The First World War

Mobilisation and the monetary shock of August 1914

The international gold standard, which had seemed a permanent feature of the world economy, collapsed within a few days in the summer of 1914. After Austria-Hungary declared war on Serbia on 28 July 1914 and Russia ordered general mobilisation on 30 July, the Federal Council placed the whole army on standby on 31 July and ordered general mobilisation on 1 August. Between 3 and 7 August about 220,000 men reported for duty. On 3 August the Federal Assembly elected Ulrich Wille as General, against the initial opposition of francophone deputies and the Social Democrats, and on the same day granted the Federal Council unlimited powers to safeguard the independence and neutrality of the country.¹ These full powers (Vollmachten) became the legal basis of an emergency regime under which the Federal Council governed the economy by decree for the rest of the war and beyond. The Federal Archives describe them as a mandate that allowed the government to intervene directly in the economy.²

For the national bank, mobilisation meant an immediate run on cash. Soldiers needed pay, families withdrew savings, businesses hoarded coin, and gold and silver disappeared from circulation within days. Tanner records that on the outbreak of the war the obligation to redeem notes was suspended.³ The notes of the national bank were declared legal tender, which meant that creditors had to accept them in payment even though they could no longer be exchanged for gold. At the same time the bank had to supply small denominations, because the silver coins that had served for everyday payments had vanished into private hoards. The Federal Council instructed the bank for the first time to issue notes of small denomination.⁴ The 20-franc note, of which some 646,600 pieces had been in circulation on 31 July 1914, and a new 5-franc note became the most visible sign of the war economy. By the end of the war about four million 20-franc notes and 6.2 million 5-franc notes were in circulation. Gerhard attributes the introduction of the small denominations to a general shortage of means of payment caused by the hoarding of gold and silver coin.⁵

Harold James, who compared the Swiss experience with that of other countries, has pointed out that Switzerland avoided both the internal suspension of convertibility that affected the United States and the severe credit restrictions that Germany and Italy had to impose. The monetary shock of August 1914 was absorbed without a banking panic of the kind that Switzerland would experience in 1931.⁶ As in all European financial centres, the stock exchanges were closed for a time while banks restricted withdrawals under emergency moratorium rules.⁷ What had looked like a technical provision in the National Bank Act, the power of the Federal Council to suspend the redemption obligation in an emergency, became the legal hinge on which Swiss monetary policy turned for the next decade.

Paying for neutrality: war loans and the first direct federal taxes

Armed neutrality was expensive. Because the army remained mobilised, in varying strength, for more than four years, the Confederation had to finance not only its pay and equipment but also a growing apparatus of economic administration: the import of grain and coal, price controls, rationing and relief. The federal budget of 1914 rested almost entirely on customs duties, which collapsed as trade was disrupted. Schaltegger and Weder have described how unprepared the federal finances were for the war. Expenditure swelled because of defence, the procurement of raw materials and unemployment relief, while the main source of revenue dried up.⁸

The Confederation met the gap mainly by borrowing. According to the Historical Dictionary of Switzerland, it issued nine so-called mobilisation loans and one loan in the United States, raising about one billion francs in total. These loans covered some 60 per cent of the enormous additional federal expenditure, while new taxes covered about 20 per cent. The remainder was financed through short-term surpluses of the national bank, that is, through additional banknotes.⁹ Baltensperger and Schaltegger give slightly different figures, with nine domestic war loans totalling 830 million francs and two loans in the United States of 45 million francs. On their calculation the federal debt rose from 2.8 per cent of gross domestic product in 1913 to 15.1 per cent in 1918.¹⁰ The war article of the Historical Dictionary puts the Confederation’s borrowing at 912 million francs and the total debt of all levels of government at 5.5 billion francs at the end of 1918.¹¹

Placed through bank consortia in which the Zurich banks played a leading role, the loans were subscribed by banks, insurance companies, pension funds and a broad public of savers. For many Swiss households the mobilisation loans were their first contact with the federal bond market. For the banks, the placing of federal debt became a regular and profitable business that continued after the war. The consortium practice, in which the big banks and the cantonal banks divided federal issues among themselves according to agreed quotas, later became a characteristic feature of the Swiss capital market and a frequent target of criticism.¹²

Borrowing alone was politically insufficient. A federal state in which direct taxation was traditionally the preserve of the cantons now needed a share of income and wealth taxes. In April 1915 the Federal Assembly adopted a constitutional basis for a one-off war tax, and two months later, on 6 June 1915, the people and the cantons accepted it at the ballot. The Swiss Federal Tax Administration describes the war tax as the first direct federal tax. It was levied on income from work and on wealth, while income from capital was captured through the tax on wealth.¹³ Schaltegger and Weder give the date of the vote, 6 June 1915, describing the tax as the first direct federal tax on income and wealth. According to Baltensperger and Schaltegger, it was accepted with more than 90 per cent of the votes and began to yield revenue in 1916.¹⁴

The war tax was followed by a war profits tax, which the Federal Council introduced by emergency decree in September 1916 and which remained in force until 1920. It skimmed off the extraordinary profits that some firms, particularly in the export and munitions industries, earned from the war. The Historical Dictionary estimates the annual yield of the war profits tax between 1917 and 1919 at 85 to 191 million francs.¹⁵ Stamp duties on securities and other documents followed, based on a constitutional amendment of 1917, and took effect in 1918. The Federal Archives record that a proposal for a permanent direct federal tax was rejected by the voters in June 1918.¹⁶

For the financial centre, these fiscal innovations had a long afterlife. The stamp duties on the issue and transfer of securities became a permanent element of Swiss tax law and remain so today, in modified form, as the issuance stamp duty and the securities transfer stamp duty. Schaltegger and Weder observe that the stamp duties became permanent fiscal instruments that later helped finance the welfare state.¹⁷ The direct federal tax, reintroduced after the war as a “new war tax” and in the 1930s as a crisis levy, became permanent in the form of the defence tax of 1940 and the direct federal tax that replaced it.¹⁸ Every private client adviser in Zurich who explains the Swiss stamp duty to a foreign client is explaining, in effect, a piece of legislation born out of the financing of armed neutrality in the First World War.

The note press and inflation

The part of war expenditure that neither loans nor taxes covered was financed by the national bank. Schaltegger and Weder describe how the bank financed much of the federal deficit by discounting federal treasury notes. These short-term federal bills, known as rescriptions (Reskriptionen), accumulated on its balance sheet. Baltensperger and Schaltegger put the outstanding rescriptions at 538 million francs in 1919, most of them held by the national bank, and describe how this monetisation increased the note circulation during the war.¹⁹ Tobias Straumann dates the shift to direct financing of the state to 1916 and notes that the note circulation doubled between 1916 and 1918.²⁰ Gerhard’s figures for individual denominations confirm the pattern: by 1918 some 4.2 million 50-franc notes and about three million 100-franc notes were in circulation, more than twice the number of 1913.

The result was inflation on a scale that Switzerland had never experienced. The consumer price index rose from 100 at the outbreak of the war to 204 at its end according to Schaltegger and Weder, while the Historical Dictionary gives a rise of the retail price index from 100 in 1914 to 230 in 1918 and an increase in the cost of living of 130 to 150 per cent in the towns.²¹ Whatever the precise measure, prices roughly doubled in four years. The Historical Dictionary’s article on monetary policy notes that banknote demand surged while the cover ratio declined, and that Switzerland, like most other countries, suspended gold redemption and gave paper money the status of legal tender. The Swiss franc nevertheless remained stronger than the currencies of the belligerents, which made it in 1918 one of the most sought-after currencies in Europe. Scarcity of goods, imported inflation and monetary financing of the deficit combined to produce a price rise that was modest by the standards of Germany or Austria but socially explosive in Switzerland.

Wages did not keep pace. Straumann reports that men’s nominal wages rose by 62 per cent and women’s by 57 per cent during the war, which amounted to a real wage loss of around 15 per cent by 1917.²² Marco Jorio, the former editor-in-chief of the Historical Dictionary of Switzerland, puts the fall in real wages at 25 per cent by the end of the war. Food rationing began only in 1917. By 1918 about one sixth of the population depended on public relief.²³ Farmers and many industrialists profited from the war, while the urban working population and salaried employees on fixed incomes carried its costs. The inflation of 1914 to 1918 thereby became the social prehistory of the general strike.

Zurich’s banks in the war economy

For the Swiss banks, and above all for the big banks in Zurich, the war was a period of opportunity. The Historical Dictionary’s article on the war notes that Swiss financial institutions emerged from it strengthened, more independent of foreign capital and with a larger market share.²⁴ Before 1914, the Swiss banks had largely been intermediaries between Swiss savers and foreign capital markets, particularly Paris and Berlin, while a considerable part of the capital of Swiss companies had been held abroad. During the war French and German investors repatriated capital or sold Swiss assets, while the belligerents needed credits to buy Swiss goods. Swiss banks organised such credits, often in connection with trade agreements that tied Swiss exports of manufactured goods to imports of coal, iron and food from the belligerent states.

The Historical Dictionary’s article on the Swiss financial centre attributes the rapid rise of the Swiss banks during and after the war directly to the fact that Switzerland did not take part in it militarily.²⁵ The Zentralbibliothek Zürich summarises the same development in a single sentence: the banking and financial centre of Zurich rose into the first league during the two world wars.²⁶ The consolidation of the banking landscape continued during the war. In 1912 the Bank in Winterthur and the Toggenburger Bank had merged to form the Schweizerische Bankgesellschaft (Union Bank of Switzerland). In 1917 the new bank moved into the Münzhof building at Bahnhofstrasse 45 in Zurich, whose six Doric columns became a symbol of solidity. It absorbed the Aargauische Creditanstalt in 1919 and the Banca Svizzera Americana in 1920.²⁷

Zurich also became a centre of the institutions through which the belligerents controlled Swiss foreign trade. The Entente powers required Swiss importers to route their purchases through the Société suisse de surveillance économique, founded in October 1915 with its seat in Bern, which guaranteed that goods supplied by the Entente would not reach the Central Powers. Its counterpart for trade with Germany was the Schweizerische Treuhandstelle für Überwachung des Warenverkehrs, founded in June 1915 with its seat in Zurich. It controlled and guaranteed that exports of the Central Powers to Switzerland were used only for Swiss domestic consumption. Austria-Hungary joined the arrangement in August 1915. The Treuhandstelle was liquidated on 26 June 1919.²⁸ The fact that the German-oriented control body sat in Zurich while the Entente body sat in Bern mirrored the commercial geography of the country, in which Zurich and eastern Switzerland were closely tied to the German economy.

The war also taught the Swiss banks a lesson that would shape their behaviour in the 1920s. Neutrality and a currency that held its value better than those of the neighbours attracted foreign money. Wealthy families in France, Germany, Austria and Italy, fearing inflation, war taxes and political upheaval, began to transfer assets to Swiss banks during the war years. Enrico Berbenni has summarised estimates according to which foreign capital held in Switzerland amounted to about two billion francs before the First World War and to between ten and twenty billion by 1920.²⁹ Such estimates are uncertain by nature, since flight capital does not declare itself. The direction of the movement, however, is beyond doubt. By 1918 the Swiss banks had discovered the business that would define Zurich for the rest of the century.

Notes

1. Historisches Lexikon der Schweiz, “Weltkrieg, Erster”, version of 5 May 2015, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/, sections on mobilisation, the election of the General and the full powers of 3 August 1914. ↩
2. Swiss Federal Archives, “Stärkung des Bundesstaats und politische Radikalisierung”, https://www.bar.admin.ch/bar/de/home/recherche/recherchetipps/themen/der-erste-weltkrieg-in-der-schweiz/staerkung-des-schweizer-bundesstaats-und-politische-radikalisier.html. ↩
3. Tanner, “Schweizerische Nationalbank (SNB)” (HLS), https://hls-dhs-dss.ch/de/articles/013747/2015-06-29/: “Bei Ausbruch des Ersten Weltkriegs wurde die Noteneinlösungspflicht ausser Kraft gesetzt.” ↩
4. Wikipedia, “Swiss National Bank”, https://en.wikipedia.org/wiki/Swiss_National_Bank, section on history, stating that during the war the Federal Council instructed the bank to release notes of small denomination for the first time. The monetary history of this period is treated in detail in the SNB’s centenary history The Swiss National Bank 1907–2007 (Zurich 2007). ↩
5. Gerhard, “Von Gold und Silber zum Papier”, geldscheine-online.com, 2024, https://www.geldscheine-online.com/post/von-gold-und-silber-zum-papier-der-banknotenumlauf-in-der-schweiz-1907-bis-1939, with figures for 31 July 1914 and 1918. ↩
6. James, speech of 21 June 2007, https://www.snb.ch/public/publication/en/www-snb-ch/publications/communication/speeches/2007/ref_20070621_hja/publications0_en/ref_20070621_hja.en.pdf. ↩
7. Schweizerische Nationalbank, Siebenter Geschäftsbericht 1914, pp. 8–9, https://www.snb.ch/dam/jcr:4249e5f6-2667-40b9-8206-0fcd54078990/annrep_1914_komplett.de.pdf: the Swiss stock exchanges “hatten ihren Verkehr eingestellt oder auf Kassageschäfte beschränkt”. In early August the SNB asked the banks by circular to limit repayments to private persons to 200 francs on deposit accounts and 50 francs on savings accounts per case, and on 5 August the Federal Council decreed a general Rechtsstillstand until 31 August 1914. See also V. Furlan, “Zur Charakteristik des Wirtschaftsjahres 1914 in der Schweiz”, Zeitschrift für schweizerische Statistik und Volkswirtschaft (1914), https://www.sses.swiss/journal/archive/pdf/1914/1914-I-38.pdf. ↩
8. Christoph A. Schaltegger and Martin Weder, “Die Bundesfinanzen im Spiegel der Geschichte”, Die Volkswirtschaft, January 2010, https://dievolkswirtschaft.ch/de/2010/01/schaltegger-9/. ↩
9. Martin Körner and Sébastien Guex, “Kriegsanleihen”, in: HLS, version of 15 April 2010, https://hls-dhs-dss.ch/de/articles/013762/2010-04-15/. The article compares the financing of the two world wars and notes that in the Second World War recourse to the printing press remained measured because of the experience of the first. ↩
10. Ernst Baltensperger and Christoph A. Schaltegger, “100 Jahre Hyperinflation: ein Vergleich Deutschland – Schweiz”, Institut für Schweizer Wirtschaftspolitik (IWP), Universität Luzern, 2023, https://admin.iwp.swiss/wp-content/uploads/2023/11/100-Jahre-Hyperinflation.pdf. ↩
11. HLS, “Weltkrieg, Erster”, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/, section on economy and finance. ↩
12. Malik Mazbouri, “Kapitalmarkt”, in HLS, version of 18 February 2010, https://hls-dhs-dss.ch/de/articles/013913/2010-02-18/, on the Emissionssyndikat der Schweizer Banken formed in 1911 by the big banks and the cantonal banks to place and distribute public loans above a certain size. ↩
13. Swiss Federal Tax Administration, “100 Jahre Eidgenössische Steuerverwaltung – Direkte Bundessteuer”, https://www.estv2.admin.ch/jubi/steuerarten-dbst-d.htm. The page describes the war tax adopted by the Federal Assembly in April 1915 and accepted at the ballot two months later, and the war profits tax introduced by the Federal Council in September 1916 and maintained until 1920. ↩
14. Schaltegger and Weder, “Die Bundesfinanzen im Spiegel der Geschichte”, Die Volkswirtschaft, 2010, https://dievolkswirtschaft.ch/de/2010/01/schaltegger-9/, for the date of the vote. Baltensperger and Schaltegger, “100 Jahre Hyperinflation”, IWP 2023, https://admin.iwp.swiss/wp-content/uploads/2023/11/100-Jahre-Hyperinflation.pdf. ↩
15. HLS, “Weltkrieg, Erster”, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/, on the war taxes of 1915, the stamp duties of 1917 and the yield of the war profits tax. ↩
16. Swiss Federal Archives, “Stärkung des Bundesstaats und politische Radikalisierung”, https://www.bar.admin.ch/bar/de/home/recherche/recherchetipps/themen/der-erste-weltkrieg-in-der-schweiz/staerkung-des-schweizer-bundesstaats-und-politische-radikalisier.html. ↩
17. Schaltegger and Weder, “Die Bundesfinanzen im Spiegel der Geschichte”, https://dievolkswirtschaft.ch/de/2010/01/schaltegger-9/. ↩
18. Conrad Stockar, “Direkte Bundessteuer”, in HLS, version of 4 April 2006, https://hls-dhs-dss.ch/de/articles/013768/2006-04-04/, which gives the designations “neue, ausserordentliche Kriegssteuer” (1921–1932), “Krisenabgabe” (1934–1940) and “Wehrsteuer” (from 1941). Federal Tax Administration, “Steuerarten – Wehrsteuer / Direkte Bundessteuer”, https://www.estv2.admin.ch/jubi/steuerarten-dbst-d.htm, on the Federal Council decree of 9 December 1940 based on the full powers of 30 August 1939 and the renaming as direct federal tax in 1982. ↩
19. Baltensperger and Schaltegger, “100 Jahre Hyperinflation”, IWP 2023, https://admin.iwp.swiss/wp-content/uploads/2023/11/100-Jahre-Hyperinflation.pdf. See also: Schaltegger and Weder, “Die Bundesfinanzen im Spiegel der Geschichte”, https://dievolkswirtschaft.ch/de/2010/01/schaltegger-9/. ↩
20. Tobias Straumann, “Ein Kind seiner Zeit”, Die Volkswirtschaft, September 2020, https://dievolkswirtschaft.ch/de/2020/09/ein-kind-seiner-zeit/. ↩
21. Schaltegger and Weder, “Die Bundesfinanzen im Spiegel der Geschichte”, https://dievolkswirtschaft.ch/de/2010/01/schaltegger-9/; HLS, “Weltkrieg, Erster”, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/. The different figures reflect different indices and base periods. See also: HLS, “Geld- und Währungspolitik”, https://hls-dhs-dss.ch/de/articles/013748/2010-08-26/, section on the First World War. ↩
22. Straumann, “Ein Kind seiner Zeit”, Die Volkswirtschaft, 2020, https://dievolkswirtschaft.ch/de/2020/09/ein-kind-seiner-zeit/, also on the number of strikes: 34 in 1916, 136 in 1917 and 264 in 1918. ↩
23. HLS, “Weltkrieg, Erster”, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/, on real wages falling by 25 to 30 per cent and one sixth of the population receiving emergency assistance in 1918. See also: Marco Jorio, “Die Schweiz in der Krise – der Landesstreik von 1918”, Die Volkswirtschaft, October 2018, https://dievolkswirtschaft.ch/de/2018/10/jorio-11-2018/. ↩
24. HLS, “Weltkrieg, Erster”, https://hls-dhs-dss.ch/de/articles/008926/2015-05-05/, section on economy and finance. ↩
25. Historisches Lexikon der Schweiz, “Finanzplatz”, https://hls-dhs-dss.ch/textes/d/D45549.php, which states that Switzerland’s non-participation in the First World War was decisive for the rapid growth of the Swiss financial centre. ↩
26. Zentralbibliothek Zürich, “Zürcher Wirtschaft – Streiflichter”, https://www.zb.uzh.ch/de/zuerich/zuercher-wirtschaft: “Der Banken- und Finanzplatz Zürich steigt während der zwei Weltkriege in die erste Liga auf.” ↩
27. UBS, “Virtual Museum 1906–1922”, https://www.ubs.com/global/en/our-firm/our-history/virtual-museum/1906-1922.html, on the merger of 1912, the Münzhof building of 1917 at Bahnhofstrasse 45, the merger with the Aargauische Creditanstalt in 1919 and the acquisition of the Banca Svizzera Americana in 1920. ↩
28. Bernard Degen, “Schweizerische Treuhandstelle für Überwachung des Warenverkehrs”, in: HLS, version of 24 October 2013, https://hls-dhs-dss.ch/de/articles/013784/2013-10-24/. See also: Bernard Degen, “Société suisse de surveillance économique (SSS)”, in: HLS, version of 30 November 2010, https://hls-dhs-dss.ch/de/articles/013785/2010-11-30/. ↩
29. Enrico Berbenni, “Italian Offshore Wealth in Switzerland before and after WWII”, working paper, Institute for New Economic Thinking, https://www.ineteconomics.org/uploads/papers/Berbenni-Pisa-Paper.pdf. The estimates of foreign capital in Switzerland are cited from earlier literature and vary widely. ↩

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.