Swiss Franc — a safe haven

20.02.2020 09:04|

In a currency world, it is regarded as an oasis of stability and a favourable capital investment in times of market uncertainty. In some countries, it is most associated with mortgage loans. Those who earn in francs on a daily basis may seem lucky.

Before Franc

The Swiss Franc (CHF — Confederatio Helvetica Frank) became the official national currency in 1850. Today, it may seem unbelievable that earlier on the territory of relatively small Switzerland, various payment methods were used.

These were, among others: Basel thalers, Bernese thalers, Geneva thalers, Zurich thalers, St. Gallen thalers, guilders. Before 1850, Swiss cantons, semicantons, cities, banks and abbeys were supposed to issue as many as 8 thousand different coins and banknotes of different values and denominations.

It was not easy for the inhabitants of a country of a few million people to understand this. Therefore, regional currencies were usually used for small transactions within e.g., cantons. More serious settlements were made with money used in Germany or France.

The end of monetary diversity was announced by the Swiss Federal Constitution of 1848. It contained a provision that only the federal government shall become competent to issue money. On May 7, 1850, by virtue of a law adopted in Switzerland, the Franc came into force, the value of which at the beginning was equal to the French franc, introduced 55 years earlier.

According to a publication on the portal of the National Bank of Poland, the current Swiss currency could have been the Helvetian franc, minted in the years 1798-1803.

Union, silver and gold standards

Złote monety CHF

Switzerland, France, but also Belgium and Italy were united by the Latin Monetary Union in 1865. Its member states agreed to link their money to precious metals. One franc was to be equivalent to 4.5 grams of silver or 0.29 grams of gold.

The Latin Monetary Union formally collapsed in 1927, although in practice already several years earlier. Nevertheless, the Franc kept the standards of silver and gold until 1936.

The great economic crisis, which affected almost the whole world, led to a 30% devaluation of the Franc. Users of the world's main currencies, the US dollar, the British pound or the French franc, faced a similar problem. As it later turned out, this was the only drastic depreciation of the Swiss currency.

In 1945, when World War II ended, maintaining its military neutrality, Switzerland joined the Bretton Woods system, which regulated financial and commercial relations between the United States, Australia, Japan, Canada and Western European countries. The exchange rate of the Swiss franc was then linked to the US currency and the gold. 1 CHF was equivalent to 0.2 grams of gold ore, while 1 USD cost about 4.3 CHF.

At the same time, at the end of the war, the victorious coalition members loudly criticized the attitude of Switzerland. However, this was not about its neutrality, but rather the policy of buying by the Swiss National Bank (the acronym SNB) gold that could come from the reserves of countries conquered by the Nazis. As compensation, and in order to avoid a global boycott, Switzerland pledged to pay out 250 million Swiss francs to countries affected by World War II and to close bank accounts that were set up by German citizens in Swiss banks.

A safe haven

Bilon EUR i CHF

On the foreign exchange market, the Franc has belonged to the safe haven group for many years. In other words, these are financial instruments to which investors' capital flows during periods of market turbulence and increased risk. Apart from CHF, the so-called safe havens also include gold, Japanese yen, US dollars and government bonds.

The Franc belonged to this group for a long time due to, among other things, a strong gold plating. Until the beginning of this century, at least 40% of all issued francs were covered by precious metal reserves. And although as a result of the referendum, the Swiss abolished this limit, their currency was gaining in value quite quickly and consistently.

A significant event here was the financial crisis of 2011. — the culmination of the huge Greek debt and economic problems in the USA and Western European countries. In an atmosphere of increased risk and uncertainty, global investors created an ever-growing demand for the Franc, as one of the so-called safe havens already mentioned. As a result, the CHF/USD exchange rate first exceeded 1.10 and then 1.30.

The strength of the Franc then became a threat to the national economy. In order to avoid revaluation of its currency, the Bank of Switzerland decided to act by introducing a minimum exchange rate of 1.20 Franc for 1 Euro. The value of CHF dropped by about 8 percent compared to the 16 most popular currencies in the world, including about 9 percent compared to the US dollar.

Black Thursday

15 January 2015 — this day made the history of the world's financiers as (yet another) black Thursday.

The Swiss National Bank released its currency from the minimum rate of exchange in relation to the Euro. This led to a real panic in the markets and a sudden rise in the value of CHF. In relation to many major currencies, the Franc gained in one day and even in one hour, several dozen percent.

The bank motivated its action, among other things, by the fact that the common European currency was consistently losing in relation to the US dollar, which in turn pulled down the rate of the Franc.

This sudden change in the value of CHF impacted importers of goods manufactured in Switzerland or borrowers who took on liabilities in the Swiss currency. Tourists going to an Alpine country could also talk about substantial increases. For a change, those employed in Switzerland, who lived permanently in Italy, Austria or Germany and mainly spent their money there, gained a few dozen percent increases in one day.

In the following years and after further fluctuations in the exchange rate of the Franc in Switzerland, negative interest rates on bank deposits appeared, which meant that depositors paid extra to keep money in Swiss banks. This is how SNB attempts to reduce the value of the Franc.

Coins and banknotes

Zrolowane banknoty CHF

Currently, the Swiss currency is used in the 10, 20, 50, 100, 200 and 1000 francs banknotes. They contain images: Le Corbusier, architect and urban planner from the last century, composer Arthur Honegger, Sophie Taeuber-Arp, artist, painter, sculptor and designer, Alberto Giacomettiegio, sculptor and draughtsman, novelist Charles-Ferdinad Ramuz and Jacob Burckhardt, art and cultural historian who lived in the 19th century. Until the end of the last century, the 500-franc banknote was also in circulation, but because of its low popularity, it was replaced by a 200-franc banknote.

Swiss citizens speak French, German, Italian and Romance, depending on the region. All these languages are among the official languages of the country. The banknotes, therefore, contain information in four languages.

1 Swiss franc is divided into 100 centimetres, which also appear under names in different language regions: Rappen, rap, centesimo. Coins are currently available with denominations: 5, 10, 20 and 50 centimetres and 1, 2 and 5 francs.

CHF is legal tender not only in Switzerland but also in the Principality of Liechtenstein and the Italian enclave Campione d'Italia.

High prices, even higher wages

Banknoty i monety CHF

Salaries in Switzerland are among the highest in the world. Specifics? More than 91 percent of employees, regardless of age and education, earn more than 4,000 Swiss francs per month. Converted into American currency, it amounts to about 4 thousand USD. However, this is still not much compared to the most common payout amount in the Alpine country.

According to the Federal Statistical Office, it amounts to 6.5 thousand francs, i.e. according to the exchange rates of 17 February 2020, about 6.7 thousand US dollars. Moreover, more than 20 percent of full-time employees in Switzerland earn slightly more than CHF 8,000, which is about USD 8.6 thousand per month. In the earnings elite, a group representing about 10 percent of employees, the average exceeds CHF 53 thousand, which translates into USD 54.7 thousand per month. The data refers to gross salaries, i.e., even before the deduction of taxes and health care contributions.

High salaries are useful for Helvets when they need to do basic grocery shopping. Prices in Switzerland are significantly above the European average.

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