A Bloomberg (opinion) piece notes

In January 1975, the Swiss government held an emergency meeting and then took the extraordinary step of slapping a 41% annual penalty on foreign deposits. But even this failed to stem the tide. The franc continued to appreciate against the dollar — a total of 70% in nominal terms between 1971 and 1975 alone.

I feel that something is missing in this story... What sane investor would put their money into an account earning -41%, even in the mid-70s?! So what explain this story, if it is actually accurate?


1 Answer 1


I am not sure if 41% is correct I wanted to double check it but could not find a reference to primary source for 41%, but the overall narrative seems to be true. For example, Reinhart, C. M., & Smith, R. T. (2002), in their paper that you can read here argue that

Switzerland in the late 1970s in which substantial capital inflows – partly because of German residents’ desire to escape a new withholding tax in Germany – prompted the Swiss National Bank to impose a 100% reserve requirement on non-residents’ bank deposits in Switzerland. The result was a negative nominal interest rate on foreign deposits in Swiss banks, as these banks demanded a fee to accept foreign deposits.

The above quote already gives you a partial answer (it was German savers), but actually the second part of the original quote of paragraph you gave gives you hint at the rest of the full answer. CHF was appreciating really fast at the time. Standard monetary model for exchange rate tells you that exchange rate depends on fundamentals, output, money supply, price levels, interest rate and also based on future expectations of these.

Now consider western world in the 70s. Half of Europe was under uncertain totalitarian regimes, eastern Europe under iron curtain, Spain was still under Franco, even democratic regimes across the Europe seemed very uncertain. You had a lot of right or left wing radical terrorism across many democratic countries in Europe. Major developed countries like USA or Britain were hit hard with oil shocks. France and west Germany were not doing very good as well. Many countries were experiencing stagflation. Plus in 70s it was popular to have punitively high marginal tax rates and Switzerland always was good tax haven.

In such crazy world there were not that many options to invest your capital in so safe havens like Switzerland experienced unprecedented capital inflow. If you are faced with bad options a rational person picks the least bad option. It is like asking why did you got your arm cut. Well if other options involved you dying then suddenly loosing a limb is not so bad.

Investors expectations of fundamentals in all other countries were probably so bad that simply Switzerland came on the top even if you face negative nominal interest rates. They rightly expected large appreciation of CHF and also expected that their savings will be safe even in near-apocalyptic scenarios - after all if you saved your money in Switzerland during I or II world war you did not lost your money, but if you did so in many other European countries your savings could be often confiscated or wiped out by inflation. It is also the real not nominal interest which drives decision making and I am sure that must have been less negative or even positive. Some irrational exuberance could play role too. Once everyone is saving in Switzerland it sort of becomes self fulfilling prophecy, but in this case Swiss fundamentals seemed to be really strong so this was at the best just part of the story.


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