Swiss Electrical Trusts, the Gold Bloc, and the 1936 Franc Devaluation

On Saturday, September 26, 1936, following an emergency cabinet session in Bern triggered by France’s abandonment of its gold parity the previous day, the Swiss Federal Council instructed the Swiss National Bank (SNB) to devalue the Swiss franc by roughly 30 percent—instructing the central bank to maintain the currency’s fine gold value within a band 25.94 percent to 34.56 percent below its statutory 1929 gold parity of 290.32 milligrams of fine gold. Although Federal Councillor Albert Meyer went on national radio the following day to reassure citizens that inside Switzerland “one franc remains one franc,” the reaction on the Zurich, Basel, and Geneva stock exchanges when trading resumed was explosive. Within days, the Swiss composite equity index surged by more than 40 percent, reversing five years of suffocating deflationary contraction that had brought Switzerland’s celebrated international electrical holding trusts (Finanzgesellschaften) and major commercial banks to the brink of insolvency. ^[1]

Zurich and Basel as Global Hubs for Finanzgesellschaften#

To understand why interwar Swiss equity markets rose so high in the late 1920s and crashed so severely between 1931 and 1936, one must examine a distinctive financial institution invented by Swiss and German bankers at the turn of the twentieth century: the specialized electrical holding and financing company, known in German as a Finanzgesellschaft or Unternehmergeschäft trust. Beginning in 1895–1896, major electrical equipment manufacturers—such as Allgemeine Elektricitäts-Gesellschaft (AEG) and Siemens in Germany and Brown, Boveri & Cie (BBC) in Baden, Switzerland—discovered that municipal utilities and tramway operators across Europe and Latin America lacked the capital to purchase dynamos, turbines, and power grids outright. ^[2]

To solve this bottleneck, equipment manufacturers teamed with Swiss universal banks (led by Schweizerische Kreditanstalt in Zurich and Schweizerischer Bankverein in Basel) to incorporate specialized holding trusts in Switzerland. Leveraging Switzerland’s political neutrality, stable gold-backed currency, low cantonal holding-company taxes, and the deep appetite of domestic and foreign rentiers for Swiss franc bonds, these Finanzgesellschaften issued their own common shares and long-term Swiss franc debentures on the Zurich, Basel, and Geneva bourses. They then used the capital to acquire equity stakes in, and extend equipment-construction credits to, electric power plants and distribution grids in Germany, Italy, France, Spain, Eastern Europe, and South America.

The four titans of this sector dominated interwar Swiss stock-exchange turnover: the Bank für elektrische Unternehmungen (Elektrobank), founded in Zurich in 1895 with AEG and Credit Suisse backing; the Schweizerische Gesellschaft für elektrische Industrie (Indelec), founded in Basel in 1896 alongside Siemens; Motor-Columbus AG für elektrische Unternehmungen in Baden, created in 1923 by merging BBC’s Motor AG (1895) with Columbus AG (1913) to finance hydroelectric networks from the Swiss Alps to Buenos Aires; and the Geneva-based Société Financière Franco-Suisse pour l’Industrie Électrique (1898). Having survived the post-World War I currency collapses through capital write-downs and dollar- and franc-denominated restructurings in the early 1920s, the Swiss electrical trusts led a roaring bull market between 1924 and 1930. As archival data compiled by financial historian Luciano Segreto demonstrates, combined shareholdings and advances at Elektrobank and Motor-Columbus reached their interwar nominal peaks in 1930–1931—exceeding CHF 240 million at Motor-Columbus and CHF 170 million at Elektrobank—while Swiss equity indices more than doubled between 1924 and early 1930. ^[3]

The 1931 Currency Trap and German Exchange Controls#

The structural vulnerability of the Swiss Finanzgesellschaften—and of the Swiss big banks that held their shares and underwrote their credits—was a classic balance-sheet currency mismatch. While the holding companies owed fixed dividends and bond interest in hard Swiss francs in Zurich and Basel, their underlying operating utilities collected electricity tariffs in German Reichsmarks, Italian lire, British pounds, Argentine pesos, and Eastern European currencies.

In the summer of 1931, that mismatch turned catastrophic. Following the collapse of Austria’s Creditanstalt in May 1931 and the failure of Germany’s Danatbank in July 1931, Berlin imposed strict foreign-exchange controls (Devisenbewirtschaftung) and negotiated the German Standstill Agreements (Stillhalteabkommen), freezing billions of Reichsmarks in short-term credits and blocking the free transfer of dividends and interest out of Germany. Two months later, on September 21, 1931, the United Kingdom abandoned the gold standard and allowed the pound sterling to depreciate by roughly 30 percent, followed in April 1933 by President Franklin D. Roosevelt’s suspension of U.S. dollar gold convertibility and a subsequent 41 percent dollar devaluation. ^[4]

For Swiss electrical holding companies, the twin blows of foreign currency depreciation and Central European transfer moratoria were devastating. Utilities in Germany, Italy, and Latin America could no longer remit hard-currency dividends to Zurich, Baden, or Basel, yet trusts like Indelec and Motor-Columbus were forced to maintain high ratios of locked-in short-term credits just to keep their foreign operating subsidiaries afloat. Between 1931 and 1936, the balance-sheet value of shareholdings and credits at Elektrobank, Indelec, and Motor-Columbus contracted by 25 percent to 35 percent, dividend payments were slashed or suspended, and the market prices of Finanzgesellschaft equities on the Zurich and Basel exchanges plunged by more than 60 percent from their 1930 peaks. ^[5]

The Gold Bloc Deflationary Vise (1933–1936)#

Rather than following Britain and the United States off gold, the Swiss Federal Council and SNB Chairman Gottlieb Bachmann joined France, Belgium, the Netherlands, Italy, and Poland at the London Economic Conference in July 1933 to form the “Gold Bloc”—a coalition of creditor nations pledged to defend their pre-Depression gold parities at all costs. Orthodox Swiss monetary policymakers feared that devaluing the franc would ignite imported inflation, destroy Switzerland’s reputation as an international safe haven for foreign flight capital, and Trigger social conflict. ^[6]

Because the Swiss franc was now overvalued by 30 to 40 percent against the sterling and dollar areas, Bern attempted to restore export competitiveness through “internal deflation” (Preisabbau): cutting federal and cantonal civil-service salaries, forcing down industrial wages, restricting new hotel and factory construction, and maintaining punitive real interest rates whenever gold outflows threatened the SNB’s reserves. The economic consequences were ruinous. Watchmaking exports from the Jura and textile exports from eastern Switzerland collapsed by more than half; Alpine hotel occupancy fell below 30 percent; registered unemployment climbed from under 10,000 in 1929 to a peak of 124,000 in January 1936; and five of the eight major Swiss commercial banks—most notably the Schweizerische Volksbank, Banque d’Escompte Suisse (which closed in April 1934), and Basler Handelsbank—had to undergo painful judicial debt moratoria, federal bailouts, or capital reductions of up to 75 percent after their frozen German and Central European assets turned illiquid. ^[7]

The September 1936 Devaluation and the 40% Equity Surge#

By early 1936, the Gold Bloc was disintegrating. Italy had effectively exited through strict exchange controls in 1934, Belgium had devalued the belga by 28 percent in March 1935, and Poland imposed currency restrictions in April 1936. When Léon Blum’s Popular Front government in France negotiated the Tripartite Monetary Agreement with the United States and Britain and informed Bern on September 25, 1936, that Paris was devaluing the French franc, the Swiss Federal Council recognized that remaining the last isolated gold-parity island in Europe would destroy Swiss industry. ^[8]

Meeting on Saturday, September 26, 1936, the Federal Council invoked emergency decree powers to suspend the Swiss National Bank’s obligation to redeem banknotes in gold coin and ordered the SNB to devalue the franc by an average of 30 percent (creating a book revaluation profit of CHF 538.6 million on the SNB’s gold stock, which was placed into an Exchange Equalization Fund). The Netherlands followed suit hours later, bringing the Gold Bloc to an end. ^[9]

The financial market response was immediate and dramatic. Far from triggering capital flight, the removal of devaluation uncertainty prompted an instantaneous reflux of gold and hoarded capital into Swiss banks, enabling the SNB to cut its discount rate to 1.5 percent. On the Zurich, Basel, and Geneva stock exchanges, shares of export manufacturers, banks, and international holding trusts—whose foreign-currency assets and dividends in dollars, pounds, and pesos were suddenly worth 43 percent more when translated into devalued Swiss francs—skyrocketed, lifting Swiss equity indices by more than 40 percent before the end of 1936 and launching a robust industrial recovery that lasted until the outbreak of World War II.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. Luciano Segreto, Financing the Electric Industry Worldwide: Strategy and Structure of the Swiss Electric Holding Companies, 1895–1945, Business and Economic History, 1994. Historical & Financial Reference
2. Jean-Pierre Roth, Opening Remarks, Conference 'Seventy Years After: The Final Collapse of the Gold Standard in September 1936', Swiss National Bank, 2006-12-15. Central Bank / Monetary Authority
3. Michel Peytrignet, Swiss Monetary Policy under a Flexible Exchange Rate Regime: Monetary Targets in Retrospect, Swiss National Bank Quarterly Bulletin, 2003-06. Central Bank / Monetary Authority
4. Michael D. Bordo, Helge Berger, and Harold James, Historical Macroeconomics and Monetary Policy, National Bureau of Economic Research Working Paper 12491, 2006-08. Peer-Reviewed / Academic Research
5. Enea Baselgia and Isabel Z. Martínez, A Safe Harbor: Wealth-Income Ratios in Switzerland over the 20th Century and the Role of Housing Prices, ETH Zurich Research Collection, 2020. Peer-Reviewed / Academic Research
6. Daniel Verdier, Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870–1914, International Organization, 1998. Peer-Reviewed / Academic Research
7. Chronicle of Monetary Events, Swiss National Bank. Central Bank / Monetary Authority
8. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
9. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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