ard dates to the period between 1870C1914. During this period, all countries that played a role in international trade adhered to this system. Theoretically, each country adhering to the gold standard defined the value of its own currency in terms of a specific quantity of gold, and the central banks of the several countries guaranteed he convertibility of their banknotes into gold (Crettol & Halbeisen, 1999, p. 6). In 1914, at the beginning of the First World War, most countries unilaterally abolished convertibility, introduced currency controls and supervised the import and export of gold (Crettol & Halbeisen, 1999, p. 7).
The catastrophic monetary conditions that prevailed in most countries at the end of the First World War coincided with the prevalence of flexible exchange rates. As a consequence, flexible exchange rates tended to be held responsible for the problems. Most countries, thus, expressed a desire to return to the gold standard. To avoid the risk of a gold shortage, a system was developed wherein central banks would hold their reserves not only in gold but also in convertible currencies. Most countries, including Switzerland in 1924, joined this gold-currency standard between 1924 and 1928. Currency instability soon returned, however, and confusion reigned once again. A major problem was that many countries defined their currencies in relation to gold at a ratio which did not correspond to economic reality (Crettol & Halbeisen, 1999, p. 8).
During the Great Depression, the Swiss National Bank supported international efforts to reinforce the gold standard (Crettol & Halbeisen, 1999, p. 10). The Bank implemented policies that protected the Swiss franc from instability, allowing the foreign exchange value to fluctuate only modestly (0.23 at most). The Federal Law of 20 December 1929 on the Swiss National Bank provided for a return to the gold standard by defining the Swiss franc in relation to gold and requi...