Seven - The Swiss Exception

Summary

On Tuesday morning, 23 January 1973, shortly before the foreign-exchange market opened at 9.30 a.m., the Swiss National Bank announced that it would stop buying dollars at a fixed rate and let the franc float. It also explained that this measure was only temporary and would be reversed as soon as the markets had calmed down. Yet the temporary measure turned out to be a regime shift of historical proportions: Never before had a small European country permanently adopted a flexible-exchange-rate regime. As shown in Part 1 of this study, small European states only temporarily and half-heartedly let their currencies float during the interwar years, and after 1945, it was a small state outside of Europe, Canada, that adopted a flexible-exchange-rate regime (from 1952 to 1962 and from May 1970 onward). Thus the Swiss decision to let the franc float was a new milestone in the monetary history of small European states.

From a comparative perspective, this episode raises two interesting questions: Why was Switzerland the only small European state shifting to a flexible-exchange-rate regime in 1973, and why was Switzerland's regime change not imitated by other small European countries before the European Monetary System (EMS) crisis of 1992–1993? It is striking that only in the 1990s did a flexible-exchange-rate regime became a vital option for Sweden (1993), Norway (1999), and Iceland (2001).