The Swiss Franc Surge Is a Sad Story of Global Growth That Never Happened

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"The sole use of money is to circulate consumable goods" - Adam Smith, The Wealth of Nations, p. 370

Back in the late 1970s, realistically the last time the world's major monetary authorities engaged in economy-sapping "competitive" currency devaluations in unison, Switzerland was, like it is now, the responsible party. Unwilling to do that which was and always is inimical to economic growth, its central bank communicated to the markets a plan to protect the Swiss franc.

The results were predictable, yet at the same time counter to so much of the money commentary today that amounts to little more than naïve mysticism. To protect the franc the Swiss National Bank didn't contract "supply" of francs so as to limit their capacity for "multiplication" (yes, even some smart gold standard types comically believe money multiplies once in circulation); rather supply of francs surged 19.7% in 1978 alone. Dollar growth during the same year was 8.2%.

Commentators who should know better frequently write about "money printing" that allegedly pushes money into circulation, central bankers tragically presume that creation of "money" is the equivalent of economy-boosting wealth creation, but the greater truth is that money is decidedly not wealth. As my upcoming book, Popular Economics, repeats with annoying regularity, money is solely a measure of wealth. So if the desire is to foster a surge of "money supply," the surest way to do it isn't to devalue the currency as so many central bankers and mystics believe, rather it is to protect the currency's value at all costs.

To see what is so basic up close, readers need only pick up Adam Fergusson's When Money Dies, about Germany's post-WWI hyperinflation. Good money pushes out bad as logic would dictate, so while no serious person would work or produce for German marks back then, and while the offering of marks wasn't a good way to receive goods in return, the U.S. dollar could buy most anything in Germany. The mark was freely floating downward, the dollar had a stable definition in terms of gold, so readers can probably guess which currency was actually attractive to buyers and sellers back then as a medium of exchange.

More modernly, historically expert money "printer" Argentina has a population of 41 million, while responsible money issuer Switzerland has a population of 8 million. But does anyone want to guess which country's currency is in greater supply? If readers were selling an important asset, would any take Argentine pesos over Swiss francs in return for said asset? Currencies that are credible are heavily demanded and in abundant supply. This is the opposite of what most quantity theorists presume about inflation, it's totally counter to central bank efforts to "goose" money supply through devaluation, but is nonetheless true. Money supply, as Arthur Laffer long ago noted, is demand driven. Good money is what producers demand. End of story.

This is important in light of the Swiss National Bank's correct decision to let the franc rise against the euro and other currencies. In a prosperity-inducing replay of the 1970s, Swiss monetary officials have properly turned their noses up to the actions of global monetary authorities focused on devaluation. In possession of a clue, they'll protect the franc, and with currencies like the euro in decline (the euro fell 12% versus gold in 2014 alone), the only way to maintain the franc's value is to let it rise against the weak.

This decision will ultimately bode well for Switzerland's economy. Lest we forget, there are no companies and no jobs without investment first. Furthermore, when investors commit capital in Switzerland, they're generally buying future income streams denominated in francs. That those income streams will not be devalued sends a very positive message to the investors who create all the jobs that it's a great deal less risky to invest in Switzerland.

As for the silly argument that a strong franc will sap the ability of Swiss producers to export, those who believe what is false need only consider Japan. Despite the yen's substantial rise against the dollar in the ‘70s and ‘80s, Japanese exports to the U.S. surged. Furthermore, if devaluation were the path to prosperity and export bliss, then it would certainly be true that Switzerland would be poor, while Argentina and Zimbabwe would be exceedingly rich.

Beyond that, as is well known now about the Swiss National Bank's decision to let the franc rise, some major investors were caught on the wrong side of the franc's burst upward. Supposedly more than a few asset managers and hedge funds will not survive the franc's lurch. This is sad, but what's more important is that all of this could have been avoided. It's the inevitable result of floating money values.

What's tragic is that in a normal world money wouldn't float. Too often forgotten is the historical tautology that money is once again a measure. Nothing more, nothing less. Actual wealth is in our heads, it's what we produce, it's what we help produce, while money is what we use to exchange the fruits of our labor for what we don't have.

Money's sole purpose is to make it possible for the proverbial baker of bread to transact with the vintner even if the baker is a teetotaler. When we produce we're demanding "money," but what we're really demanding are the goods that money can be exchanged for.

This is why gold has historically been used to define money. Since money's purpose is to facilitate the exchange of real wealth, and to make it possible to invest in the creation of future wealth, it's most useful if it's stable in value. Gold gave it that stability until 1971, when President Nixon sadly delinked the dollar from gold, and in doing so, set the currencies of the world afloat.

In a world of floating money, Swiss officials have more than most sought to maintain some semblance of what prevailed before money was neutered, and subsequently deprived of its only purpose. What about the hedge fund and asset manager blowups? They're merely the unfortunate seen. The far more tragic unseen is what the doubtless smart and talented employees of those financial firms would be doing if the dollar were still pegged to gold, and the rest of the world's currencies pegged to gold through the dollar.

Unseen are the cancer cures that were never developed thanks to so many great minds having migrated toward the trading of chaos unleashed by floating money values, not to mention the investments that never took place at all thanks to floating money having rendered investment in the software, transportation and entertainment ideas of the future all too risky. Floating money values haven't just reduced the frequency of commercial "leaps" (there are no entrepreneurs without capital) necessary for progress, they've also greatly shrunk the number of brilliant minds taking the leaps in the first place.

A Bloomberg View columnist asserted last week that "Switzerland Ambushes the Global Economy" in response to the Swiss National Bank's correct decision to not devalue the earnings and investments of Switzerland's citizenry. Mark Gilbert, the author of the piece, missed by many miles. The "ambush" of the global economy is the absence of monetary policy that floating money values represent.

The Swiss central bank didn't so much "ambush" the global economy as much as its actions were a sad, but healthy reminder of the staggering amounts of growth and progress that have been lost since 1971. Let's hope the world's pols finally see what comically deluded central bankers are so blind to. Floating money is the massive ball-and-chain suffocating global economic growth. It's time we realize this while returning money to its sole, measuring rod purpose.


John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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