them in the legislative process was not new. In 1894 the people had voted on an article in the Federal Constitution. It had planned to adopt a federal commercial law that would have allowed to form corporative associations, which in place of the parliament would have had the competence to adopt legal regulations. 54 per cent of the people had voted No in 1894.

1935 – The people paves the way for direct democracy

The year 1935 became “a fateful year for Swiss democracy” (Alfred Kölz). The people proved worthy of its political responsibility and rejected both popular initiatives presented above. An acceptance would have led to an authoritarian order and restricted the people’s rights. Switzerland’s entire political system would have changed.
Switzerland had kept to the liberal principle in its Economic Constitution – associated with social components – and was therefore quite unique in the thirties. In the Soviet Union there was communism, in Germany and Italy fascist state economy ruled, in France the Popular Front with a kind of economic government and Austria was under a corporative state economic order regime. The Anglo-Saxon countries followed the ideas of the British economist John Maynard Keynes, who recommended government intervention, economic management and public debt to a large extent. Almost all economists (who were no Communists) followed his credo.
The people’s No on the two economic initiatives of 1935 had a completely different effect. It was a signal that the population expected the problems to be solved not only by the authorities, but that the citizens themselves were in control of the situation to improve their living conditions. It was becoming obvious that these efforts were often more sustainable and more successful than the government measures. For example, many cooperatives were newly established or the existing ones were extended. There is always a risk that political debates forget about the contribution of the population to crisis management.

Self-help and self-responsibility in the crisis: the creation of cooperatives

To improve legal certainty, the National Council and the Council of States revised the cooperative law in the Code of Obligations in 1935 and in the following years, until the post-war period a number of cooperative start-ups came about or expansions of cooperatives in agriculture were made, consumer services in housing and in many others areas of life and business – all of this in an amazing variety. Numerous writings on the cooperative movement have been published – in line with the recently published booklet “Wie gründe ich eine Genossenschaft?” (How do I start a cooperative?) The Confederation, the cantons and communes supported this movement by fiscally favouring and subsidising the cooperatives in many ways. Today there are about 12,000 cooperatives in Switzerland. Three typical examples from this period are to demonstrate the variety of ways that the citizens themselves have to become active and to take up the reins on their way out of the crisis.

 WIR cooperative

When in 1934, the economic crisis increasingly intensified, sixteen businessmen met to found the WIR cooperative. Banks had become more cautious during the crisis and were reluctant in granting credits. The cooperative built up their own system of credit with an own (complementary) currency – the WIR francs. The merchants and artisans invited their suppliers and business customers to participate. They could get loans free of interest in WIR francs, which in turn created this money out of nothing, just like any other bank. The cooperative needed the permit as a bank, which it received in 1936. This cooperative money facilitated payments, solved some financial straits and promoted the sales between the cooperative members, who were in contact at common fairs and regular meetings, something they still do today. The system has been successful – until today. Around 60,000 SMEs – that is a quarter of all Swiss SMEs – have joined this system. Sales in WIR francs amount now between two and three billion per year. Approximately 800 million WIR credits are outstanding accounts. In 1998, the cooperative opened a “real” commercial bank – the WIR Bank, which offers both loans in Swiss francs as well as in WIR and manages savings (in Swiss francs).

“Bauernhülfskassen” (Farmers’ help savings banks)

In terms of self-help, many farmers established innumerable, various agricultural cooperatives. Interestingly, there have been and there are still those that do not consist of farmers: the so-called Bauernhülfskassen. An example from the Canton of Zurich: In 1932 the Zürcher Kantonalbank, five commercial banks and some rich individuals (who remained anonymous) founded the “Zürcher Bauernhülfskasse”. Its purpose was to help the farmers in need, and that was when the farmers’ self-help organisations and in particular the Raiffeisen banks could no longer grant loans in accordance with their statutes. In difficult times the “Bauernhülfskasse” rescued – as the name says – various family businesses. It still exists today.

Adventure Migros

In parallel with the decline of the National Front in 1935 a new party entered the political scene: the “Landesring der Unabhängigen” (Ring of Independents) with Gottlieb Duttweiler, owner of Migros. Duttweiler set off to advance things in the economy and in politics in Switzerland. Five representatives of the new party were immediately elected to the National Council. In 1940, Gottlieb Duttweiler converted his Migros from a plc to a cooperative by giving the company as a gift to its loyal customers. Each of the 75,540 customers who had a customer card and was thus enrolled, now received a free cooperative share of CHF 30 and became co-owner. For many small grocery stores, Migros spelled the end. For many housewives on a narrow budget, however, the low prices for staple foods were a blessing. In order to strengthen the civic education and intellectual resistance in those difficult times, Duttweiler gave the new cooperative members a book about “William Tell”. It was the first “book transfer”, which should be followed by many more. Thus began the adventure “Migros” with steady growth and its own cooperative culture, including the Club School, Exlibris, Culture Percentage and many others. Today Migros is a huge company and the largest employer in Switzerland.

Recognition: Plea for direct democracy

These lines should end with a retrospective. In the Canton of Thurgau in 1830, Thomas Bornhauser had postulated the trade and economic freedom as a freedom right based on natural law – a hundred years prior to the great economic crisis in the 20th century. Other cantons followed and the federal government included the freedom of trade and commerce as a fundamental right in the Federal Constitution. (See part 2 of the series of articles from 16 june 2015). “Wise police laws”, so Bornhauser’s words, were to avoid abuse. Today we can say the following. There is no political authority that would have been able to adopt such “wise laws” or even implement the “ideal economic order”. But Thomas Bornhauser’s words have initiated a learning process at all political levels, a constant search and further development, in which the people in Switzerland play a central role and are directly involved via the people’s rights – as this series of articles has shown. Direct democracy with initiative and referendum is probably the best way to adjust the legislation directly to the needs of the population. The former relative low number of signatures of 50,000 necessary for the launching of an initiative and 30,000 of a referendum has favoured the involvement of the population in the learning process. Even today – after the introduction of women’s suffrage – this numbers (100,000 and 50,000) are still low, but these signatures must always be at first collected and then authenticated. The required number of signatures in the cantons and communes is also relatively low.
The present state of the economy and the large number of referendums that have taken place at the federal level since 1848, are proof that the learning process often works better and produces better results than if basic decisions are made by a small elected elite in the government and parliament only. The discussions are supported widely and more intensely. Suggestions from the population are included that would otherwise not be heard. A popular initiative sensitises the political elite, even if it is rejected in the vote.
However, it is not just about the question of how decisions are taken, but also about how the population can be involved and how politicians respect the people as the sovereign. In direct democracy the people identify far more with the political process and with the legal system than is the case if they are involved only indirectly through elections. All this maintains social peace and strengthens the social cohesion which cannot be overestimated in today’s troubled world.

Social market economy

Our history of popular rights has not yet come to an end after these remarks: Inspired by the two fundamental and pioneering economic referendums in 1935, the parliament began with the reform of the economic articles in the Federal Constitution. They should be adapted better to the crisis and better respond to the requirements of a population in need. The groups that had launched the Crisis Initiative, joined forces and created the “Richt-linienbewegung” (Guideline Movement) to accompany these works in their spirit. The Second World War delayed this process, so that the Social Democrats and the Ring of Independents with Gottlieb Duttweiler took the opportunity in 1943 and submitted two other popular initiatives – both on the “right to work”, which they wanted to have implemented in different ways into the Constitution. Almost simultaneously, two groups in the field of social policy became active. The Catholic-Conservative Association CCA launched a popular initiative on the topic “Protection of the Family”, which was to allow more of family-friendly policies, and handed it in with 178,000 signatures. Almost simultaneously the Commercial Association of Switzerland launched a popular initiative with 180,000 signatures, making a concrete proposal for the establishment and the social aspect of the old-age and survivors’ insurance (AHV), which the people had already agreed on in principle in a constitutional vote in 1925. A first concrete draft law, however, had been rejected in 1931 in a referendum.
As a result of these activities in the middle of the war five referendums were to take place between 1946 and 1947 that set the course for the social market economy, as we know it today.     •

Alfred Kölz, Neuere schweizerische Verfassungsgeschichte (mit Quellenbuch), Berne 2004; 100 Jahre Sozialdemokratische Partei, Zurich, 1988; Häner Isabelle, Nachdenken über den demokratischen Staat und seine Geschichte, Beiträge für Alfred Kölz, Zurich 2003; W. Linder, C. Bolliger, Y. Rielle, Handbuch der eidgenössischen Volksabstimmungen 1848 -2007, 2010; Bruno Hofer, Volksinitiativen der Schweiz, 2012; Sprecher Thomas, Schweizer Monat, 2013. A. Gebert, Die jungliberale Bewegung der Schweiz 1928-1938, 1981; Wolf Walter, Faschismus in der Schweiz, Die Geschichte der Frontenbewegung in der deutschen Schweiz, 1930-1945, 1969; Various scripts on the organisation of cooperatives and economy.