Superb speech by Ernst Baltensperger. He has written a book on history of Swiss Franc commissioned by SNB.
Some bit on importance of history and econ history:
The history of a country – and of its population and institutions – provides us with potential lessons for the present. But that is not the only reason why it is of interest to us. When we bear in mind the multitude of ways in which the present reflects events of the past it becomes clear that history is far more fundamental. Decisions by our parents, grandparents and their ancestors, along with all the events of their own times which they could not influence, are responsible for the world in which we live today. In this way, present and past are inseparably linked. The former cannot really be understood without knowing the latter. Seen from this perspective, studying history should be a necessity – something that goes without saying.
Yet, above and beyond this, it is legitimate and reasonable to pose the question as to what specific insights and lessons for modern life can be derived from our study of history. Certainly, the world moves on continually and the problems of the present always differ in one way or another from those of the past. Nevertheless, many aspects remain more or less unchanged over longer periods of time, and many questions recur in slightly altered forms in later periods. In this sense, we can certainly learn from history.
Very well put. This time is never really different as emphasized by Reinhart/Rogoff duo.
He covers following areas:
- The vital importance of political and financial stability for the rise of the Swiss franc
- Monetary, financial and economic stability are interwoven
- Metal-based versus paper-based currencies
- Competition and monopoly in money and currencies
- The importance of monetary stability as the main target of central bank policy in a paper money system
- The importance of central bank independence from politics and social interest groups
- Fixed versus flexible exchange rates, and the value of monetary sovereignty
The one on Competition and monopoly in money and currencies is interesting. Swiss Franc was issued in 1850. Before CHF, banks competed and issued own currencies. This did not really pick up because of multiple sources issuing multiple currencies. CHF was introduced but there was no real central agency issuing these notes. SNB came up only in 1905. Despite a CHF, the usage did not pick up:
This phase came to an end with the introduction of the new Swiss franc in 1850. From 1850 to 1881, the Swiss currency system – which now featured one common, dominant currency, the new Swiss franc – was characterised by competition between independent note-issuing banks (both private and public). Until the Banknote Act of 1881, however, the banking system remained largely unregulated. Measured by the criteria of financial and currency stability, this competition between issuing banks while banknotes were being freely issued did not have any negative consequences. In this respect, therefore, it can be judged to have been successful. Nevertheless, if we consider that, for a long time, banknotes played a relatively minor role in the Swiss payment system and that the resulting monetary system was characterised by major shortcomings as regards efficiency, and, in particular, the acceptance and reciprocal recognition of banknotes, this conclusion is put in perspective. The shortcomings meant that there was a tendency for common quality requirements to be introduced, either through regulatory interventions or via cartel-type agreements (‘concordats’, compacts).
From 1881, statutory requirements placed severe restrictions on the reserve, liquidity, encashment and issuance policies of banks. Until 1905, a policy of limited banking freedom prevailed. This featured a system with a joint currency – now compulsory – as well as heavily regulated banknote transactions, but as yet no state banknote monopoly. Although the banknote ‘homogenisation’ achieved through this regulation promoted the acceptance of banknotes as well as the efficiency of the monetary and payment system, competition was no longer in a position to carry out its disciplinary function in this environment. As a result, too many banknotes were issued and the monetary and currency system was weakened. This was the situation which finally led to the establishment of the Swiss National Bank and the centralisation of banknote issuance.
Ultimately, therefore, the cause of the move towards centralisation was the pursuit of efficiency and stability – consistent with the idea of money as a natural monopoly. Although the system based on competition worked, it displayed shortcomings in terms of efficiency. Consequently it gave rise to regulatory interventions which, in their turn, destroyed the foundation for the disciplinary effect of competition and finally led to centralisation.
The experience of having competition in currency issuance is unlike what Austrian school would suggest – Doing away with central banks (Fed in particular). Even with a single accepted currency but issued my multiple banks did not work.
At the last he touches on Eurozone crisis and compares it to Latin Mon Union (which is seen as the precursor to Eurozone):
In this situation, the maintenance of monetary sovereignty is to be recommended as a valuable good, an option that should never be relinquished thoughtlessly or frivolously. In principle, even where fixed exchange rate commitments are entered into, such sovereignty allows for a return to an autonomous, self-determined monetary policy course at any time. The dangers and risks that can be linked to the premature surrender of monetary sovereignty to a higher community level – without prior credible agreement on joint political and economic values – have been clearly documented by the current confusion in the euro area.
This is clearly seen if we compare the European Monetary Union of today with the Latin Monetary Union of the 19th century. At that time, there was no surrender of monetary sovereignty at union level. Both the definitions and the statutory basis of the participant nation currencies remained national. The union was no more than an international agreement for the joint adoption of a given metal currency standard. In principle, members could leave and return to a different currency policy at any time, and this was relatively easy to do – very unlike the situation in the present currency union in Europe.
As Prof Eichengreen has argued at several places there is nothing like Eurozone in history and perhaps unlikely to be in future as well..
