The first Swiss franc was issued 174 years ago, but the foundations of one of the world's most stable currencies were laid in the early 20th century. The Swiss franc is, along with gold, one of investors' favorite assets.
When economic storm clouds gather and signs of a financial thunderstorm loom, investors invariably turn to safe-haven assets. In the realm of currencies, the US dollar and the euro are often top of mind. Other notable examples include the Japanese yen, the Chinese yuan, the British pound, the Australian dollar, and the Canadian dollar.
These assets are distinguished by their ability to provide stability and security, safeguarding against significant losses. The Swiss franc, in particular, stands out as a preferred choice for investors, sharing this highly-regarded position with gold. This reputation has been hard-earned, thanks to the franc's robust performance in relation to inflation.
The Swiss franc in retrospect
The first Swiss franc was issued in 1850. However, it wasn't until 1907 that the groundwork for a stringent monetary policy was established, laying the foundations for what would become one of the world's most stable currencies. From that point on, the currency adhered strictly to the gold standard. So resilient was this policy that during World War I—a conflict in which Switzerland remained neutral—the Swiss franc emerged as one of the world's strongest currencies, earning the status of a safe-haven asset, which it retains to this day. It's important to note that Switzerland has upheld an official policy of neutrality in armed conflicts since 1815, aligning with the conclusion of the first major international war.
The gold standard was maintained until 1976, when the Swiss National Bank (SNB) decided to transition to flexible exchange rates. Throughout this extended period, both the currency and the nation have, like the rest of the world, faced complex challenges. These situations compelled the Central Bank to make critical decisions to ensure the stability of the Swiss franc.
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What distinguishes it from other currencies?
The best way to measure the stability of any currency is to observe its purchasing power and the impact of inflation over the years. As time passes, inflation erodes value, meaning more money is required to buy the same goods. For example, if 10,000 euros were needed to buy a new car in 2010, today it might take 15,000 euros. This is one way to measure the stability of the euro.
Because of this, savers and investors aim primarily to outpace inflation and ensure the stability of their money. There are various assets designed to offer greater stability to savings, ensuring that the purchasing power of those 10,000 euros in 2010 does not diminish as much as it would if left uninvested.
If you look at the data, you can see that 100 francs from 1956 would now be equivalent to 454.46 francs. In other words, what you could buy with 100 francs in 1956 now requires 454.46 francs. This becomes particularly relevant when compared to the performance of the U.S. dollar, the world's primary store of value. The American currency has depreciated more than twice as much against the franc over this period: 100 dollars in 1956 is equivalent to 1,120.91 U.S. dollars in 2023. In other words, a good that cost 100 dollars in 1956 now requires 11 times that amount to purchase. In summary, a dollar from over 70 years ago has lost more than 11 times its value, compared to the franc, which has lost about 4.5 times its value.
But how can a country with only 0.1% of the world's population have the strongest long-term currency?
There are multiple reasons for this, but perhaps the most significant factor is that the Swiss franc is the ultimate safe-haven currency, highly sought after in times of economic and/or political uncertainty.
For illustration, consider the strength of the franc during the last two global crises: after the burst of the tech bubble in 2000, and since the onset of the 2008 financial crisis. In both instances, the Swiss currency appreciated by around 70% in the 3-4 years following the start of the crisis.
Why do investors seek a safe haven in Switzerland?
There are many and varied reasons why the Swiss franc is one of the most stable currencies. Here are the most important ones:
- Proven legal, financial, and political stability.
- Stability of inflation and interest rates relative to its peers.
- One of the highest levels of value reserves in the world, despite being a country with a very low population. Extremely low level of public indebtedness.
- A highly productive and diversified economy, with significant contributions from high-value sectors such as technology, pharmaceuticals, luxury goods, biotechnology, and more.
