The Swiss franc goes back a long way, even predating the foundation of the Swiss National Bank (SNB). It is no exaggeration to say that the currency known as CHF is an integral part of our national identity. More than just a legal tender, our currency and its history (particularly the political and economic choices that have shaped its destiny) have played an important part in making Switzerland the country it is today. These historical decisions have often been at odds with those of other European countries, yet have frequently turned out to be wise in hindsight.
The Swiss franc: a reflection of national identity
The franc is probably one of the best ambassadors for the Swiss Confederation. Even on an aesthetic and artistic level, special care has always been taken to avoid depicting any local legends on the coins and notes, in order to prevent any sense of rivalry between the various cantons that make up the nation. Yet the famous Swiss neutrality has not prevented the country from taking a strong stance on currency issues on occasions.
The beginning of an extraordinary currency
It all began in 1845, when the Swiss franc was introduced to the Confederation. The aim was to make trading easier and facilitate the spread of the currency. It took 20 years for the Swiss franc to reach parity with the French franc, which happened after the currency joined the Latin Monetary Union. Following that, the Swiss franc went from strength to strength, eventually being seen by investors as a safe haven. Below we take a look at the history of a very special currency...
The first investors pile in
In the early Twenties, as other continental currencies fell like dominoes, the Swiss franc began to build solid foundations that would eventually lead to the safe haven status it enjoys today. In Germany back then, the deutsche mark was plummeting due to the Weimar Republic’s hyperinflation problem. The Swiss franc survived because it kept to the gold standard. This made it very appealing to investors, who flocked in and made it one of the world’s most expensive currencies. Unfortunately, this had a negative effect on exports, and Switzerland consequently endured an increase in unemployment during the Thirties.
Anything but neutral: political and economic decisions that led to success
The Second World War saw an increase in trade with Germany, and vast amounts of gold were deposited in Swiss banks. After the war, Switzerland declined to sign up to the Bretton Woods agreement, which was based on the idea of pegging currencies to the US dollar. This turned out to be a wise choice as the system collapsed in 1971. Henceforth, currencies would simply be subject to supply and demand, and this played to the Swiss franc’s strengths. The other currencies were therefore evaluated in relation to Switzerland’s currency. This naturally led to investors piling in from all over the world, although it was a dark time for local industry and Switzerland was once more hit by rising unemployment.
Other challenges in the Seventies included the oil crisis, which prevented the SNB from taking the steps needed to stop the Swiss franc from sky-rocketing. More tough times came in the late Eighties, when the worldwide stock market crash burst the real estate bubble and dragged the country into a major recession. Yet despite this rollercoaster ride, the Swiss franc has stood the test of time and is still going strong.
Swiss franc cap: saving Switzerland’s industry from the subprime mortgage crisis
The Swiss franc has proven its resilience time and again, holding up against virtually all currencies despite the many crises in the world economy. The most recent example is the subprime mortgage crisis that devastated the US banks. The SNB responded by dropping its exchange rates to zero in order to protect the national banking system. Capping the franc against the euro helped to save Switzerland’s exports, as it led to the franc flooding the markets and being seen as a safe haven once more.
Why is the Swiss franc so stable?
The country’s strong and steady economy is the first reason that comes to mind. Despite being hit by the many crises that have rocked the world’s financial markets, Switzerland has always managed to hold firm without too much trouble. Another important factor is the country’s relatively low level of national debt. While most of the world’s top 10 economies have debt ratios of around 100% (or sometimes more), Switzerland’s is less than 30%.
Like all countries with a strong currency, Switzerland is very attractive to foreign investors, creating a virtuous circle that makes its currency even more valuable. In 2016, the SNB decided to abandon its cap in order to strengthen the Swiss franc, which was falling slightly against the dollar and yen at the time.
The end of the cap: the price to pay for a strong currency
Why was this decision made? In a nutshell, before 2016, Switzerland bought heavily into the euro in order to maintain this artificial ceiling. However, the policy of the ECB (European Central Bank) at the time was to buy debt and inject liquidity into the markets. This made it very hard for the SNB to maintain its rates and maintain a safe-haven currency. So in order to keep a strong franc for imports and increase buying power, it removed the cap.
To this day, Swiss industry sometimes struggles to cope with the strength of the franc, yet the strategy has been successful overall. In the medium term, it has worked as intended in all areas of the national economy. This is why Switzerland’s currency is of such immense political and economic importance: our national prosperity depends to a large extent on the safe haven that is the Swiss franc. It truly is a very special currency!