Is the Swiss Franc (CHF) a strong currency and what does it mean

A Short History of the Swiss Franc

Origins and Adoption (1850)

Before the mid-19th century, Switzerland’s money system was a patchwork of local currencies – one could even pay with coins nicknamed “fat men” or “horses” in various cantons. This changed after Switzerland became a federal state in 1848. The new constitution gave the central government sole authority to issue money, paving the way for a single national currency. In 1850, the Federal Assembly passed the first Coinage Act, formally introducing the Swiss franc as the country’s official currency and replacing the multitude of regional coins and notes. The Swiss franc was initially set at par with the French franc (backed by 4.5 grams of silver) to ensure stability and ease of exchange. The creation of a unified currency not only simplified trade and finance, but also became a unifying symbol for the young Swiss nation.

Stability and Neutrality

Over time, the Swiss franc earned a reputation as a bastion of financial stability and neutrality. Switzerland’s longstanding policy of political neutrality, coupled with prudent fiscal and monetary management, underpinned the franc’s strength. The Swiss Central Bank (later the Swiss National Bank, established in 1907) pursued a conservative, low-inflation strategy that kept the currency remarkably stable. Unlike many countries, Switzerland avoided bouts of hyperinflation or currency collapse, even as wars and crises raged around it. By the 20th century, the Swiss franc had become synonymous with reliability – a safe and stable currency trusted both at home and abroad as a symbol of the country’s economic soundness and neutrality.

From Gold Standard to Modern Monetary Policy: Major Shifts

Despite its stable profile, the Swiss franc has undergone several important shifts aligned with global monetary changes:

• 1936 – Sole Devaluation: The franc remained on the gold (and silver) standard well into the 20th century. During the Great Depression, after gold-backed currencies like the British pound and U.S. dollar were devalued, Switzerland eventually followed suit. In September 1936 the Swiss franc was devalued by about 30% – its first and only devaluation – as a response to worldwide economic pressures. This move marked the end of the strict gold parity that had defined the franc until then.
• 1945–1970 – Bretton Woods Era: After World War II, Switzerland joined the Bretton Woods system in 1945, pegging the franc’s value to the U.S. dollar along with other Western currencies. Under this system the franc’s exchange rate was fixed (at CHF 4.30521 per USD) and remained stable for decades. Switzerland, while not an original Bretton Woods signatory, maintained this fixed parity until the early 1970s when the Bretton Woods system collapsed and major currencies shifted to floating rates.
• 2000 – End of the Gold Standard: Switzerland was among the last countries to formally sever its currency’s link to gold. For many years, Swiss law required the franc to be at least 40% backed by gold reserves – a testament to the country’s sound money principle. This link endured long after most nations left the gold standard. In 1999, a public referendum approved a constitutional change to drop this requirement, and as of May 2000 the franc became a pure fiat currency (no gold backing). This shift allowed the Swiss National Bank (SNB) more flexibility in monetary policy, marking the end of an era in which gold literally anchored the franc’s value.
• 2011–2015 – Modern SNB Interventions: In the 21st century, the franc’s very strength posed challenges. Amid the eurozone debt crisis of 2010–2011, panicked investors poured into Swiss francs, driving its value sharply higher as a safe haven. Fearing an overvalued franc would hurt Switzerland’s economy, the SNB took the extraordinary step of capping the franc’s exchange rate at 1.20 CHF per euro in September 2011, pledging to buy foreign currency “in unlimited quantities” to defend that limit. The SNB also pushed interest rates to zero and eventually negative territory – a radical policy aimed at discouraging speculative inflows. In January 2015, however, the SNB suddenly abandoned the currency cap (after determining it was unsustainable as the euro weakened). The franc immediately surged by about 30% against the euro in minutes, before settling at a higher level (Swiss franc - Wikipedia). This episode, sometimes dubbed “Francogeddon,” highlighted the franc’s global safe-haven role and the lengths to which Swiss policymakers would go to moderate its value.

The Swiss Franc as a Safe-Haven Currency

In global finance, the Swiss franc is renowned as a safe-haven currency – a financial shelter in times of crisis. Investors tend to flock to the franc during periods of uncertainty, expecting it to hold its value or even appreciate when other assets falter. For example, during the late-2000s European debt turmoil, the franc consistently strengthened as nervous capital sought stability (Swiss Franc (CHF) - Overview, History, Monetary Policy). This safe-haven appeal is rooted in Switzerland’s political and economic stability: the country’s neutrality, sound banking system, and solid public finances inspire confidence that the franc will remain secure. Indeed, the Swiss franc is often mentioned in the same breath as the U.S. dollar and Japanese yen as a go-to refuge for investors in volatile times. However, despite its reputation, the franc is not as widely used as a reserve currency by central banks – in part because of Switzerland’s relatively small economy and the SNB’s active efforts to prevent excessive appreciation. Still, as a store of value and symbol of financial safety, the Swiss franc occupies a unique and influential place in the world’s monetary order, illustrating key economic principles of trust, stability, and the political dimensions of monetary policy.

Switzerland generally does not “operate at a loss” under normal conditions. In fact, the Swiss government usually runs balanced budgets or small surpluses, thanks in part to a constitutional “debt brake” rule that limits deficits. For example, after incurring deficits in 2020–2021 due to pandemic spending, Switzerland’s fiscal balance swung back to a surplus of about 1% of GDP in 2022. Preliminary data indicate another surplus in 2023 – roughly CHF 4.4 billion for the general government – even without any profit transfer from the Swiss National Bank (SNB) that year (Public finances). By 2024 the federal budget was essentially balanced (a tiny CHF 80 million deficit on a budget of around CHF 80 billion). In short, tax revenues have been sufficient to cover expenditures in recent years, often yielding a modest surplus. Normal tax income usually exceeds or meets spending, with shortfalls only arising during extraordinary events (like COVID-19) or due to deliberate one-off outlays. Historically, Switzerland had balanced budgets and only began running larger deficits in 2020 with the COVID shock. As pandemic costs waned, the budget returned to balance, indicating that under typical circumstances tax revenues do cover government spending. Even looking ahead, projected deficits are relatively small (on the order of CHF 2–3 billion annually, or well under 1% of GDP) and reflect new priorities (e.g. higher defense and pension costs) rather than structural insolvency.

Financing of Deficits: Bonds and Investors

When Switzerland does run a deficit (or needs to refinance debt), it issues government bonds and short-term bills to raise funds. The Swiss Confederation’s finance agency regularly auctions these bonds and Treasury bills, with the SNB acting as the Confederation’s banker to conduct the auctions. Investor demand for Swiss government debt is strong, and Swiss federal bonds have historically even carried negative yields (investors effectively paying Switzerland to hold their money) due to the country’s safe-haven status. The bonds are typically purchased by private and institutional investors, such as banks, insurance companies, investment funds, and pension funds. In fact, when the government issued its first green federal bond in 2022, most of it was snapped up by domestic investors (led by insurers, funds and pension funds) via banks (Green Bonds) – the same pattern holds for conventional government bonds. This means the market – not the central bank – finances the Swiss government’s debt. Switzerland’s credit rating is excellent (AAA), and its debt is viewed as very safe, so the government has no trouble borrowing modest amounts. Overall, tax revenues fund the bulk of expenditures, and any deficit is covered by bond issuance to investors.

SNB’s Role in Government Debt

The Swiss National Bank does not directly finance government spending. By law, the SNB is prohibited from buying newly issued government debt or lending directly to the Treasury. It can purchase Swiss government bonds only on the secondary market, and its holdings are minimal. As of end-2023, the SNB held just CHF 840 million in Confederation bonds – a mere 1.2% of all outstanding federal bonds. This tiny share shows that the SNB’s balance sheet is not relied upon to absorb government debt. (For comparison, many other central banks hold much larger portions of their national debt.) The SNB’s monetary policy in recent years has focused on forex interventions and maintaining price stability, rather than quantitative easing of domestic bonds. In sum, virtually all Swiss public debt is held by the private sector (domestic and international investors), and the SNB’s involvement in funding the government is negligible. The central bank acts as a facilitator (banker) for issuing and settling government securities, but it does not serve as a buyer of last resort for government bonds under normal circumstances.

Switzerland’s Gold Standard Referendums: 2000 and 2014

2000 Referendum: Abandoning the Gold Standard

In 1999, Swiss voters approved a constitutional revision that formally removed Switzerland’s requirement to back 40% of the Swiss franc with gold. This was part of a broader modernization of the constitution and monetary policy. The Swiss National Bank (SNB) and the Federal Council supported the change, arguing that the gold backing was an outdated constraint that limited monetary flexibility. The shift allowed the SNB to manage the franc as a fully fiat currency, aligning Switzerland with global financial norms.

A key motivation was Switzerland’s large gold reserves, which could be better utilized if not legally tied to currency issuance. The SNB later sold about half its gold reserves, using proceeds for public funds. The public backed the change (59% Yes) due to trust in the SNB, global trends away from gold standards, and assurances that Switzerland’s gold reserves would remain substantial. This referendum officially ended Switzerland’s gold-backed currency era, allowing for a more adaptive monetary policy in future economic crises.

2014 Referendum: The Failed “Save Our Swiss Gold” Initiative

In 2014, a Swiss People’s Party (SVP)-led initiative sought to reinstate a form of gold backing by requiring the SNB to:

1. Hold at least 20% of its assets in gold (up from ~7-8%).
2. Repatriate all Swiss gold held abroad.
3. Permanently ban the SNB from selling gold.

Supporters argued this would protect Switzerland’s wealth and prevent excessive fiat currency expansion. However, the SNB and government strongly opposed the measure, warning that it would restrict monetary policy, force costly gold purchases, and limit the SNB’s ability to stabilize the economy. Economists and business leaders also feared that rigid gold requirements could harm Switzerland’s financial flexibility.

Swiss voters overwhelmingly rejected the initiative (77% No), affirming their trust in the current fiat system and the SNB’s independence. This result cemented Switzerland’s departure from the gold standard, ensuring that gold remains an asset rather than a fixed monetary foundation.

Conclusion

The 2000 referendum officially ended the Swiss gold standard, while the 2014 vote reaffirmed that decision. Both votes highlight Switzerland’s pragmatic economic approach—prioritizing monetary flexibility and stability over gold-backed constraints, while still maintaining substantial gold reserves as part of its financial security.