Switzerland Teaches Us a Lesson

The Swiss National Bank announced today that it was committing itself to keep the euro-franc exchange rate above 1.20 francs per euro. Here is the opening of the Bloomberg story.

The Swiss central bank imposed a ceiling on the franc’s exchange rate for the first time in more than three decades and pledged to defend the target with the “utmost determination.” The Swiss National Bank is “aiming for a substantial and sustained weakening of the franc,” the Zurich-based bank said in an e-mailed statement today. “With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.”

The euro had fallen to 1.11 francs per euro on Friday. Citing the deflationary threat to the Swiss economy of a massively overvalued franc, the Swiss central bank pledged to buy euros in unlimited quantities to meet its exchange rate target.

The euro is now trading at just over 1.2 francs per euro. The dollar has appreciated against both the euro and the franc, the dollar rising from $.787 on Friday to $.857 today.

The two-fold lesson that the Swiss are teaching us — not that it hasn’t been taught before, e.g., by FDR in 1933 – is simply this:

1) A country adopting a meaningful exchange rate peg against another currency surrenders control over its domestic money supply and its domestic price level to the monetary authority (or in case of a gold standard to the international gold market) controlling the currency against which the peg is established.

2) However, if a country wishes to increase (decrease) its domestic money supply and price level from their current levels, it can do so by pegging its exchange rate against another currency at a rate significantly below (above) the current exchange rate against the targeted currency.

It is therefore simply wrong to assert that the US or any country could not achieve any desired price-level target, because the US monetary authorities (i.e., the Fed and Treasury) could announce that they would peg the dollar to another currency at a rate significantly different from the current exchange rate. By making such an announcement in a credible fashion (as the Swiss have done) there is nothing to stop the US from achieving any desired level of prices (corresponding to a particular exchange rate peg). Monetary policy is never ineffectual except by the choice of the monetary authorities .

HT:  Lars Christensen

Update:  Marcus Nunes has an excellent post on the Swiss National Bank announcement

6 Responses to “Switzerland Teaches Us a Lesson”


  1. 1 Lars Christensen September 6, 2011 at 10:54 am

    Inspiring stuff! Thanks David…my god why is this all so similar to events during the early 30ties? Some central banks are doing the right thing. Others are failing. The we are getting quite a bit of asymmetries in monetary policies across the globe. I think that clearly will show up in differences in economic performance – as it did during the 30ties. Swedish GDP up 25% during the 30ties – Austrian GDP down 25% in the same period. No reason to worry about Sweden and Switzerland these days – they are long our of the Great Recession thanks to sound monetary policy.

  2. 2 JP Koning September 7, 2011 at 7:57 am

    Many are saying that the new peg for the CHF means that the population of legitimate stores of value has now been reduced, leaving (among a few others) gold. Gold prices should thus rise.

    Yet the Swiss National Bank’s announcement marked the precise top in the gold market, $1920. It’s now at $1800. Odd.

  3. 3 David Glasner September 10, 2011 at 9:06 pm

    Lars, I agree that there are many striking similarities between the 1930s and the current situation. Perhaps the most disturbing is the widespread acceptance of the view that monetary policy is ineffective.

    JP, As I have said on a few occasions, it is really hard to tell a story about what explains movements in the gold price, so I won’t even try.


  1. 1 The “William Tell strategy”: Aim and shoot | Historinhas Trackback on September 6, 2011 at 7:12 am
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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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