Abstract

Excerpts

1. Introduction

2. Economic Background

3. Political Economy

4. Historical Narrative

2. Economic Background

The initial response to the Great Depression varied greatly across countries. Switzerland, like some of the gold bloc countries (notably France), was affected later and less than others. To some extent, the relative favorable conditions in 1930 and 1931 reflected the impetus from strong capital inflows, which allowed for a substantial expansion of the money supply (see below) and supported production in domestically-oriented sectors. However, with their overvalued exchange rates, the gold bloc countries benefitted much less from the global recovery that started in 1993 and, in notable contrast with most other industrial economies, output and production stagnated from 1933.

The effect of the depressed activity in most trading partners, the relatively strong domestic demand during 1930-31, and the real appreciation associated with the maintenance of the francs’ gold parity was clearly visible in Switzerland’s trade performance. The merchandise trade deficit widened both in nominal and real terms from 1930 to 1933, and then stabilized, as Swiss exports began to recover, with the economic recovery in the United States and other countries.

In the structure and direction of trade, there was an asymmetry between exports and imports. While most exports were manufactures, imports were largely food and raw materials. Using the pre-crisis period 1925-29 as a base, the gold bloc countries were particularly important as sources of imports, while the sterling bloc and the rest of the world was relatively more important as export destinations.

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Switzerland’s adherence to the gold peg while its major trading partners devalued or applied currency controls was clearly reflected in bilateral real exchange rates. Against the British pound and the U.S. dollar, the real rate appreciated; and the real rate against the French franc also appreciated because of the more pronounced price deflation in France.

Money markets were affected by trade and capital flow fluctuations through the specie-flow adjustment mechanism. With the large capital inflows, the monetary base expanded sharply during 1930-31 despite the widening trade balance deficit. Subsequently, the reversal in speculative capital flows led to a decline in the base, although it never fell below the levels observed at end-1929. The decline was only reversed with the devaluation of the franc in 1936.