In 1944 Henry Hazlitt, American journalist attended Bretton Wood conference as a New York Times correspondent. His writings were later gathered and published in the book format, titled “From Bretton Woods to Global Inflation: A Study of Causes and Consequences.” The ebook is currently available at the Mises Institute website for free.
In chapter 5, “Monetary Conference” Hazlitt writes: “It is possible, of course, to keep a valueless currency at any arbitrarily chosen level by a commitment to pay that price for it, just as it is possible to
keep a worthless stock at $100 a share by buying at that price all of the stock that is offered for sale. But when the allotted resources of the buyer run out, the currency or the stock will immediately drop to its natural level, and the buyer will find himself holding just that much worthless paper. The plan becomes particularly unrealistic when each nation can turn out unlimited amounts of its own currency on its own printing presses-with the incentive, which it does not ordinarily have, of a buyer at a fixed price. It seems probable that the plan could only lead to a huge waste of funds and to a temporary world inflation with a subsequent collapse.”
If only Hildebrand invested some time to read Hazlitt and saved on Keynes, he would have known that pegging Euro to Swiss Frank is a terrible idea. Decision of one men cost Swiss population 60 billion Swiss francs. The loss equals to 8.5 years of Switzerland’s budget expenditure on education and research, which was budgeted at 7.3 billion for 2016.
So what exactly did Hildebrand do wrong?
He decided to defend undervalued Swiss franc by setting a floor to Euro at 1.20, in the same way as in Hazlitt’s example of setting artificial price for a stock at 100$. Between September 2011 and January 2015 Hildebrand and his successor Thomas Jordan bought Euros every time the Swiss frank was heading to its real valuation by appreciating to Euro. During this time both bankers have accumulated several hundred billions of Euros and other foreign reserves. As in Hazlitt’s example, there was a second party, in this case it was Mario Draghi, president of European Central Banking. He has publicly expressed his determination to print unlimited amount of money in order to “stimulate” European economy. Having a much larger printing press against himself, Thomas Jordan has made a correct decision and removed the peg. The market revalued the Swiss franc (as it did with the 100$ stock) and he ended up with 60$ billion loss. Had he kept the peg for longer and tried to fight against ECB, it certainly would have cost Swiss people much more.