The Swiss Franc Shock: Floating, Negative Rates and 1978

On the morning of January 23, 1973, the Swiss National Bank (SNB) under Governing Board Chairman Edwin Stopper announced that it was ceasing mandatory purchases of United States dollars and allowing the Swiss franc to float freely on foreign exchange markets. Triggered by a torrent of speculative safe-haven capital that threatened to explode Switzerland’s domestic money supply and fuel double-digit inflation, the decision ended nearly three decades of fixed postwar parities under the Bretton Woods system. Over the ensuing six years, under Stopper and his successor Fritz Leutwiler, Switzerland became the world’s laboratory for monetarist central banking and capital-control experimentation. To tame inflation while fending off relentless currency appreciation, the SNB pioneered strict monetary-aggregate targeting (M1) alongside punitive negative interest rates (Negativzins)—commission taxes reaching 10 percent per quarter, or 40 percent per year, on non-resident Swiss franc bank deposits. Yet when a global dollar panic in the autumn of 1978 drove the franc to devastating highs near 0.75 Swiss francs per Deutsche Mark, Leutwiler’s SNB executed a dramatic policy reversal on October 1, 1978, temporarily abandoning its M1 target to enforce an exchange-rate target keeping the Deutsche Mark clearly above CHF 0.80, thereby limiting franc appreciation. ^[1]

Bretton Woods Contagion and the January 23, 1973 Float#

Although Switzerland never joined the International Monetary Fund during the Bretton Woods era out of concern for national sovereignty and banking confidentiality, the Swiss Confederation maintained a de facto fixed exchange rate anchored to gold and the US dollar throughout the 1950s and 1960s, pegged near 4.37 Swiss francs per dollar. As long as the United States maintained price stability, this fixed parity fostered an extraordinary postwar export boom for Swiss watchmakers, chemical and pharmaceutical manufacturers, precision machinery builders, and international banks. ^[2]

By the late 1960s and early 1970s, however, expansionary US fiscal and monetary policies exported severe inflationary pressures to Europe. Because the SNB was obligated to defend its dollar parity by buying surplus greenbacks with newly created Swiss francs, every wave of international currency speculation flooded the Swiss banking system with high-powered base money. In May 1971, following a massive influx of dollars, Switzerland revalued the franc by roughly 7 percent; after President Richard Nixon suspended the dollar’s gold convertibility in August 1971 and the Smithsonian Agreement realigned currencies in December 1971, the franc stood near 3.84 CHF per dollar. Even so, Switzerland’s domestic monetary base had swelled dramatically, and consumer price inflation—historically below 3 percent—surged past 7 percent in 1972 and toward nearly 12 percent by late 1973. ^[3]

The final breaking point arrived in mid-January 1973, when the Italian government introduced a two-tier foreign exchange market for the lira. Fearing an imminent chain reaction across European currencies, international investors dumped US dollars and lira to buy Swiss francs. On January 22, 1973, alone, the SNB was forced to absorb hundreds of millions of dollars within hours. Recognizing that further intervention would destroy domestic monetary control, SNB Chairman Edwin Stopper obtained Federal Council approval to stop intervening on January 23, 1973. Within weeks, the collapse of the Smithsonian parities forced the European Economic Community and Japan to abandon their dollar pegs as well, inaugurating the modern era of floating exchange rates. ^[4]

Monetarist Targeting and the 40% Negative Rate on Foreign Deposits#

Freed from the obligation to buy dollars, the SNB—guided by Fritz Leutwiler, who succeeded Stopper as Chairman of the Governing Board in May 1974, and Chief Economist Kurt Schiltknecht—became the first central bank in the industrialized world to adopt formal, pre-announced annual growth targets for the money supply. Beginning in December 1974 for the 1975 calendar year, the SNB announced an explicit target of 6 percent annual growth for the narrow monetary aggregate M1 (currency in circulation plus domestic sight deposits), underpinned by strict control of the monetary base (M0). ^[5]

The monetarist cure crushed inflation with remarkable speed, bringing Swiss consumer price inflation down from nearly 10 percent in 1974 to just above 1 percent by 1976–1977. Yet this domestic price stability came at a brutal cost during the post-oil-shock recession of 1974–1976, when Swiss real GDP contracted by more than 7 percent and hundreds of thousands of foreign guest workers left the country. Worse still for Swiss exporters, international investors viewed a zero-inflation currency backed by strict monetarist rules as the ultimate store of value. Safe-haven inflows drove the Swiss franc up by more than 70 percent in nominal trade-weighted terms between 1971 and 1978. ^[6]

To deter foreign speculators from parking “hot money” in Zurich and Geneva without abandoning domestic monetary restraint, the Federal Council and the SNB deployed an escalating arsenal of administrative capital controls and negative interest rates (Negativzins or Kommissionsgebühr) on non-resident Swiss franc bank accounts:

• Zero Interest and Reserve Curbs (July 1972): Following the pound sterling crisis of June 1972, Swiss authorities banned the payment of any positive interest on foreign-owned Swiss franc deposits and imposed a negative penalty commission of 2 percent per quarter (8 percent annualized) on increases in non-resident balances, though the surcharge was temporarily suspended after the 1973 float.
• Reintroduction at 12% Annualized (November 1974): As petrodollar recycling and global stagflation drove a fresh wave of safe-haven inflows in late 1974, Bern reinstated the negative interest levy at 3 percent per quarter (12 percent per year) on all non-resident Swiss franc deposits accumulated after October 31, 1974, exceeding CHF 100,000.
• Escalation to 10% per Quarter / 40% per Year (January 1975 – 1978): When inflows still failed to subside in January 1975, the Federal Council and the SNB raised the negative interest commission to a punitive 10 percent per quarter—an annualized confiscation rate of 40 percent—on increases in non-resident Swiss franc sight and time deposits above exemption thresholds, supplemented in February 1978 by a near-total ban on foreign purchases of domestic Swiss bonds and equities.

In practice, however, international investors and Swiss commercial banks proved adept at regulatory arbitrage. Foreign clients bypassed the 40 percent deposit tax by purchasing physical Swiss franc banknotes for storage in safe-deposit boxes, entering forward foreign-exchange swaps, or routing funds through fiduciary accounts (Treuhandkonten). While the negative interest rate compressed the volume of direct non-resident sight deposits, it failed to stop the relentless appreciation of the Swiss franc. ^[7]

The Autumn 1978 Appreciation Panic and the October 1 DEM Floor#

The currency crisis reached a crescendo in the summer and autumn of 1978. As US inflation accelerated and confidence in the Carter administration’s macroeconomic policy faltered, global currency markets experienced a disorderly flight out of the US dollar. Because Switzerland’s financial markets were small relative to global dollar flows, the franc bore a disproportionate share of the shock. ^[8]

Between May and September 1978, the US dollar plunged from roughly 1.95 Swiss francs to a historic low of 1.45 francs. Even more alarming for Swiss manufacturers was the franc’s surge against the currency of Switzerland’s largest trading partner, West Germany. Historically trading above 1.00 to 1.20 Swiss francs per Deutsche Mark, the cross rate broke through parity in 1977 and plummeted to nearly 0.75 Swiss francs per Deutsche Mark (100 DEM = 75 CHF) in late September 1978. Swiss watchmakers in the Jura arc, textile mills in eastern Switzerland, and machine-tool exporters faced immediate insolvency, while Alpine tourism collapsed as German vacationers found Switzerland prohibitively expensive. ^[9]

Confronted with the prospect of mass industrial layoffs and deflation, Fritz Leutwiler and the SNB Governing Board concluded that administrative capital controls were exhausted and that rigid adherence to the 1978 M1 growth target of 5 percent was no longer tenable. On Sunday, October 1, 1978, the SNB announced a radical regime shift: it suspended its annual money-supply target for 1979 and proclaimed an explicit exchange-rate floor against the Deutsche Mark, pledging to intervene with unlimited Swiss franc creation until the exchange rate rose “clearly above” 0.80 Swiss francs per Deutsche Mark (80 CHF per 100 DEM).

Market Impact and Legacy for Modern Central Banking#

To make the 0.80 CHF/DEM floor credible, the SNB backed its announcement with massive, unsterilized foreign-exchange interventions, purchasing billions of US dollars and Deutsche Marks directly in the spot and forward markets while driving domestic Swiss short-term money-market interest rates down to virtually zero. Reinforced a month later by President Jimmy Carter’s November 1, 1978 dollar-defense package, the SNB’s intervention broke the back of speculative franc hoarding. By early 1979, the exchange rate stabilized comfortably between 0.88 and 0.90 Swiss francs per Deutsche Mark.

The price of defending the export sector was a temporary surge in domestic liquidity: Switzerland’s M1 money supply expanded by 16.2 percent in 1978—more than triple the original 5 percent target—contributing to a modest rebound in Swiss inflation to around 4 to 6 percent during the second global oil shock of 1979–1981. Once exchange-rate calm returned, the SNB dismantled the 40 percent negative deposit commission in 1979 and resumed monetary targeting in late 1979, shifting its operational anchor from M1 to the adjusted monetary base (M0). Decades later, during the Eurozone debt crisis of 2011–2015, the SNB explicitly drew upon Fritz Leutwiler’s 1970s playbook when it imposed the 1.20 CHF/EUR exchange-rate floor in September 2011 and reintroduced negative interest rates on sight deposits in December 2014.

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. Swiss National Bank (SNB), “The Swiss National Bank 1907–2007,” Schweizerische Nationalbank Centenary Volume, 2007. Central Bank / Monetary Authority
2. Georg Rich, “Monetary Policy Under Low Interest Rates: The Experience of Switzerland in the late 1970s,” Swiss National Bank, 2001-04-11. Central Bank / Monetary Authority
3. Swiss National Bank (SNB), “Fritz Leutwiler (1924–1997): Biographical Note,” Historical Archive of the Swiss National Bank, 2015. Central Bank / Monetary Authority
4. SWI swissinfo.ch, “When the Swiss franc had to learn to float,” Swiss Broadcasting Corporation (SRG SSR), 2023-01-23. Historical & Financial Reference
5. Morten Linnemann Bech and Aytek Malkhozov, “How have central banks implemented negative policy rates?,” Bank for International Settlements (BIS Quarterly Review), 2016-03. Central Bank / Monetary Authority
6. Michael D. Bordo and Harold James, “From 1907 to 1946: A Happy Childhood or a Troubled Adolescence? (and Postwar SNB Monetary Regimes),” National Bureau of Economic Research (NBER Working Paper 14596), 2008-12. Peer-Reviewed / Academic Research
7. Swiss National Bank, “Geld- und währungspolitische Chronik — 1. Oktober 1978,” Schweizerische Nationalbank, original German-language monetary chronology, 1978-10-01. 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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