How Switzerland Became Rich

Surrounded by Europe’s economic powerhouses lies a small mountainous land that eclipses all of them. Yet it is not part of the E.U., has bunkers to shelter its entire population, and needs to write all official papers in four languages. Switzerland has its currency, the Swiss franc, and its poverty threshold (2.421€) is almost double that of Germany (1.313€). Known for its neutrality and banking industry (235 banks as of 2022), Switzerland is one of the most prosperous and liveable countries on earth. According to the International Monetary Fund (IMF), Switzerland has a GDP per capita of over 95.000€ and boasts two cities in the top ten of the EIU Liveability Ranking.

Early Settlement and Roman Influence

The first settlements on Swiss territory date back 11,000 years. At the start of the 3rd century BCE, the region became part of the Roman Empire, which brought Christianity. After the Western Roman Empire fell, Germanic tribes migrated to the area, introducing different languages and ways of life. During the Middle Ages, Christianity spread rapidly throughout Europe and Switzerland.

Switzerland’s Modern Formation

The three valley communities of Uri, Schwyz, and Unterwalden formed the Swiss Confederation in 1291: Switzerland was born. The goal of the union was to defend against foreign powers. Over the next two centuries, the Confederation developed a loose network of rural and urban alliances. Additional territories soon joined either voluntarily, through purchase, or by conquest. The eight cantons (regions) administered their affairs and sent delegates to the Federal Diet (the legislative and executive body) to discuss common issues.

Reformation and The French Revolution

The Reformation divided Western Christianity into Catholics and Protestants, leading to unrest and wars across Europe and Switzerland. Despite the tensions, Switzerland maintained neutrality during the Thirty Years’ War, which opposed protestant and catholic countries.

The period became the foundation for developing the maxim of neutrality in Swiss foreign policy. The 18th century saw peaceful foreign policy, agricultural changes, and early industrial developments in textiles and watchmaking.

In 1798, the revolutionary French government invaded Switzerland. Napoleon imposed a new constitution and established the Helvetic Republic, which centralized the government and abolished the cantons. Highly unpopular, the decision turned Switzerland into a French satellite state and led to significant resistance from the local population.

The Helvetic Republic’s unpopularity and the invasions by Russian and Austrian forces eventually led to Napoleon’s Act of Mediation in 1803, which restored much of Swiss autonomy and established a Confederation of 19 cantons. Finally, in 1815, the Congress of Vienna re-established Swiss independence and recognized its permanent neutrality, forming the monarchic federal state in 1803.

Switzerland established a new constitution in 1847 due to revolutionary ideas and civil unrest. The Federal Assembly met for the first time in Bern, the county’s capital, on November 6, 1847. After the Industrial Revolution and its implications, a new constitution was established in 1874. It expanded federal powers and supported industries such as railways, machine construction, chemicals, and banking, which became the cornerstones of the Swiss economy.

Escaping The War in The 20th Century

During World War I, tensions among Switzerland’s German, French, and Italian-speaking regions nearly threatened its neutrality, but it managed to stay out of the hostilities. The interwar period was marked by labor unrest, culminating in a general strike in 1918. The unrest led to an agreement in 1937 between employers and unions, committing to settle disputes peacefully in the future.

Surrounded by fascist power in World War II, Switzerland maintained political neutrality through dubious deals and readiness to defend. The Cold War allowed Switzerland to emerge from diplomatic isolation, integrating economically with the American-led order while remaining outside supranational bodies. It joined the Council of Europe in 1963, the Bretton Woods Institutions in 1992, and the United Nations in 2002. This integration was not always sure, as we will discuss Switzerland’s position during WWII.

Neutrality: A Pillar of Swiss Policy

Switzerland’s neutrality is often viewed as an asset. This neutrality was codified in 1907 and states that the country must:

• Refrain from participating in war.
• Ensure its defense.
• Ensure that belligerent states are treated equally when exporting war materials.
• Not supply mercenary troops to war-fighting states.
• Not allow belligerent states to use their territory.

This neutrality was advantageous during WWI, WWII, and the Cold War, as none of these conflicts directly affected Swiss territory. Until today, Switzerland is neither part of the E.U. nor NATO and only joined the U.N. in 2002.

Direct Democracy and Governance

Besides its neutrality, Switzerland’s direct democracy stands out. If at least eight cantons express support for a piece of federal legislation, each of the 26 cantons can launch a popular referendum. The population can also directly influence lawmaking. Initiatives to amend the constitution need to gather 100,000 signatures to appear on the ballot, and referendums against new laws passed by Parliament need 50,000 signatures. Four referendums are held each year.

Never Trust Your Environment

While Switzerland maintained neutrality in all conflicts, it knew it needed a potent defensive strategy to survive. Hitler promised its southern neighbor that Germany wouldn’t attack. Switzerland, however, didn’t believe the dictator and knew its perilous position in the middle of Europe. After WWII began, it built bunkers in all corners of the country.

After WWII, the Cold War became a new concern. In 1963, a law was passed that required all buildings to include a fallout shelter to withstand debris and radiation, following the slogan: “Neutrality won’t protect us from radioactivity.”

Today, the country has approximately 360.000 shelters, 5100 of which are public. According to a post from the Swiss National Museum, “The shelter facilities in Switzerland would create a tunnel approximately 1.200km long.” Regulations have also evolved. Since 2006, bunkers need to include protection against terrorist attacks and chemical or biological weapons.

Besides protecting the population, the bunkers make Switzerland difficult to invade. Many bunkers are hidden in the mountains, making defending for the soldiers easier. The big military is because men between 18 and 24 must undergo compulsory military service. In 2023, the country had over 147.000 active soldiers for a population of about 8.7 million. Germany had about 180.000 active soldiers for a country of over 84 million.

With The Banks Came The Money

At the start of the 20th century and especially after World War I, several European countries increased taxes on high earners, leading the wealthy to seek alternatives. Despite lacking the commercial power of German, British, or French banks, Swiss banks offered a unique advantage: the ability to evade high domestic taxation. Secrecy became their main selling point, fueling growth and expansion through aggressive marketing as a tax haven.

WWI marked a turning point for Switzerland’s financial position. The conflict led to monetary and financial crises throughout Europe, prompting a massive influx of foreign capital into Swiss banks. Switzerland’s neutrality made it a haven, attracting the wealthy with the stability of the Swiss franc and low taxation. Switzerland emerged as a major European financial center, with Swiss banks solidifying their position in the global banking hierarchy by becoming a preferred destination for foreign capital.

Secrecy as a Law

Secrecy has been a cornerstone of Swiss banking since the late 19th century. Initially, this practice was rooted in tradition rather than formal laws, with breaches considered civil and not criminal offenses.

After the war, the French and Belgian governments attempted to gather information about the identity of specific capital holders. Their goal was to exert and penalize the owners. They were also concerned that Germany was moving money to Switzerland to avoid paying the reparations required by the Versailles Treaty. The Swiss government successfully evaded these efforts.

After the stock market crash on Black Friday in 1929, Switzerland faced economic hardship starting in 1931. A major Swiss bank went bankrupt, and others required assistance or restructuring. The middle classes demanded increased oversight of banking activities to protect their savings and reduce interest rates.

In 1934, a new law was passed that included most of the middle class’s demands. More important, however, was Article 47 of the Banking Law (Federal Act on Banks and Savings Banks). It ensured secrecy by making its violation a crime, punishable by heavy fines and up to six months of prison.

Banks During WWII

During World War II, Switzerland maintained a neutral diplomatic position; its economic policies aligned closely with the Axis powers (Germany, Italy, and Japan). The Swiss franc remained strong and was the only European currency almost freely convertible throughout the conflict.

Nazi gold worth 1.7 billion Swiss francs was deposited in Swiss banks. According to the Bergier Commission, Switzerland bought 1231 million Swiss francs of gold from the Germans. Switzerland, however, also bough almost 3000 million Swiss francs worth of gold from the U.S., Great Britain and Canada.

This collaboration caused tensions with the Allied powers at the end of the war. The U.S. blocked many Swiss firms and froze assets from the Swiss National Bank and the capital administered by Swiss banks in the U.S. The decision froze at least six billion Swiss francs.

In a draft of the Washington Agreement, the Allies established a 250 million Swiss franc fine and presented two main demands to unfreeze the assets:

• A detailed inventory of all German assets in Switzerland or controlled by Swiss companies and the expropriation of these assets
• The precise identification of all private assets stemming from Switzerland and frozen in the United States

These demands would require lifting Swiss banking secrecy, ending Switzerland’s status as a financial haven.

Maintaining Secrecy At All Costs

In a paper by Sébastian Guex from the University of Lausanne, the historian explained how Switzerland maintained its banking secrecy through three tactics, even under U.S. pressure.

First, Switzerland constantly delayed signing and negotiation agreements, insisting on thorough legal valuations and raising new technical problems. Ambiguous formulations and legal excuses for investigations gave Switzerland time to plan.

Second, Switzerland leveraged financial gains from the past decades as a strategic tool. Before the negotiations in Washington, Swiss authorities granted France a credit of 250 million Swiss francs on favorable terms. One week before the meeting, Switzerland granted a loan of 260 million Swiss francs to Great Britain. During the negotiations in Washington, France’s credit was increased to 300 million. The goal was to persuade France and England to be more accommodating during the talks.

Thirdly, Swiss politics used humanitarian aid to weaken the Allies’ eagerness to sanction it. Switzerland accommodated tens of thousands of refugees and war victims at the end of the war. In 1944, Swiss authorities founded the Don Suisse pour les victimes de la Guerre (Swiss Donation for Victims of War), endowed with about 200 million francs, partly from donations by the Swiss population. Don Suisse soon conducted rescue operations, including distributing food, clothes, and materials in several foreign countries.

The Swiss authorities reaped the benefits of their policy during the signing of the Washington Agreement and the subsequent “Certification Agreement.” The Allies lifted the blocklists and released the frozen assets in the U.S. without compromising banking secrecy. Additionally, it ended Swiss diplomatic isolation after the war, helping it integrate into the Western world order.

Swiss Banks After WW2

Swiss banks capitalized on the growing post-war economy in Europe by expanding their services and client base. With the country’s stability, the banks’ reputation, and their promise of anonymity, Swiss financial institutions became the preferred home for assets. Swiss banks, such as UBS and Credit Suisse, expanded their operations globally.

Swiss banks rapidly became leaders in wealth management and private banking. Many high-net-worth individuals were interested in Switzerland for the benefits of anonymity and tailored financial services, contributing to Switzerland’s reputation as a monetary haven.

Bank’s Under Pressure

In the second half of the 20th century, Swiss banking secrecy faced growing scrutiny from the international community. Governments worldwide became increasingly concerned about Swiss banks’ role in enabling tax evasion, money laundering, and hiding illicit funds.

Two major crises stand out:

The first occurred in the 1990s and involved unclaimed assets of Holocaust victims. Investigations revealed that during and after WWII, Swiss banks held accounts belonging to Jews who perished in the Holocaust. Many of these accounts remained unclaimed and undisclosed to the benefit of the banks that could use the money for their affairs. The resulting outrage led to a $1.25 billion settlement in 1998, paid by Swiss banks to Holocaust survivors and their heirs.

The second crisis centered on UBS, which became the focus of tax evasion in investigations by several countries. The United States Department of Justice (DOJ) found that UBS had assisted American clients in hiding billions of dollars in undeclared Swiss accounts to evade taxes. A former UBS banker, Bradley Birkenfeld, provided details about the bank’s practices to U.S. authorities.

In 2009, UBS admitted to these activities and agreed to a $780 million settlement, including fines and restitution. As part of the settlement, UBS was also required to disclose the identities of thousands of U.S. account holders, resulting in a significant breach in Swiss banking secrecy.

The End of Banking Secrecy

Under growing pressure, Switzerland agreed to significant reforms in 2009, effectively ending the era of traditional banking secrecy. In 2014, the country adopted the Foreign Account Tax Compliance Act (FATCA). This U.S. law requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers to the IRS (the U.S. agency responsible for enforcing tax laws and collecting taxes) and curbed tax evasion from U.S. citizens.

Additionally, Switzerland committed to the Automatic Exchange of Information (AEOI) framework developed by the OECD. Under this framework, Swiss banks automatically share financial account information with tax authorities in participating countries, promoting global financial transparency. The Swiss Financial Market Supervisory Authority (FINMA) enforces these regulations to ensure that Swiss banks adhere to international standards.

These changes have aligned the Swiss banking landscape with global efforts to combat tax evasion and financial crimes. Banking secrecy is gone, but Swiss banks’ standing remains. Today, Swiss banks hold over 8.3 billion Swiss francs.

Not Only The Banks

Besides its banking industry, Switzerland is also renowned for its high-quality and precise Swiss watches, with brands such as Rolex, Breitling, Tag Heuer, and Cartier globally recognized.

Switzerland has a strong machinery industry and is home to leading pharmaceutical companies like Roche and Novartis. These industries have significantly contributed to Switzerland’s robust and well-prepared economy, enhancing its international reputation.

Furthermore, it is one of the top spenders on research and development (R&D) globally, allocating over 3% of its GDP to R&D, one of the highest rates worldwide. The country’s commitment to innovation is evident in its top educational institutions, such as ETH Zurich and EPFL in Lausanne. Education is central to Switzerland’s success, with several universities in the top 150 in the Times Higher Education Ranking.