I blogged a while ago about Switzerland and its origins as a financial centre, dating back to the Knights Templar.
After spending a couple of days in Switzerland, I found a fascinating book that sheds more light on the background to this small, but important, centre of private banking. The book is called Swiss Made: The Untold Story Behind Switzerland's Success by R. James Breiding, and talks about the history of Switzerland’s commerce.
Why has Switzerland – a tiny, land-locked country with few natural advantages – become so successful for so long at so many things? In banking, pharmaceuticals, machinery, even textiles, Swiss companies rank alongside the biggest and most powerful global competitors. How did they get there?
I’m not going to repeat verbatim from the book, as I also discovered quite a lot of history of Switzerland myself whilst there, but thought it might be interesting to amalgamate some of these learnings from history to set the context of Switzerland’s success as a financial centre today.
It’s certainly a fascinating country with the origins of its strength in banking formed from the Knights Templar, who would look after pilgrims’ wealth whilst escorting them to the Holy Land.
Once the Knights settled in Switzerland in the 1300s, they became known as good hosts to negotiate trade and finance with.
For example, during the Renaissance, the wool traders of Florence found that they could get around the laws of usury, banning interest on payments, by selling their goods in advance with a discount, to the bankers of Geneva. The difference in price was effectively a payment of interest.
This is recorded by the Bishop of Geneva, Adhemar Fabri, who permitted the city’s bankers to lend money in exchange for interest in 1387, ‘as long as [it was] held in reasonable restraint’.
The result was the Geneva became a key destination for European trade fairs, with exchange and credit granted as money was transferred between traders.
The next key ingredient to Switzerland's success is neutrality.
Swiss neutrality dates back to the Reformation, and the divide between Catholic and Protestant interests. In Switzerland, as the different regions split into factions, there were mammoth wars and warrior-style battles.
The Swiss were known as the most prestigious military in the 15th century, bearing in mind that the country had been the settling place for the fierce legions of Knights Templar who survived the rout by the French King in 1307. In fact, Swiss soldiers were much in demand by all the Kings of Europe, leading to the long-standing tradition as to why the Pope is protected by a Swiss Guard at the Vatican.
Then the Reformation started. Switzerland became torn in two thanks to the influence of Huldrych Zwingli, and eventually all of Europe became involved in the religious Thirty Years War.
Zwingli himself was killed at the Battle of Kappel in 1531, when an army of Catholic soliders laid seige to Zurich. After his death Zwingli's successor, Heinrich Bullinger, sought to achieve strength through the pen, rather than the sword.
This was in part due to the defeat of the Protestants by the Catholics in Switzerland and, equally, du to Bullinger being offered the position of pastor of the Protestant city of Zurich.
During his negotiations with the civic leaders of Zurich for this position, Bullinger refused to accept their terms, which were that he would take the position with the condition that he would not criticise government policy. Bullinger said that would not work and insisted on his right to interpret the Bible, even if it contradicted the position of the civic authorities.
In a compromise, they agreed that Bullinger had the right to criticize the government privately in writing and hence he became the Minister of Zurich, writing long thesis on Biblical tenets. A strong writer and thinker, his spirit was essentially unifying and sympathetic, and his theology became widely respected across all Swiss communities.
His approach healed the deep internal divisions between the various Protestant cantons, resulting in a military alliance called the Christian Civic Union, which succeeded in securing the independence of Switzerland.
It is illustrated well by this painting from the Zurich Kunsthaus Museum.
The painting is classically depicts soldiers from two different Swiss cantons, throwing aside their weapons and armour to share in milk and bread in peace. The Protestant army brought the milk; and the Catholics the bread. Behind them, in the upper left of the picture, we can see the Mayor of one canton talking to the Captain of the troops of the other, to agree their peace accord.
And so, Switzerland became a nation at peace.
It also became a nation of wealth, as the attitude to money allowed usury, and the outcome of the Protestant Reformation was that the accumulation of wealth was made also acceptable for the first time.
Before the Reformation, Catholic teachings would encourage people to give any abundance to the Church and so there was little need to work beyond the minimal need. After the Reformation, Protestant teachings not only encourage wealth accumulation, but saw it as a good thing, reflecting hard work and the fulfilment of one's duty.
This added another key factor for Switzerland’s attractiveness. In particular, the country's fiercely independent and objective status allowed the Swiss to avoid being sucked into the political battles of monarchs, churches and republics that raged around across the rest of Europe for centuries to follow.
As all of Europe battled for power, the Swiss remained neutral and this resilience not only laid the foundation for the country’s prosperous banking sector, but attractive other nation's industrious people to join the community.
For example, when the Huguenots were being persecuted in France they fled to Switzerland in the 1550s. The Huguenots not only brought Switzerland their extraordinary watchmaking skills, but also founded chemical companies and banks.
Banks such as Pictet (1805), Lombard Odier Darier Hentsch (1796), Mirabaud (1819) and Bodier (1844) all trace their heritage to the Protestant Reformation, building upon the reputation of the Knights Templar before.
More on the history of Swiss banking tomorrow.
This is the second in a five-part series on Swiss Banking: