The Corner

Monetary Policy

The Swiss Franc and Vietnamese Dong — the Odd Couple

A Swiss flag in front of the Swiss National Bank in Bern, Switzerland, May 2, 2019 (Denis Balibouse/Reuters)

The U.S. Treasury is required to issue a semi-annual report in which it fingers so-called “currency manipulators.” On Wednesday, it issued its most recent report. Switzerland and Vietnam were both nailed as currency manipulators. Talk about an odd couple. Perhaps the world’s greatest currency, the Swissie, and the pathetic Vietnamese dong. Indeed, the little dong isn’t even fully convertible. Never mind.

The absurdity of putting the Swiss franc and the dong in the same basket brings back memories of May 1, 2002. That’s when I appeared before the Senate Banking Committee, along with then-Treasury secretary Paul O’Neill, to testify on exchange rates and the Treasury’s “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” I was highly critical of both the entire concept and the particular methods used to label a country as a currency manipulator. I indicated that the U.S. Treasury’s report was little more than an invitation for political mischief that would interfere with free trade. In short, I thought, and think, that the entire semi-annual currency-manipulator ritual is rubbish and should be trashed. The Swissie-dong odd couple certainly suggests that I am on to something.

Moving beyond the report, allow me to make a few remarks about the great Swissie. The inconvertible dong requires no further elaboration. During the 19th century, the Swiss franc, which was introduced in 1850, was a relatively “normal” currency, with alternating periods of strength and weakness. Since World War I, however, the franc has experienced a strong trend of nominal and real appreciation against the British pound, U.S. dollar, and major continental currencies. Indeed, in their authoritative book, Swiss Monetary History since the Early 19th Century, Ernst Baltensperger and Peter Kugler concluded that the trend rate of the real, inflation-adjusted Swiss franc appreciation against the world’s international currency, the U.S. dollar, has been nearly one percent per year during the post-WWI era.

The Swiss franc’s unprecedented display of power shows up in spades when foreigners consider investing in assets denominated in the Swissie. With data going back to 1900, the Credit Suisse Global Investment Returns Yearbook shows that all foreigners would have received a Swiss franc real return pop on their investments. For example, an American with a U.S. dollar base would have, on average since 1900, received about a 75-basis-point real-return bump because of the Swissie’s strength against the greenback.

I wonder if all this Swiss franc strength has anything to do with the 1,040 tonnes of gold that the Swiss back the franc with? That’s not only a lot of gold, but on a per capita basis, puts the Swiss on top of the world by a country mile.

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute in Washington, D.C.

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