The Swiss Gold Rush

In the United States, if we hold a referendum, so voters may speak directly and decisively on a question, it always is at the state level, and, lately, has addressed the legality of gay marriage, the decriminalization of marijuana, getting tough on illegal immigrants, or some other grave matter.

You never will guess what the Swiss, by giving more than 100,000 signatures in support of a Swiss People’s Party referendum, will be deciding in a nationwide vote on November 30. They will vote on whether or not the Swiss National Bank (the equivalent of the U.S. Federal Reserve) should be prohibited from selling its precious metals, including gold; should be required to hold at least 20 percent of its foreign reserves in gold; and should hold its gold within the country.

Can you imagine a more gnomish matter? It seems that just 10 years ago, the Swiss National Bank (SNB) had the highest per capita gold holdings in the world. And the Swiss liked it that way. But, taking advantage of a time when the world economy was calm and prosperity comfortable, Switzerland in a national referendum in 1999 authorized the bank to sell 50 percent of its gold reserves. Through 2008, the bank sold hundreds of tons of gold—always too cheaply, because the price of gold kept climbing.

The chairman of the SNB’s board of directors declared that having a currency (the Swiss Franc) backed 40 percent by gold was “a relic.” And so it was, in one sense. When the U.S. Federal Reserve Bank was created in 1913, the U.S. dollar was backed 40 percent by gold. Imagine, Switzerland not catching up after all these years!

Except that the Swiss Franc, backed by gold, has tended to sustain its purchasing power over the decades. Whereas the U.S. dollar, since creation of the Federal Reserve, has lost at least 95 percent of its value. Probably more. At times of crisis, such as 2008, foreign investors have rushed to convert their dollars, or Euros, or pesos into Swiss francs. The result has been to push up the value of the Swiss franc against other currencies. Sometimes by a lot—say, 25 percent against the U.S. dollar, at one point.

Conventional bankers’ wisdom is that this is bad for exports. Swiss goods denominated in francs are pricey against the wimpy dollar or Euro. Furthermore, a currency heavily backed by gold makes its almost impossible for a central bank to depreciate the currency—that is, to print more money, to inflate. And such “expansion of the money supply,” goes the conventional wisdom of central bankers, can be crucial in stimulating an economy. (Critics say that, yes, it stimulates the economy, creates burgeoning bad investments, or “bubbles,” and then, when the money drug no longer can be supplied in ever-greater quantities, the economy crashes. Boom and bust. You know, like the real-estate bubble and crash of 2008.)

The SNB and the Swiss government are campaigning fiercely for defeat of the referendum. Their argument is that approval of the referendum will limit the flexibility of the SNB to manipulate the quantity of money to stimulate the economy and encourage exports. The argument of those that support the referendum is a mirror image of this: requiring a Swiss franc heavily back by gold will prevent the SNB from manipulating the money supply and inflating the currency. It’s all in your viewpoint.

Right now, Switzerland holds about 1040 metric tons of gold, about 7.8 percent of its foreign reserves, so you see that the “relic” of 40 percent gold reserves against the franc is no more. The referendum, if approved—and it is gaining support, to the dismay of the Keynesian money crowd—would require the bank to approximately triple its reserves over the next five years. Depending on prices, that is as much as $83 billion in gold purchases (gold and gold-mining stock investors are paying attention) to be undertaken.

If the course of the Swiss referendum is typical, then about November 21, a week or so before the vote, the slugging match over the referendum will become violent. At this point, perhaps the story of this decision and its significance will surface, if only fleetingly, in international news sources. So far, the referendum has been reported only in a few financial publications.

In the United States, the virtually limitless power of the Federal Reserve to create hundreds of billions of new money, out of thin air, has become a political matter. In fact, there is a disturbingly good case that the Federal Reserve’s money expansion in the nick of time saved the stock market long enough to hand Barrack Obama re-election. There are bills or proposals in the U.S. Congress to limit the power of the “Fed”—or even close it down.

Imagine how much simpler, and more appealing, might be legislation to require the Federal Reserve to back the issuance of all new money with a 20 percent reserve of gold. “Keep the U.S. dollar as good as gold.” “Restore the integrity of dollar.” “Turn soft-headed thinking into hard money!” “Make a dollar worth a dollar, again!”

Imagine what a brilliant publicist could do if he had an understanding that our national prosperity, and even our civil peace, may depend upon clawing back control over our money. Remember, it was the great German inflation between the world wars that broke the German middle class and left it open to the inflammatory calls for “revenge” by history’s deadliest demagogue.

Speak, Switzerland.

This essay first appeared in Financial Sense.

Related Posts:

1. The Case for Sovereign Gold Bonds
2. Will Bitcoin Survive the Feds and End the Fed?
3. Monetary Renaissance is here. In Metallic Form

   

About the Author: Walter Donway

Walter Donway contributes to Savvy Street on political economy, science, and trends in fiction, film, and culture. Walter Donway’s most recent book is Donald Trump and His Enemies: How the Media Put Trump in Office (Romantic Revolution Books: New York, September 2017). His Amazon profile can be found here