The history of the Swiss franc: from Napoleon to a global safe-haven currency

Its history is a fascinating tale, spanning from the monetary upheaval of the Napoleonic era to the establishment of a world-renowned currency.

Today, a robust economy, low levels of debt and the strategic management of the Swiss National Bank (SNB) ensure its stability.

Source: ProRealTime Web

The concept of a strong currency is entirely relative: a currency may be strong against one currency and weak against another.

Take, for example, the EUR/CHF exchange rate (in other words, the value of one euro when converted into Swiss francs). At the start of 2012, it cost around 1,219 Swiss francs to buy 1,000 euros, but today it costs just 1,035 Swiss francs to buy the same amount.

Whilst both currencies can be considered strong in absolute terms, the Swiss franc has come out on top against the euro over the last decade, with a positive trend in the exchange rate against the single currency.

Another example: over the same period, it cost around $1,270 to get €1,000 in 2012, whereas today it costs just under $1,134 to get the same amount.

A History of the Swiss Franc in the 20th Century

From the 1920s to the Second World War

In the 1920s, European currencies collapsed one after the other, culminating in the German mark, which fell victim to the hyperinflation of the Weimar Republic, where, in 1923, the retail price rose by a factor of 750 billion over a period of 10 years. In other words, a baguette that had sold for 1 mark 10 years earlier now cost… 750 billion marks: a clear illustration of the currency’s loss of value!

Conversely, the Swiss franc, for its part, fully demonstrated its value as a safe-haven currency thanks to the maintenance of its gold standard, which increasingly attracted foreign investment.

By the late 1920s, the strength of the Swiss franc was not all good news: the export-oriented Swiss economy was hit hard by the high value of the Swiss franc, resulting in unemployment affecting more than 20% of the working population by the mid-1930s.

During the Second World War, Switzerland built up its gold reserves by selling raw materials to Germany in exchange for the precious yellow metal. 

It was therefore during these 25 years that the Swiss franc laid the foundations for its strength.

Switzerland and the Bretton Woods Agreements

At the end of the war, Switzerland refused to sign up to the Bretton Woods Agreement (which pegged currencies to the dollar, with a link to gold), but the Swiss franc nevertheless remained one of the strongest currencies.

When, in 1971, the Bretton Woods agreements collapsed and currencies were subject to floating exchange rates (meaning that exchange rates were determined by supply and demand), the Swiss economy was in good health. Capital was pouring into Swiss banks from abroad, but Swiss companies, particularly those in the industrial sector, were once again facing very difficult times and unemployment in Switzerland was rising.

The oil crisis of the 1970s and the currency crisis of the 1990s

The oil crises of the 1970s sounded the death knell for the various measures devised by the Swiss National Bank (SNB) to curb the rise in the value of the Swiss franc. Switzerland’s economic difficulties persisted, compounded by the poor management of liquidity injections into the economy intended to mitigate the effects of the 1987 stock market crash.

The result was that the construction and property sectors began to overheat. To counter this, the SNB raised interest rates, plunging the country’s economy into a severe recession. Ultimately, the 1990s proved to be a very difficult period economically due to the interest rate cuts coming too late. Nevertheless, the Swiss franc held its ground against almost all other currencies.

The floor rate in response to the 2008 crisis

To address the fallout from the 2008 crisis, the SNB decided in 2010 to cut its interest rates to zero in order to safeguard the Swiss banking system and flooded the market with liquidity.

Despite this, the Swiss franc retained its status as a safe-haven currency and its value rose significantly against the euro and the dollar, forcing the SNB to introduce a floor against the euro (to protect Swiss exports) until the EUR/CHF floor suddenly collapsed in 2015.

The reasons why the Swiss franc is a strong currency

In the case of Switzerland, two key factors explain the strength of the Swiss franc relative to other currencies:

• economic growth; which has held up relatively well compared with the rest of the world and has managed to weather the recent crises without too much damage.
  
• low levels of debt; despite the crisis, Switzerland’s debt levels remain well below those of its European counterparts. Whilst Switzerland’s debt-to-GDP ratio does not exceed 30%, those of its neighbours are soaring, at 116.3% for France and 153.5% for Italy.

• the stability of the geopolitical environment. Unlike certain currency areas that are relatively unstable due to geopolitical factors and/or rampant inflation, Switzerland offers reassurance thanks to its high level of economic and political stability.

Switzerland, the Swiss franc and foreign capital

Countries with what is known as a strong currency all share one characteristic: they attract capital from foreign investors. The more foreign capital flows in, the stronger the currency becomes.

In 2020, foreign investment in Switzerland totalled more than 1,216 billion Swiss francs. In contrast, Switzerland invested more than 1,460 billion Swiss francs globally.

Switzerland is one of the world’s leading investors abroad. However, in 2019 and 2020, against the backdrop of the health crisis, Swiss companies repatriated 54 billion and 34 billion Swiss francs respectively, which helped to shore up the Swiss franc on the foreign exchange market.

Is the Swiss franc a safe-haven currency?

According to a study published by the CEPII, the Swiss franc is not as strong a currency as is commonly believed. To support this claim, they analysed the behaviour of the major currencies in crisis situations. These experts assumed that a safe-haven currency should generate a positive return during periods of crisis and a negative risk premium over the long term.

Based on this premise, analysts examined the performance of 26 currencies over a 15-year period, from 1999 to 2013. To everyone’s surprise, only two currencies, according to the analysis, behaved as safe-haven assets: the yen and the dollar.

Conversely, the Swiss franc, which tends to track movements in the euro, does not possess the characteristics of a safe-haven currency. Analysts point out, however, that this analysis predates the end of the EUR/CHF exchange rate floor. It can therefore be assumed that, once freed from its peg to the euro, the Swiss franc will perform better (and thus more positively) in times of crisis.