ACHIEVING PRICE STABILITY IN THE FACE OF A WEAK U.S.

In the second half of the 1960s, Swiss inflation began to accelerate in line with the worldwide surge in prices. Despite a strong desire to stabilize prices, the SNB was powerless in curbing inflation as long as Switzerland insisted on maintaining a fixed exchange rate. Furthermore, as the postwar system of fixed exchange rates began to collapse, Switzerland faced massive inflows of speculative capital triggered by expectations about a sub-stantial revaluation of the Swiss franc and other European currencies against the U.S. dollar. Since the SNB could sterilize at best a small portion of the attendant increase in its foreign exchange reserve, the capital inflows led to an excessive expansion in the money supply, adding fuel to the already serious inflation problem. Notably in 1971, the Swiss monetary base expanded enormously.1 Not surprisingly, the year-on-year inflation rate, measured in terms of consumer prices, shot up to a peak of 11.9 percent in December 1973. The Swiss public regarded this development as a major calamity. In the past, persistently high inflation had never arisen during peace-time. A realignment of exchange rates in 1971 pro-vided only temporary relief to Swiss authorities. Another incipient speculative assault at the beginning of 1973 forced the authorities to float the exchange rate of the Swiss franc. As a result, the SNB acquired the ability to combat inflation through a tight monetary policy. Under th