Introduction

Switzerland participated in the varying gold standards in the period 1871–1971. Switzerland backed its currency to gold and committed itself to fixed gold exchange rates from 1878–1914 and from the end of 1924 until 1936. After the Second World War Switzerland returned to gold convertibility until 1973. In order to understand the implications of the gold standard regimes for the divergence and convergence of international financial systems it is important to investigate the outcome for the banking industry. Using a new data set on Swiss banking it becomes possible to study banks’ balance sheets over a long time period from 1906 until 1971.

During these times Switzerland had to cope with three banking crises, the first being a consolidation of the banking industry in the years 1911–14 and the second one a result of the First World War in the years 1920–1. Last, a very severe banking crisis occurred in the wake of the Great Depression in the years 1931–5.

In this chapter, the three Swiss banking crises in the period 1906–71 will be analysed with respect to gold standard membership. The gold standard regimes might have helped European financial systems to converge and to prosper growth due to the reductions in exchange rate fluctuations during normal times. At the same time increased international interdependencies might have made the Swiss financial industry more vulnerable to foreign shocks in times of crises.

An indicator measuring the output gap between the potential return on equity and actually achieved return on equity is proposed, instead of using the traditional measures such as return on equity, Tier I ratio or cost–income ratio. By including the profit and loss accounts as well as balance-sheet data in the investigation, it becomes possible to reduce a comprehensive data set to one single measure. If a banking group strongly deviates from its potential output it is considered to be under distress.