The 1970s: floating, negative interest and the defence of the franc

The end of Bretton Woods

The strains that had shown themselves in the gold market in 1968 reached the exchange markets in the following years. As the American balance of payments deteriorated, money moved out of the dollar and into currencies that were expected to appreciate, above all the Deutsche Mark and the Swiss franc. In May 1971 a wave of inflows forced the German authorities to let the Mark float. Switzerland responded differently: on 9 May 1971 the Federal Council revalued the franc by 7.07 per cent, raising its gold parity from 203.22 to 217.59 milligrams of fine gold.¹ The first change of the franc’s parity since the devaluation of 1936, it brought the dollar rate down from about 4.37 to a little above four francs. The respite was brief. When President Nixon suspended the convertibility of the dollar into gold on 15 August 1971, the fixed-rate system lost its anchor. The Swiss National Bank found itself once again buying dollars in large amounts to hold the rate.

The Swiss authorities reacted with a sequence of emergency measures whose legal basis had to be improvised. On 9 August 1971, a week before Nixon’s announcement, the SNB concluded an emergency agreement with the three big banks on the handling of large inflows of foreign currency. On 8 October 1971 the Federal Council issued a decree on the protection of the national currency, which entered into force on 15 October and gave the government powers to restrict capital inflows. In the following summer a further flight from sterling and the dollar led to a comprehensive set of ordinances. On 26 June 1972 the Federal Council banned the investment of foreign funds in Swiss real estate. On 4 July 1972 it issued an ordinance on the payment of interest on foreign funds, which prohibited the payment of interest on new foreign deposits and introduced a commission charge on them. The following day brought ordinances on borrowing approvals, minimum balances and the banks’ foreign currency positions.²

The commission charge on foreign deposits deserves attention because it anticipated by forty years the negative interest rates of the 2010s. Banks were required to deduct a charge from the franc balances of non-residents, so that a foreign depositor received less than he had placed. Legally the charge was a fee levied at the instruction of the authorities. In substance it was a negative interest rate on foreign money, designed to make holding francs costly for the speculators whom the authorities held responsible for the pressure on the currency.

The float of January 1973

By January 1973 the defence of the parity had become untenable. On 23 January 1973 the Swiss National Bank announced that it would stop its dollar purchases aimed at supporting the exchange rate until further notice, which meant in practice that the franc was allowed to float.³ Switzerland thus became one of the first countries to abandon a fixed rate against the dollar, several weeks before the general move to floating in March 1973. The decision was announced by the finance minister, Nello Celio. A retrospective published on the fiftieth anniversary recalled the admission of Fritz Leutwiler, who was to lead the SNB for the rest of the decade, that he had “no idea how to conduct monetary policy under flexible exchange rates”, and quoted the economic historian Tobias Straumann’s description of the Bretton Woods order as a prolonged war economy.⁴ Leutwiler’s candour was characteristic and well founded. Because no central bank at the time had experience of managing a freely floating currency, the SNB had to learn by trial and error.

The immediate effect of floating was a strong appreciation of the franc, which the economic historian’s retrospective describes as dramatic. The SNB responded in the mid-1970s by adopting targets for the growth of the money supply, becoming one of the first central banks to do so.⁵ The strategy succeeded in bringing inflation down faster than in most other countries, which strengthened the franc further. The recession of 1975 hit Switzerland unusually hard. The swissinfo retrospective gives a decline of more than seven per cent in output in the mid-1970s and a fall in the share of the workforce employed in manufacturing from 40 to 32 per cent between 1970 and 1980.⁶ Part of the adjustment was borne by foreign workers who lost their permits and left the country, which dampened the effect on Swiss unemployment statistics.⁷

The arsenal against foreign money, 1974–1979

The strong franc brought new rounds of restrictions. On 20 November 1974 the Federal Council adopted an ordinance on measures to counter the inflow of foreign funds, which combined the ban on paying interest, the commission charge and a limitation of forward sales of Swiss francs to foreigners. On 22 January 1975 the ban on interest was extended to all Swiss franc balances held by foreigners, while the commission charges on increases in such balances were raised.⁸ Samuel Weber’s survey of the SNB lists the principal elements of the arsenal: a minimum reserve requirement of one hundred per cent on increases in non-resident deposits, commission charges on foreign deposits that reached ten per cent per quarter by 1978, and prohibitions on the purchase of Swiss securities and real estate by non-residents.⁹ A charge of ten per cent per quarter meant that a foreigner who increased his franc deposits lost, on an annual basis, roughly a third of the additional amount. The measure was intended to be prohibitive, since no investor could rationally accept such terms.

Alongside the statutory measures the SNB continued to rely on agreements with the banks. A gentlemen’s agreement of 20 March 1975 concerned the reporting of foreign exchange transactions. Another, of 15 June 1976, dealt with currency measures and was to remain in force until 15 June 1981.¹⁰ These agreements show the working method of the Swiss authorities in the 1970s. The Federal Council supplied the legal framework by emergency decrees and ordinances. The SNB negotiated the operational details with the banks, whose cooperation it needed because the measures could be enforced only through the banks’ own procedures. The banks, for their part, accepted restrictions that cost them business, partly out of a sense of shared responsibility for the currency and partly because a negotiated restriction was preferable to legislation. The same pattern reappears in the Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence of 1977, which the next chapter examines.

The measures had limited success. Kurt Schiltknecht, the SNB’s chief economist from 1974 to 1984, recalled in 2011 that negative interest and investment restrictions had proved ineffective in the 1970s.¹¹ Money found its way around the rules through the Euromarkets, through the purchase of franc assets abroad and through the many channels that an open economy with a large financial sector offers. The franc continued to rise. By late September 1978 its export-weighted value had risen by 42 per cent within a year, and against the dollar it had gained about thirty per cent in nine months.¹² With the watch industry and other exporters in distress, the pressure on the SNB to act became intense.

The exchange-rate target of October 1978

The SNB’s answer was a decisive change of strategy. On 1 October 1978 it announced an exchange-rate target against the Deutsche Mark, under which the Mark was to be held well above 80 Swiss francs per 100 Marks.¹³ Fritz Leutwiler declared that the SNB would, if necessary, buy unlimited amounts of foreign currency to defend the target. In the first week of October alone it bought three billion dollars.¹⁴ The target worked. Schiltknecht later attributed the success to the credibility of a published exchange-rate objective, remarking that the market, after some hesitation, had been convinced that the situation would improve.¹⁵ In a separate interview he described the situation of 1978 as considerably more dramatic than that of 2011, since at the time every expert agreed that the franc was overvalued.¹⁶

The price of the policy was inflation. The interventions expanded the money supply, and consumer price inflation rose to 7.5 per cent by the autumn of 1981, a high figure by Swiss standards.¹⁷ As the pressure on the franc eased, the controls were dismantled. On 20 February 1980 the ban on interest was lifted for foreign savings deposits and eased for time deposits, and on 27 August 1980 the ban on paying interest and the commission charge on foreign franc balances were repealed completely.¹⁸ The decade of capital-import controls thus came to an end almost exactly nine years after the emergency agreement of August 1971.

For the Zurich financial centre the 1970s left a double lesson. The first was that the attractiveness of the franc and of Swiss banks could become a burden for the Swiss economy, which meant that the authorities would not hesitate to restrict the banks’ foreign business when the currency was at stake. The second was that such restrictions were costly and porous. The only instrument that had really worked was a credible commitment by the central bank to a price target backed by unlimited intervention. Both lessons were remembered in 2011.

Notes

1. Swiss National Bank, “Chronicle of monetary events”, entry of 9 May 1971, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
2. Swiss National Bank, “Chronicle of monetary events”, entries of 9 August and 8 October 1971 and of 26 June, 4 July and 5 July 1972, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
3. Swiss National Bank, “Chronicle of monetary events”, entry of 23 January 1973, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
4. SWI swissinfo.ch, “Als die Schweiz den Franken floaten liess”, https://www.swissinfo.ch/ger/kultur/als-die-schweiz-den-franken-floaten-liess/48235328. ↩
5. SNB, “Monetary and currency policy chronicle”, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik, entry of 8 January 1975: the Governing Board set the objective of expanding the monetary base and the money stock M1 by about 6 per cent. The entry of 23 January 1973 records the end of the dollar purchases that had supported the exchange rate. ↩
6. SWI swissinfo.ch, “Als die Schweiz den Franken floaten liess”, https://www.swissinfo.ch/ger/kultur/als-die-schweiz-den-franken-floaten-liess/48235328. ↩
7. David Eugster, “Als die Schweiz den Franken floaten liess”, SWI swissinfo.ch, 31 January 2023, https://www.swissinfo.ch/ger/kultur/als-die-schweiz-den-franken-floaten-liess/48235328: “Dass es zu keiner Massenarbeitslosigkeit kam, war nur der Rücksendung ausländischer Arbeitskräfte und der Entlassung von Frauen im Nebenerwerb geschuldet.” ↩
8. Swiss National Bank, “Chronicle of monetary events”, entries of 20 November 1974 and 22 January 1975, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
9. Samuel S. Weber, “Swiss National Bank and Swiss Franc’s Role in Global Financial Markets”, in Henri B. Meier, John E. Marthinsen, Pascal A. Gantenbein and Samuel S. Weber, Swiss Finance (Cham: Palgrave Macmillan, 2023), chapter abstract and summary at https://link.springer.com/chapter/10.1007/978-3-031-23194-0_7. ↩
10. Swiss National Bank, “Chronicle of monetary events”, entries of 20 March 1975 and 15 June 1976, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
11. SWI swissinfo.ch, “Währungskrise: Die Lehren aus den 1970er-Jahren”, 11 August 2011, https://swissinfo.ch/ger/waehrungskrise--die-lehren-aus-den-1970er-jahren/30865616. ↩
12. St. Galler Tagblatt, “Nationalbank: ein Spannungsfeld mit Tradition”, https://www.tagblatt.ch/wirtschaft/spannungsfeld-mit-tradition-ld.1039661. The article draws on the Dodis database of Swiss diplomatic documents and on the Federal Council’s minutes of October 1978. ↩
13. Swiss National Bank, “Chronicle of monetary events”, entry of 1 October 1978, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩
14. St. Galler Tagblatt, “Nationalbank: ein Spannungsfeld mit Tradition”, https://www.tagblatt.ch/wirtschaft/spannungsfeld-mit-tradition-ld.1039661. ↩
15. SWI swissinfo.ch, “Währungskrise: Die Lehren aus den 1970er-Jahren”, 11 August 2011, https://swissinfo.ch/ger/waehrungskrise--die-lehren-aus-den-1970er-jahren/30865616. ↩
16. 20 Minuten, “«Die Situation war 1978 viel dramatischer»”, interview with Kurt Schiltknecht, 14 January 2011, https://www.20min.ch/story/die-situation-war-1978-viel-dramatischer-306576348885. ↩
17. St. Galler Tagblatt, “Nationalbank: ein Spannungsfeld mit Tradition”, https://www.tagblatt.ch/wirtschaft/spannungsfeld-mit-tradition-ld.1039661. ↩
18. Swiss National Bank, “Chronicle of monetary events”, entries of 20 February and 27 August 1980, https://www.snb.ch/en/the-snb/organisation/history/geld-und-waehrungspolitische-chronik. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.