Swiss Franc History, 1970s: Due to US Stagflation CHF Strengthens Massively

An extract from history:

 Jimmy Carter beat the incumbent Gerald Ford in the presidential election of November 1976, an election dominated by concerns about high unemployment and high inflation. The country had gone through a sharp recession the previous year and the unemployment rate still averaged almost 8 percent. Although inflation had declined to 5 percent in 1976, less than half its 1974 level, it was almost the same as was considered embarrassing in 1969.

Stagflation — the lethal combination of high unemployment and high inflation — reflected a change in consumers’ behavior. The “buy now, pay later” philosophy adopted by those with jobs overwhelmed the spending restraint of the unemployed, resulting in higher prices. Economists had to rework their thinking to take account of Milton Friedman’s warning that gains in employment would disappear once inflationary expectations caught up with reality.

Volcker understood the power of expectations. At his very first FOMC meeting on Aug. 19, 1975, he had warned the optimists on the committee not to be encouraged by the projections “for reduced inflation emanating from some econometric models,” which he said “did not take adequate account of the important factor of expectations.”

The need to consider the inflationary consequences of monetary policy even with unemployed resources wasn’t yet the conventional economic wisdom. Keynesian economic models ignored inflationary expectations, but the market for gold bullion did not. By 1978, gold signaled renewed concerns with inflation and on July 28 the price passed its previous peak of $197.50, and would trade as high as $243.65 later in the year. The foreign-exchange market noticed. (source Bloomberg)


On the other side of Atlantic, there were two countries that had different views:

  • Wage increases remained relatively small, the US price-wage-spiral was not copied.
  • Both Switzerland and neighboring Germany in the 1920s, the Swiss developed an aversion against inflation and financial repression.
  • Together with Germany, the Swiss pioneered Friedman’s monetarist theories in the 1970s: The Swiss National Bank (SNB) allowed money supply to rise only gradually, using tools like minimum reserve requirements for banks and relatively high real interest rates.

In August 1978, the US currency fell to new lows against the German mark and even further down against the Swiss franc, “a fresh vote of no confidence in America”. “On Oct. 30, 1978, one dollar purchased 1.72 German marks, an all-time low, representing a decline of more than 20 percent in a year. “

Comparative Daily Exchange Rates: Relative to US Dollar

(see more posts on US dollar, )
USD-DEM-CHF 1977-1979

USD-DEM-CHF 1977-1979, © 2012 by Prof. Werner Antweiler, University of British Columbia - Click to enlarge


<— Back to history overview

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
See more for 1.) CHF History

Permanent link to this article:

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This site uses Akismet to reduce spam. Learn how your comment data is processed.