In my answer to an article on mises.org (“Can Switzerland Survive Today’s Assault on Cash and Sound Money?“, 08/06/2017 by Marcia Christoff-Kurapovna), I decidedly argue the latter:

“Mrs Christoff-Kurapovna’s criticizes three elements of SNB policy:

1. The inflation of its balance sheet (money printing)
2. Negative interest rates
3. The selling of a large portion of its gold in the years following 2000

I will argue that all three elements of policy are reasonable choices and in fact, related.

In light of the argument presented below, the SNB is not betraying the Swiss values of solidity and dependability. Quite the contrary, the SNB is probably the most responsible and conservative actor within the Swiss economic and political system, and certainly within the global financial infrastructure.

1. Money printing

Mrs Christoff-Kurapovna cites James Grant who rants about the SNB creating Swiss Francs “out of thin alpine air” with which it then buys US stocks. I greatly value Mr. Grant’s opinions on the US but he does miss the point on the Swis situation. I contend that “buying productive assets” with “money created out of thin air” is what actually happens when an American Private Equity firm takes over a European company. The SNB does nothing of the kind.

Rather, the new Swiss currency that swells the SNB’s balance sheet comes into existence through a large current-account excedent earned by the Swiss through hard work and saving it all. After the Great Financial Crisis, who can blame them for bringing these savings home and keeping them liquid rather than spending them?

In the situation of a continuous inflow of savings, all the SNB does is to accommodate it as a (temporary) custodian: it takes the foreign liability on the asset side of its balance sheet and hands the Swiss savers new Swiss Francs as a substitute for their claim against their foreign counterparty. In the old days, the SNB would have bought gold instead of shares and government bonds, but the mechanism is still the same.

The rather surprising conclusion is that the Swiss monetary system still very much works like in the times of the gold standard: base money is created through real savings and not through debt. This is quite a contrast when compared to QE, is it not?

2. Negative Interest

When the balance sheet of the SNB did not stop growing several years into the Crisis, the SNB started charging negative interest on central bank deposits. Is this irrational or immoral? No, it is not. It is a rather gentle reminder that the SNB will only be a temporary custodian of foreign liabilities.

The negative interest should be viewed as a sort of safe-storage fee and, more importantly, a fee for the insurance against loss of value of what are really claims on foreign assets. Rather than delegating the job of safeguarding foreign assets, it is really up to Swiss savers to recycle abroad what they acquired through their own actions. Otherwise, it would be far too easy to offload private risk to society, in this case embodied by the SNB and its currency.

3. The selling of gold by the SNB post-2000

The SNB did not go off the gold standard because it wanted to or because it unnecessarily yielded to foreign pressure. When the de-monetisation of gold was jointly decided by the cartel of the major central banks, the long-term value of gold did become more uncertain. At the same time, holding gold became less practical because to a large extent, a central bank holds reserves to settle debts with other central banks. What if other central banks were not to accept gold any more as a means of payment? The responsible thing to do was therefore to diversify the assets away from the privously almost 100% gold.

Still, the amount of gold the SNB keeps is by far the largest both per capita and in relation to GDP. The decrease of the share of gold in reserves is entirely due to the rapid growth of the SNB balance sheet, not to the reduction of gold holdings.

Finally, the debate about the most adequate asset split of the SNB’s FOREX holdings remains open. After all, about 80% of the FOREX assets of the SNB are held in foreign government bonds and only 20% in real assets (i.e. shares). But also in this case, the SNB can be counted on to find reasonable compromise between liquidity, return and risk.

In summary, the SNB acts almost boringly at the conservative fringe of all Central Banks. Ever since the Financial Crisis in 2007, it fulfils the unwanted role of a temporary custodian of Swiss claims against foreign entities, effectively shielding the Swiss owners of these claims from the currency risk. It charges a fee for its services which is the negative interest. Even after selling 2/3rds of its gold, it maintains one of the largest stockpiles of monetary gold worldwide, certainly per capita, but diversified its assets after the de-monetization of gold by the world’s major Central Banks, an event that was entirely beyond its control.

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