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Globalisation – prismatically unfolded

Switzerland and the First

Wave of Globalisation

Selected economic evolutions in the late 19th and early 20th century

and how the sectors affected fared in the ensuing decades

Peter Balastèr

December 2015

revised May 2016

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Contact:

Peter Balastèr

Straglia Chasté 200

CH-7524 Zuoz

pbalaster@gmail.com

www.balaster.weebly.com

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Foreword

When preparing the publication “Globalisation – prismatically unfolded”, the question arose whether

what we experience today in the sense of an interpenetration of economic and social evolutions

around the globe is really new, not only in its content, but also in its extent. Indeed, already in the pe-

riod starting 1850 and ending with World War I, today’s industrialised nations experienced an unprece-

dented economic transition. The present collection of episodes out of Swiss economic history re-

sponds to the observation that globalisation is nothing fundamentally new and confirms it. The choice

of the episodes retained for the present text is determined by the construction plan of the underlying

publication and motivated there. They appear here in historic order.

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SWITZERLAND AND THE FIRST WAVE OF GLOBALISATION FEHLER!

TEXTMARKE NICHT DEFINIERT.

Overview 5

THE BEGINNINGS

How Swiss Agriculture grew out of Subsistence Farming 6

From Machine-Looming to the Shut-Down of Viscosuisse – the History of the Swiss Textile’s Industry 9

The Honourable Merchant 11

The Federal Law on Work in Industrial Plants of 1877 14

The Adoption of the Federal Law on Forests of 1876 18

Developing Transportation Infrastructure 20

THE UNFOLDING 23

The Construction of the Churchyard Quarters in Bern 23

The Extension of Electricity Infrastructures 26

The Hotel Pioneer Johannes Badrutt 29

Upgrading the Tourist Offer 31

The Raiffeisen Banks 33

The Swiss Chocolate Industry – A History of Mergers and Acquisitions 36

Increasing Tariff Protection and Cartelisation 39

How the Pharmaceutical Industry moved to Basle 42

THE END 44

Watches replace Cars - the Absence of a Swiss Automotive Industry 44

Fighting Bata, the Intruder in the Swiss Shoe Market 50

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Overview

In the period starting 1850 and ending with World War I, today’s industrialised nations experienced an unprecedented economic tran-sition. In retrospect, and with regard to what happened in the world economy towards the end of the 20th century, it is now often stated that these nations experienced then a first wave of globalisation. The purpose of the present text is to cast a spotlight on a selection of fifteen im-portant transformations occurring then, linking the revolutions of the time with what happened in the sectors concerned in the following dec-ades up to present times. These parallels to evolutions in the current second wave of global-isation are taken out of Swiss economic history.

It is now fairly well understood what was needed to make the Industrial Revolution happen.1 Es-sential was the development of a new economic sector which used soil only in a parsimonious way, namely industry. A second aspect was technical progress, represented by the steam engine. A third element was a profound trans-formation in agriculture, favouring production for the market over subsistence farming. This helped also feed a rapidly increasing popula-tion, the improved prospects of surviving child-hood and growing old making educational ef-forts more rewarding. These demographic changes are presumably a fourth determinant.

The evolutions at the beginning of the first wave of globalisation will be covered in part I of the following text. It is therefore placed under the heading ‘The Beginnings’. Beyond agricultural reform and the development of a textile indus-try, two other evolutions of a more societal na-ture are covered in this part. The Industrial Rev-olution also meant that two new classes in soci-ety emerged, the industrialists and, somewhat later, a working class. The first established themselves in close symbiosis with the mer-chants and emerged when the production of textiles was moved from the cottages to indus-trial plants, these often employing more than a hundred workers. The merchants commercialis-ing the fabrics out of a now industrial mode of production had been an important group in so-ciety already in the preceding early modern area but they benefitted now, after the French Revolution, from enhanced economic freedom.

Beyond economic liberalism other important preconditions for the first wave of globalisation to happen were in place in Europe around the year 1850. Most noteworthy are the repeal of

1 See Aghion, Philippe and Peter Howitt (2008): The Economics of Growth, MIT Press, Chapter 10

the British Navigation Acts, improving the pos-sibility to trade with India for other nations, com-bined with the construction of the Suez Canal and the arrival of the steam boat. As parallel evolutions within Switzerland, we will consider below the improvement of transportation by a liberalised navigation on the Rhine and the launching of the construction of the Gotthard railway tunnel beneath the Alps. The political preconditions needed so that the first wave of globalisation reached Switzerland had also been put in place. With the Constitution of 1848, a central government was established, firmly in liberal hands and creating an internal market within the national borders. Switzerland thus be-came one of the most industrialised regions on the Continent. The reverse side of the medal will not be left unmentioned in this part, however. The exploitation of the work force, most notably of children, and of the environment, most nota-bly the forests, required the adoption of protec-tive legislation by the newly established central power.

While the first entrepreneurs were often genial tinkerers, soon technical progress relied on out-standing scientific breakthroughs. Major ones were organic chemistry, the combustion motor and electricity. The second part of the text takes into account that thanks to this expansion of knowledge, other industries than just the textile industry were born. The second part is therefore placed under the heading ‘The Unfolding’. The years from 1870 on are also marked by a de-mocratisation of society. The dominance of the Railway Barons was broken and the availability of credit was generalised by way of savings and loans banks but also banks with public owner-ship, the democratic movement allowing the State a larger role. The organisation of this part of the text takes a rule of thumb as starting point, namely that one quarter of the capital stock in an economy is made out of dwellings, a second quarter out of infrastructures, a third out of commercial buildings and a forth out of equip-ment. They are taken up successively, starting with dwellings where, indeed, one case of trans-border real estate investment is known from these times. Infrastructures are covered by a chapter on how electricity provision expanded while the importance of commercial buildings is reflected by the construction of hotels and san-atoria, i.e. the development of tourism and the health sector. Equipment investment, the last quarter of total investment, is evidently core in

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deploying an industrial activity. The democrati-sation of credit, exemplified by the Raiffeisen Banks, helped in this regard, by providing work-ing capital also to small undertakings. The in-dustries on which a spotlight will be cast are the chocolate and the chemical industry and, al-ready with regard to what happened in the inter-war period, watchmaking and the automotive in-dustry.

The third part of the text, placed under the head-ing ‘The End”, describes the nationalist policies that spread in the period between WWI and WWII. Market economic principles were already in decline around the turn to the 20th century as a chapter on increasing tariff protection and car-telisation in the preceding part describes. But it was the havoc in the monetary field and with re-spect to industrial relations WWI had left behind which prepared the terrain for a new era in eco-nomic history where protectionist policies domi-nated. Certainly, the ‘Roaring Twenties’ may be seen as an attempt to return to the mode of functioning of the economy known from the pre-ceding century, but this resurgence knew an ab-rupt end with the fall into the Great Depression. The rising role of politics is illustrated by a ven-ture into the automotive industry launched by a town where watchmaking had been dominant. The rigid statute under which this industry fell in the 30’ is also described. The cartelisation which marked the economy at these times where corporatism gained prominence as a model to organise both society and the econ-omy is exemplified by the boycott against a for-eign shoe manufacturer which was staged with the complaisant support of the Ministry of Eco-nomics. The example of this shoe manufacturer illustrates also that a distinctive feature of the current second wave of globalisation is indeed the breaking up of value added chains and not to sell globally or to proceed to direct invest-ments abroad.

2 If not indicated differently, the information in this section is from: Pfister, Christian (1995): Organisa-tion und Leistungen der pflanzlichen und tierischen Produktion, vierter Teil in Band 4 “Im Strom der

The Beginnings

How Swiss Agriculture grew

out of Subsistence Farming

The end of subsistence farming in the early 19th century2

Swiss agriculture was to some extent export-ori-ented already in medieval times. Export orienta-tion was possibly higher in the Alpine regions than on the Swiss Plateau, i.e. the region be-tween the Alps and the range of the Jura Moun-tains which is dominated by hills and where land improvement thanks to large scale draining of the low lands had not yet occurred. Indeed, in addi-tion to the export of manpower (mercenaries), cattle was sold by the Alpine communities on markets in Northern Italy and cheese produced by the cattle pastured on the alps in summer was exported, thus allowing imports of grain for hu-man needs into the Alpine regions where these crops could only be grown with difficulty.

Particularly in the region of the Swiss Plateau the so-called open field system prevailed. The Ency-clopaedia Britannica qualifies the open field sys-tem as “the basic community organization of cul-tivation in European agriculture for 2,000 years or more” and explains: “Its best-known medieval form consisted of three elements: individual peasant holdings in the form of strips scattered among the different fields; crop rotation; and common grazing. Crop rotation was by the two-field system in the earlier age and by the three-field system in the later centuries; in either case some of the commonly held fields were always fallow and used for common grazing.”

The transition that was ongoing at the beginning of the 19th century was the transformation of rights to put cows on the community land de-signed to common grazing by direct property of a slice of this land. Furthermore, small and large scale efforts were made with regard to land im-provement by draining. Finally, the feeding of the livestock in the stables replaced at least to some extent grazing; fertilizer could thus be collected more easily. The combined effect of these changes was an enhanced nitrogen circuit. Thanks to the fertilizer produced on the farm, fields no longer needed to be left fallow and the extension of arable land by meliorations allowed to keep the production of grain at a considerable

Modernisierung: Bevölkerung, Wirtschaft und Um-welt 1700-1914“ der ‚Geschichte des Kantons Bern seit 1798‘, editor: Historischer Verein des Kantons Bern

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level, with the production of foodstuff for cattle growing in importance.

The expansion of cheese exports after 1850

In the middle of the century, a second transfor-mation gained momentum. The production of cheese moved from the Alps down into the val-leys of the Plateau. The Emmental valley was a forerunner in this regard. The number of dairies increased significantly. Producer communities secured a sufficient supply of milk so that cheese could be produced daily throughout the year (economies of scale). The loaf of a cheese was increased to 50 kg which helped to secure quality and facilitated exports for instance to France. The connection of Switzerland to the European rail-way network brought an additional increase in the cross-border exchange of agricultural products, also in the opposite direction: if prices allowed a deal, cheap grain could now be imported from re-gions as far away as the Ukraine. The risk of fam-ine could be eliminated. At some stage, knowledge transfer occurred. Cheese-makers from the Emmental exploited their knowledge by moving e.g. to Germany (Tilsit). Therefore, Em-mental cheese is today a generic name for a cer-tain form of cheese and no longer qualifies as a registered and thereby protected indication of origin.

Jeremias Gotthelf is one of the prominent authors in Swiss literature of the 19th century. He acted as pastor in one of the villages in the Emmental valley and described the surge in the number of diaries in one of his late novels, entitled “Die Käserei in der Vehfreude”:3 He was an advertent observer of the transitions occurring, as the fol-lowing quote indicates: 4

«Zu Ende des verflossenen Jahrhunderts und im Anfang des gegenwärtigen fand eine grosse Re-

3 Gotthelf, Jeremias (1850): Die Käserei in der Veh-freude, available in different editions, no English version 4 “At the end of the last century and the beginning of the current, a great revolution took place in agri-culture. Up until then, grazing on fallow land but also in forests and pastures was frequent, breeding of cattle and horses was important and especially the latter were sold in all parts of the world. Since the so-called artificial grass was invented, i.e. since clover, sainfoin, alfalfa came into the country, feeding in the stable became possible, the forests were closed, the pastures cultivated and potatoes planted en masse, not only as if they were an af-terdish. Once the cattle was in the stables, there was fertilizer, thick and thin. It was utilised intelli-

volution in der Landwirtschaft statt. Bis dahin wei-dete man viel im Feld auf der Brache, in Wald und Weide, zog Rinder und Pferde, handelte stark, besonders mit den letzteren, nach allen Weltgegenden. Da ward das sogenannte Kunst-gras erfunden, das heisst Klee, Esparsette, Lu-zerne kamen ins Land, die Stallfütterung ward möglich, die Wälder wurden geschlossen, die Weiden urbar gemacht und Kartoffeln massen-haft gepflanzt, nicht bloss so gleichsam zum Des-sert. Sobald das Vieh im Stalle war, gab es Dün-ger, dicken und dünnen, fleissig und verständig ward er angewandt. Das urbare Land erweiterte sich in dem Masse, als man mehr Dünger hatte, ebenso mehrte sich der Viehstand und nament-lich die Kühe, welche Nutzung gewährten […] Mit den Kühen mehrte sich die Milch, denn es greift alles ineinander, und eines entsteht aus dem an-deren auf gar seltsame Weise, und oft so fein, dass das menschliche Auge die Fäden nicht ein-mal sieht, viel feiner als Kühe und Milch».

While he seems to endorse the change in agri-cultural production at the beginning of the century he was living in, he expresses more scepticism with regard to the 2nd transition described above, namely producing cheese for export. He points to the loss of influence experienced by the farmer’s wife due to the fact that she formerly could dis-pose of excess milk, deplores the greed for money perceived by him as creeping now into the rural society, and finally makes a clear plea in fa-vour of a diversification of (agricultural) produc-tion.

The fall into agricultural protectionism5

The USA which are criticised in the underlying text for subsidizing the production of cotton, are not alone in protecting its agriculture. In fact, Switzerland is worse.6 While falling outside the topic of replacing subsistence farming by a mar-

gently, and by working hard. The arable land ex-panded in proportion to the availability of fertilizer, the livestock grew to a multiple and especially the cows, granting ample use [...]. With the cows milk was now widely available, as things are inter-twined, as one flows from the other - and in some-times curious ways, according to threads so fine that they escape the human eye, threads much finer than those linking cows and milk.” 5 Source: Dictionnaire historique de la Suisse, “poli-tique agricole”, and author’s own professional ex-perience. 6 The producer support estimate amounted in the case of Switzerland to more than 50% of gross farm receipts while the value in the USA was less than 10% of gross farm receipts (OECD, Agricultural Policy Monitoring and valuation 2015, p.16).

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ket oriented production, a few notes on how pro-tectionism crept into Swiss agriculture policy shall not miss here.

The Confederation started to support the agricul-tural sector around the year 1880. At the time, primarily rationalisation measures should help the sector withstand the growing import competi-tion due to lowered transportation costs. First tar-iff measures turned against low-priced imports were then consolidated in the tariff scheme of 1902, an achievement of Ernst Laur, an outstand-ing leader of the farmers’ movement. After WWI, during which peasants fared well, the bourgeois circles allied with the farmers to fight socialism. In accordance with this alliance, farmers started to be granted considerable government support when times turned difficult in the 1930ies. In WWII, a coordinated effort was launched to en-hance agricultural production in the isolated country. To rationalise agricultural production was also part of the plan, but, politically, the im-portant message taken out of this period was that the country should preserve the capacity to feed its population under conditions of autarky. This goal was – inadequately from an economic point of view - translated in the important constitutional amendments of 1947 by an obligation of the Con-federation to take measures allowing a peasant on an efficiently exploited farm of average size to earn an income comparable to the one of an in-dustrial worker. Rapid growth of wages in the 1950ies and 1960ies made it ever more difficult to generate sufficient revenue out of a given sur-face of agrable land. Labour intensive produc-tions such as milk production or productions con-suming a small surface such as the production of pig meat expanded disproportionately, the food-stuffs being increasingly imported. This was in contrast to the underlying goal of autarky but po-litically this aspect did not matter, since the preservation of a rural population of considerable size, not suffering too much but enough to rally behind political leaders organising financial sup-port for the sector, was the device. Support was granted by supporting prices, allowing for some internal - albeit largely insufficient - structural change within the sector, while direct payments to farmers were for a long time rejected since this would – politically - have moved agricultural pol-icy in the realm of social policy. While in the 30’, as precondition for support, milk production had been limited to a maximum quantity at the farm level, in the 60’, only a country-wide limit was set and could be kept at high levels by dumping the excess production (cheese, mainly Emmental, and milk powder) on world markets, sometimes as food aid. Productivity increases at the farm level continued, although at a ratio limited by the small size of farms (Swiss farms were around 1990 half the size of the one’s in Southern Ger-many, although topographical conditions there

are comparable to those prevailing on the Swiss Plateau). A turning point was reached in 1986 when a referendum was launched against a re-formed support scheme for sugar beet produc-tion and succeeded. It became clear that peas-ants could no longer count to win popular votes for sure. In the ensuing reform step, direct pay-ments - of which cattle breeders in the Alps ben-efitted since 1959 - became generally available while support granted by way of guaranteed prices was gradually cut back. The reorientation occurred timely because it coincided with the start of the negotiations in the Uruguay-Round where it soon became clear that Switzerland would have no chance to prolong the waiver for its agricultural policy the country had obtained in 1966 when finally joining the GATT. The govern-ment continued to assume politically an overall responsibility for the evolution of the sector, how-ever. Expression of this fact is that every four years, a financial framework and a package of le-gal reforms are submitted to Parliament. These reforms were not only shaped by the outcome of the Uruguay-Round but also through the bilateral negotiations with the EU. In order to comply with the GATT obligation to cover all trade, the free trade agreements of EFTA have a national ad-dendum covering the agricultural sector (albeit the latter do not foresee to achieve zero tariffs). So does also the FTA of Switzerland with the EU of 1972 and its extensions. In particular, the agri-cultural agreement of 21 June 1999, in force since 2002, provides for the full liberalisation in trade of cheese after five years. Anticipating a similar step by the EU (which effectively only oc-curred in 2015) in order to be first in gaining mar-ket share, the agricultural reform package of 2007 brought the abolishment of milk production quotas at the farm level by 2009. The arrange-ments found within the “Interprofession Milk” since then stress competition policy rules to the utmost, however. In 2008, agriculture continued to employ 3.3% of the labour force (full time equivalents) (2.8% in 2013 (est.)), contributing 0.9% to GDP (0.7% in 2013 (est.)) so that labour productivity in the sector is far below the national average (actually at one quarter). Since then, the stalemate in the agricultural negotiations in the WTO had as consequence that reform efforts in the sector lost momentum. In the debate regard-ing the agricultural policy for the years 2014 to 2017, the agricultural lobby insisted with success on the fact that direct payments should contain – at least for a transitional period – also an income support component and not only be (generously) granted for efforts to preserve the landscape and secure a species-appropriate treatment of ani-mals. With regard to WTO obligations, the green box compatibility of a series of measures in place may be contested.

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Conclusions

Turning back to the transformations in Swiss ag-riculture in the 19th century, five specific elements can be singled out:

- New technologies led also to a deep organ-isational change within the sector

- Transportation costs significantly modified trade prospects

- Economies of scale were of considerable importance

- Measures of quality assurance needed to be taken

- Finally, knowledge was transferred abroad.

In the following chapters, such aspects will be deepened with regard to a series of productions.

From Machine-Looming to the

Shut-Down of Viscosuisse –

the History of the Swiss

Textile’s Industry

The onset of the Industrial Revolution

Prior to the 17th century, the manufacture of goods occurred on limited scale by individual workers. This happened usually on their own premises such as weaver’s cottages. Then, in the 18th century, production of yarn and cloth started to become an industry. This evolution was prompted by a series of technological innova-tions. In 1734, in Bury (Lancashire), John Kay in-vented the flying shuttle which, while increasing the width of cotton cloth, speeded up production at a loom for a first time. In 1764, James Har-greaves is credited as inventor of the spinning jenny which multiplied the spun thread produc-tion capacity of a single worker — initially eight-fold and subsequently much further. Also in 1764, Thorp Mill, the first water-powered cotton mill in the world was constructed at Royton (Lanca-shire), England. It was used for carding cotton. Better performing steam engines allowed soon locations off the rivers. With the spinning and weaving process now mechanized, cotton mills popped up all over the North West of England.

A similar evolution occurred also on the Conti-nent.7 Switzerland, in particular, quickly reached a high degree of industrialisation. At the middle of the 19th century, it was considered the most in-dustrialised country on the Continent, and within

7 The following paragraph is based on Lorenz Stu-cki: “Das heimliche Imperium”, Chapter 3, Bern 1968.

Switzerland, the canton of Glarus stood out. In medieval times, manpower had been exported from this canton in the form of mercenaries, but in this protestant community, merchants had later to replace mercenaries. They proved very helpful in commercialising the yarn and later the fabrics which started to be produced in the region. In 1714 a clergyman invited spinners from Zurich to teach local women how to make yarn out of cot-ton (in spite of the fact that the regime of guilds in Zurich prohibited such an export of knowledge). Intermediated by representatives of Glarus’ mer-chant families in England, Russia, Norway, Italy and Spain, the yarn finished there in weaving mills. Later, in the 19th century when spinning ma-chines replaced the spinning wheel, Glarus spe-cialised in textile printing. Other regions east of Zurich specialised in other productions within the textile industry. In St.Gallen and neighbouring re-gions, stitching became the dominant activity, while in Zurich silk fabrics played an important role throughout the 19th century (as in Basle, an-other town with a strong tradition of guilds). Zur-ich was also the town which benefitted most from the continental blockade in Napoleonic times. Smuggled through Bordeaux, 26 mules, each with 204 spindles, were installed in the secular-ised cloister of St.Gallen in 1801, and Escher Wyss in Zurich copied these machines and pro-foundly transformed the spinning industry in the country. Thanks to local production, the number of spindles increased from 400’000 in 1827 (half of them in the canton of Zurich) to 662’000 in 1844 (in 131 factories) to more than 1.35mio in 1857 (in 268 factories). The textile industry be-came the primary industry in Switzerland in the middle of the 19th century. Silk fabrics accounted for 60% of exports and cotton fabrics accounted for another 20%.

While silk fabrics continued to be essentially pro-duced in an artisanal manner well into the 19th century, weaving was exposed to an industrial revolution soon after spinning. Based on a first construction by Edmond Cartwright in 1785, Jo-seph Marie Jacquard from Lyon invented in 1805 a loom which allowed to weave fabrics with a swatch. In 1832, a first weaving factory was planned in Uster in the canton of Zurich, and this led to dramatic events. In fact, two political events which happened there in 1830 and 1832 made out of the small town of Uster, located some 15 km east of Zurich at the outskirts of a hilly region, a focal point in Swiss early industrialisation.

Since medieval times, the streamlet Aabach had provided energy to five grain mills. As early as 1815, a spinning factory was erected alongside

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the river.8 It was soon followed by a series of ad-ditional buildings of impressive size, all hosting textile manufacturing. The event which occurred in 1830 is still remembered, today, and thereby also the event of 1832, although only indirectly. The liberal community in Switzerland, tradition-ally led by the economic and political establish-ment of the canton of Zurich, meets each year on 22 November in Uster in order to commemorate the fact that consecutive to a meeting of the same circles in Uster on 22 November 1830, the rural areas of the canton reached the same political rights and economic freedom as the citizens of the town of Zurich held where the traditional re-gime of guilds had been re-established in the af-termath of the Napoleonic wars. The event of 1832, namely the arson of the spinning factory of industrialists Corrodi and Pfister occurred on the occasion of the second anniversary of this liberal gathering. In these years, hand looms were pre-sent in almost all farms, and middlemen provided the farmers with cotton and yarn while buying up their fabrics in exchange and selling them to the merchants in town. This business, while not really profitable, had allowed numerous families some improvement of their living conditions up to the year 1830. Many of them were also seriously in-debted, however. Machine looms now threat-ened their business in the same way as spinning machines had done two decades earlier by pro-gressively replacing spinning wheels dispersed over the countryside by concentrated production in industrial plants. A group of these self-em-ployed persons, and not the workers of the plant which defended their job within the building and soon had to defend their lives, put the plant on fire. Two members of the cantonal government could not stop the mob. The penalties inflicted by the liberal government on the leaders of the ar-son were drastic. They had to raze down - ac-cording to the verdict for up to 24 years - as chain gang the town walls of Zurich until they were par-doned in 1839 when the conservative opponents came to power again. Today, Uster still hosts considerable industry, but the factories are only of small size.9 While, in the sense of industrial up-grading, it is true that the production of cars, named Turicum, failed in 1914, the manufactur-ing of electrical equipment gained some im-portance.

8 The following indications are taken from Erwin Bucher (1982): Ein sozio-ökonomisches und ein po-litisches Kapitel aus der Regeneration, Schweizeri-sche Zeitschrift für Geschichte, Band 38. 9 Uster counted in 2012 12’312 full time equiva-lents. Of them 136 were employed in the 1st sector, 3067 in the 2nd sector and 9110 in the 3d sector. Only 3 units had more than 250 employees.

Another deep transformation in the textile indus-try occurred at the turn to the 20th century. It was caused by cross-fertilisation from the rapidly pro-gressing chemical sciences. Instead of pro-cessing natural fibres, synthetic fibres were pro-duced and transformed into fabrics. The major in-dustrial plant in Switzerland embarking on this technology was located north of the town of Lu-cerne, on the riversides of the Emme. For the township of Emmenbrücke, the company’s name «Viscose» (or later «Viscosuisse») became quasi a synonym for almost 100 years.10 This producer of textile yarns and fabrics is just one of the many other examples in Swiss industrial his-tory where an entrepreneur from abroad launched a major venture. Ernest Carnot (1866-1955), second son of the (assassinated) Presi-dent of the French Republic Sadi Carnot, had been trained in the École des Mines and founded in 1903 Viscose Française. Subsidiaries in Spain, Italy and Belgium followed, as well as the company in Switzerland in 1906. In 1908, the pro-duction of artificial silk out of cellulose started. The 1920ies brought a significant expansion, but in the Great Depression, the factory had also to shut down for a longer period. In WWII, cellulose wool was produced as a substitute for the miss-ing imports of natural fibres, and after the war yarns for tyres became an important activity. The production of Viscose lasted up until 1980. Thanks to the well-established relations with the French textile industry, Viscose Suisse obtained around 1940 the licence to produce Nylon which became the dominant product in the second fifty years of the company’s history. While developed in the US by DuPont de Nemours in 1935, Rhône-Poulenc got hold of the relevant patent in 1939. Rhône-Poulenc also controlled Vis-cosuisse – as the company had been baptised in 1976 – when in the period 1995 to 2006 a series of sell-offs gradually led to the end of the com-pany as an industrial producer. The reasons were the arrival of emerging nations such as China as producers of textiles and cloths.11

Considered over the entire 100 years the com-pany existed, the employment figures of the Vis-cosuisse Group are revelatory for the expansion and contraction the textile sector as a whole knew. The figures read: 1906: 60 employees, 1914: 800, 1924: 2'400, 1973: 5'500, 1980:

10 The following indications have essentially been taken out of the brochure: Rhodia Industrial Yarns SA (2006): 100 Jahre Fadenzauber – Jubi-läumsrückblick 1906-2006, rhodiazytg 2006 https://www.yumpu.com/de/docu-ment/view/6609323/100jahre-viscosuisse 11 For more information see the underlying book.

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2'003, 2006: 360. A few enterprises tried to con-tinue the tradition of textile manufacturing on the spot. They wore names like SwissFlock, Serge Ferrari Tersuisse, Monosuisse and Nexis Fibers. Nexis Fibers in particular intended to continue in the tradition of Viscosuisse, producing selected industrial yarns for the automotive industry (for airbags and tyres, e.g.) or to be used in medical devices. Owned by the financial investor Butler Capital, the enterprise employed some 300 peo-ple. However, on 13 March 2009, the custodian had to state that a financial recovery of Nexis Fi-bres was not feasible due to the carrying forward of too many losses from the past. As a conse-quence, the activities of the enterprise were sold one by one. Finally, in Winter 2011/12, the core buildings of the former plant were slashed. The name “Viscosuisse” is nowadays only used to designate a group of left behind real-estate com-panies and welfare institutions, testifying of for-mer better times.

Viscosuisse confirms that globalisation can more or less wipe out an industry when the real per capita income of a country multiplies and production in countries with lower income levels takes over.

The Honourable Merchant

Trading cotton – a traditional business for Switzerland

The preceding chapter has indicated the im-portant production of cloths and fabrics out of cot-ton in landlocked Switzerland already around the year 1800, making Switzerland the largest cotton importer in Continental Europe. The provisioning in cotton had to be organised by merchants. The Paul Reinhart Company in Winterthur is an ex-ample. The trading house was founded by Jo-hann Caspar Geilinger (1747-1800), a learnt goldsmith and later a notable of the town, in 1788 together with Christoph Blum (1757-1830). The activities consisted not only in imports of raw cot-ton, but also in trading of cotton yarns and export of cotton cloths. A few years later, Johann Cas-par Reinhart married the foster daughter of Blum and took over the business which is now run in the 7th generation by this family. Johann Caspar Reinhart had two sons, the elder Paul (1836-1902) giving the company its present name while the younger Theodor (1849-19) married Lilly Volkart and thus became partner in the Gebrüder

12 Before, the Navigation Acts had for some 200 years restricted the use of foreign ships for trade between Britain and its colonies. The latter were

Volkart AG, the better known cotton trading com-pany in Winterthur . While the latter concentrated its activity on doing business with India, the for-mer specialized in trading with Egypt where Paul Reinhart had learnt the business on the spot, af-ter having spent two years in South Carolina. Similar to Geilinger, Paul Reinhart also assumed a number of activities in the public interest. To-day, the company is run under the name “Paul Reinhart AG” Company by Jürg Reinhart from the headquarters in Winterthur and his cousin Thomas Reinhart in Beijing, China

The cotton trading company Gebrüder Volkart AG in Winterthur is also of considerable historic interest, namely due to the origin of its business with India. It was founded in 1851 in Winterthur and Bombay, two years after the repeal of the British Navigation Acts,12 and grew to rank four among the world’s largest trading companies in cotton in 1989 before it knew a rapid end. The founders of the company were Salomon Volkart (1816-1893) and Johann Georg Volkart. The latter had been working as a purchaser of cotton in Kalkulatta where his brother visited him 1844/45. The establishment of trading posts fol-lowed quickly after the launching of the com-pany, an agency being opened in Colombo in 1857, in Cochin in 1859 and in Karachi in 1861. The company acted as an importer of cotton, tea, oils, coffee, spices, natural rubber and other tropical crops and sent in exchange soap, stationeries, matches, watches, textiles, ma-chines and other industrialised goods to the In-dian subcontinent. While Johann Georg died al-ready 1861, Salomon Volkart was in his profes-sional life co-founder of the Bank in Winterthur (out of which UBS emanated) and a precursor institute of the «Winterthur» insurance company (now part of the Axa Group). By marrying Lilly Volkart in 1876, Theodor Reinhart became part-ner in the company. He had completed studies in law in Berlin, Heidelberg and Zurich, and pur-sued his training in Geneva, Le Havre and New York where he learnt the trading business. The-odor Reinhart supported artists, e.g. the painter Ferdinand Hodler, but it was his son Oskar who left the family’s collection of paintings and draw-ings by Old Masters as well as Impressionists that he had kept in his private house “Am Römerholz” to the Swiss Government, while Oskar’s brother Hans Reinhart (1880-1963) sponsored a prestigious Swiss award in theatre.

The Volkart Trading Company sold in 1989 the business with coffee to the Erb Group. Since the latter went bust in 2003, the coffee business is

prohibited from trading directly with the Nether-lands, Spain, France, and their colonies, thus pre-serving the mercantilist interest of the Britain.

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now part of the British EDF Man Holdings Lim-ited, still commercialising its product under the brand name Volcafe. In 1999, the business with cotton was also stopped, so that Volkart no longer deploys trading activities. A certain num-ber of foundations subsists. The best known is, as indicated, the Museum Oskar Reinhart am Römerholz in Winterthur. Furthermore, the building, erected in 1904/1905, which hosted the company’s headquarters shapes up until to-day the view of the city. Since a few years, it is used by the University of Applied Sciences.

Early expressions of CSR

In the present discussions about globalisation, the request of Corporate Social Responsibility ranks high and obliges Multinational Enterprises to adopt corresponding Codes of Conduct. It is not easy to find direct parallels to the concept of Corporate Social Responsibility in the first wave of globalisation. Admittedly, the idea that not only the labour legislation of the time should prevent the exploitation of the labour force but that entrepreneurs should actively invest in the well-being of their labour force may be traced back to the 19th century. Many companies e.g. built in the 19th century special housing for their employees in the belief that a well-housed em-ployee was more productive. Nevertheless, it would be wrong to reduce the concept of Cor-porate Social Responsibility to the attenuation of the tensions between labour and capital.

However, it may be argued that the ideals re-flected in Corporate Social Responsibility were in earlier times manifest in the precept to act as an honourable merchant.13 The latter concept is traced back to the North-Italian towns of the 12th century. It later became the ideal of doing busi-ness in the free Hanseatic Cities. For the leading circles in these towns, to win the favours of the Court could not constitute an objective. Their as-piration was directed to build up the reputation of the merchants and their families within the con-fines of the city, thereby also promoting the re-nown of the city’s community beyond its borders. It is all natural that this ideal of honest business practises spread to the medieval towns of Swit-zerland and the guilds that were governing them.

13 Schwalbach, Joachim (ed.) (2008): Corporate So-cial Responsibility. Zeitschrift für Betriebswirtschaft – Journal of Business Economics, Special Issue 3, Wiesbaden 2008 , p.79ff. 14 Keller, Gottfried (1886): Martin Salander, Berlin: Wilhelm Hertz (1st edition). 15 By emphasising „hand“, Pestalozzi implicitly op-poses to the educational ideal of being capable to participate in an inspired way in conversations in a Paris’ Salon the educational ideal of (simultane-

In Zurich, in particular, from where Gottfried Kel-ler, the author of the novel we consider below, originates, the merchants held a privileged posi-tion compared to the 12 guilds that emanated out of specific crafts since they had been organised in the 14th century together with the nobles re-maining in town in the society of the ‘constables’ and had, as cavalry, to defend in wartimes the banner of the town.

Martin Salander – a novel by Gottfried Keller

While the protagonist in the novel we consider here, namely ‘Martin Salander’, 14 earns his money as a merchant, his initial profession was the one of a teacher. On one hand, this reflects democratisation that occurred in Swiss towns with the French Revolution and opened up the possibility to switch professions responding to economic incentives. On the other, it makes out of the protagonist a defendant of the educational ideals that had been made prominent by Johan-nes Pestalozzi. The latter postulated that educa-tion can build on an inherently good character of the child and that education should develop head, heart and hand in a harmonic way, head representing the intellectual capacities, heart the moral standards and hand the practical skills needed in professional life.15

The story of Martin Salander is thus also a late example of the social or educational novel that marked German literature in the 19th century.16 To the question of how to become a valuable member of society, the author - who by his writ-ing, combined with his profession is the exponent of Swiss liberalism in the 19th century - gives a somewhat disillusioned answer in his elder days, however.

Gottfried Keller was born on 19 July 1819 in Zur-ich and died there on 15 July 1890. He lost early his father, a craftsman with civic engagement, and was brought up by his mother. A small herit-age allowed him a stay in Munich where he un-derwent training to start a career as a painter. Re-turning home without success he began to think of becoming a writer. Simultaneously, he got ever deeper politically engaged in the liberal move-ment. This helped him obtain the financing of a stay in Heidelberg from the liberal town of Zurich.

ously) being capable to earn an income in profes-sional life. This pleased the towns run by the guilds (and not a landed elite) and provided a conceptual basis for the emphasis put on vocational training in the German speaking part of Switzerland (as in the German speaking countries in general). 16 The plot has some resemblance with „Vanity Fair: A Novel without a Hero” by the English author William Makepeace Thackeray, first published in 1847–48 (in German: 1849).

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There he experienced the revolutionary year 1848 and the consecutive setback to the liberal movement in Germany. He lived then as a writer, first in Berlin up to 1855 and then back in Zurich where he was elected First Secretary of the can-tonal executive in 1861, an office he held until 1876 when he turned back to writing. In his nov-els, with considerable autobiographic content, he portrays the virtues, but also the shortcomings of the ordinary citizen. A distinct patriotism is over-laid by irony. This way to describe the acting of the protagonists renders the texts entertaining while amplifying the impact of the author’s liberal ideals on the reader. He is famous for the follow-ing appeal to the public spirit: «No government and no battalions can protect freedom and justice unless each citizen is prepared to step outside his door and see what is going on». This sen-tence is pronounced by an elder patriot who ren-ders with his comrades service to his country by attending a public fair and by donating dubious gifts for the winner of the shooting competition at the heart of the patriotic manifestation.17 Albeit the circumstances render the patriotic speech derisory, the quote is passing on to the reader the idea – as ‚Corporate Social Responsibility‘ does - that responsible private behaviour may substi-tute for government action; it even has to com-plement it.

In Martin Salander, published in 1886, we en-counter an author sobered by years of experi-ence in practical political life. Salander had been ruined by a comrade he knew from the teacher’s college, named Wohlwend (signifying turncoat). After seven years in Brazil where he reconsti-tuted his fortune he returns home to his wife and his three children who are just going bust on the sordid restaurant the mother had been running during his absence. The very day of his arrival he learns that he has essentially been ruined for a second time by his colleague Wohlwend since the bank in Brazil behaved in a fraudulent way and transferred his money on the latter’s account. Pursued by his creditors, the latter will then re-start his life in Hungary, presumably based on his friend’s money. Salander himself sets up a small shop for i.a. colonial goods for his wife and re-turns for three years to Brazil to reconstitute there his fortune for a second time. When returning home, his two daughters have grown up to young and now wealthy ladies who are targeted by sib-lings keen to launch a political career. In fact, they had thrown dices in order to determine who of the siblings has to enter the liberal party and

17 The fair is the ‘tir fédéral’ (federal shooting) of 1848 in Aarau. After the Swiss Civil War of 1848, which fortunately left only a few deaths, this fair significantly helped to reconstitute the identity of the republic.

who the democratic party since one party alone wouldn’t have offered enough opportunities for the two. Each is elected to become a public no-tary in one of the districts of what is the canton of Zurich (although no specific geographic indica-tions are given in the novel) but both will soon be sentenced to prison terms for having embezzled money. Before marrying the daughters, they had proposed Martin Salander as candidate for the canton’s parliament. The common wedding is turned by Salander into a public manifestation of liberal spirit. Salander now a person of public life, Wohlwend interferes for a third time in his life. When on visit from Hungary, the elder Salander barely avoids to succumb to the charms of the younger sister of Wohlwend’s new Hungarian wife and scantly saves his reputation. He concen-trates his hopes on his son Arnold who had stud-ied in London to take over later Salander’s affairs in Brazil before turning home. The end of the novel is not really told in the story itself but rather through the life of the author. The latter has no longer the vigour to write the planned consecu-tive novel in which Arnold would become a pillar of society. This is not too tragic since the way Ar-nold is characterised makes out of him a terrible bore.

The reader of today will point to at least two deli-cate aspects of the plot that presumably hardly bothered at the time. The first is how it comes that one can make twice a fortune in Brazil in a short spell of time? Brazil was the last country in the Western Hemisphere to abolish slavery in 1888. The second is the role of his wife who has to earn the family’s income during his absence but steps back once he has returned home. Only on one occasion, Salander makes the remark that his two daughters might have avoided to marry the two siblings if they had undergone thorough schooling and thereby been prepared for a self-determined life.

Comment

The novel is not accusatory but descriptive in na-ture. It depicts how society had departed from the liberal ideals which triumphed in the middle of the 19th century. While there is some disillu-sion about what is going on in political life, it would be wrong to say that a dysfunctional polit-ical and social system is portrayed. To show this, we make reference to the four principles which,

according to Archie B. Carroll,18 constitute the

social responsibility of enterprises

18 See Carroll, Archie B. (1991): The pyramid of cor-porate social responsibility: Toward the moral management of organizational stakeholders, Busi-ness Horizons, Volume 34, Issue 4, July–August 1991, Pages 39-48

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1. Companies have to operate profitably.

2. The law of the country has to be respected, unlawful business is prohibited.

3. Companies should act in a fair way towards all stakeholders even if such behaviour is more than law strictly requires.

4. Companies or their exponents should serve the public interest by actively supporting the community and the community‘s life.

All four elements are at least in some sense pre-sent in the novel:

1. Salander reconstitutes by his own effort – and supported by his wife – his fortune.

2. The fraudulent siblings end in prison.

3. Salander does not use available proofs to completely knock-out Wohlwend provided the latter stays abroad.

4. Salander is elected in the community’s par-liament not for career reasons but to put his liberal convictions better into effect.

To sum up: While faith in the good functioning of the liberal society is shaken, the appeal to civism remains.

The Federal Law on Work in

Industrial Plants of 1877

The liberal and the democratic movement

The notion of industrial relations, understood as the way employers and employees interact at the workplace, presupposes the existence of work-ers and industrialists, a condition that was only gradually met in the course of the 19th century.

The first half of the 19th century had been marked by the revolutions of 1830 and 1848 by which the restorative lash-back of the Congress of Vienna at the end of the Napoleonic Wars was – in the case of Switzerland - successfully overcome. Ru-ral elites could establish themselves at the side of urban elites. As Section 2 above described, the arson of the Corrodi textile fabric in Uster oc-curred at the second commemorative day of the liberal uprising of 1830. While self-employed

19 We do not address here the ‚Kulturkampf‘, i.e. the conflict of the liberal movement with the con-servative establishment in the catholic regions. This second element shaped also the constitution of 1874 and generally Swiss politics in the 2nd half of the 19th century.

persons in threatened economic situations were the major actors there, the situation of the work-ers in industrial plants gained subsequently in-creased public attention. The liberal movement which definitively came to power in 1848 was in-deed very successful in establishing decades earlier than in neighbouring countries the rule of ‘one man, one vote’, and concerned members of this movement thematised also the issue of child labour and protection of women in childbed. It is worth noting that the organisational degree of lib-eralism remained low. This was partly due to the fact that elections were held according to the ma-jority principle. Industrialists or the candidates they favoured were, based on their economic power, in a good position to win an electoral dis-trict. This initially very broad movement broke up into different strands (industrialists, small busi-ness, workers) essentially only after 1870.

The next social movement that deserves men-tioning is accordingly the democratic move-ment.19 It was not rooted in the “big” cities of the time, where the liberal elite was established, but evolved in confrontation with this elite (‘System Escher’) in secondary towns (such as Winterthur, second in size after Zurich in the canton of Zur-ich). The movement succeeded in establishing instruments of direct democracy in Swiss consti-tutions. At the federal level, first the referendum was introduced (compulsory with regard to con-stitutional changes since 1848, an optional refer-endum with regard to new laws was introduced in 1874), and later, in 1891, the popular initiative (by collecting 100’000 signatures, a constitutional amendment may be submitted to a popular vote). Interestingly, in the town of Zurich, the demo-cratic movement came to power after the insuffi-cient sanitary conditions led to an outbreak of cholera in 1867. As the ensuing creation of a pub-lic undertaking responsible for water provisioning exemplifies, the democratic movement was more open to government interference in the economy than the liberal establishment. Progressively, the decisions of the Railway Barons were replaced by decisions of cantonal executives, which some-times terribly failed with their own investment en-deavours.20

Affiliated with the democratic movement were the Grütli-Vereine. These associations - which qual-ify as the indirect precursors of the first labour un-

20 The write-down of the losses the city of Winter-thur suffered due to the bankruptcy of the ‚Na-tionalbahn’ weighed for years heavily on the town’s budget.

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ions and the socialist party - understood them-selves, as their name indicates21, (also) as a pat-riotic movement. The Grütli associations acted as multi-purpose organisations addressing several social needs of the emerging class of workers simultaneously.

The Law on Work in Industrial Plants

The adoption of federal legislation on work in in-dustrial plants falls into the early period of the democratic movement and the Grütli Associa-tions. At the cantonal level, the Canton of Glarus had been the pioneer within Switzerland with re-spect to the protection of children and women at work. The delay in the adoption of comparable legislation to Great Britain remained limited.

In Great Britain, in 1833, work by children was confined. While children up to 9 years should at-tend school, children at the age of 9-13 years should not work more than eight hours, children from 14 to 18 not more than 12 hours a day. Four inspectors were charged to enforce the law in the whole country. Next steps in Great Britain were (i) the interdiction to employ women in mines (1842), (ii) to limit work of children under 13 years to 6.5 hours and of women to 12 hours plus an interdiction to employ them at night (1844), (iii) a general limitation of working hours to 63 a week (1847), (iv) the extension of the legislation apply-ing to the textile industry to all factories with more than 5 employees (1867) and (vi) a minimal age for workers of 12 years (1901).

In the Canton of Glarus,22 the government prohib-ited in 1846 to employ children below 12 years in spinning mills, while limiting night shifts to 11 and day shifts to 13 hours. The interdiction regarding child labour became general in 1856, and the prohibition to work on Sundays followed in 1858. The normal working day was cut to 12 hours in 1864 and the interdiction of night shifts was adopted in 1864 in a public assembly and against the opinion of the executive. The public assembly had already adopted in 1848 and 1856 legislation concerning protection at the working place and of women in childbed. An essential aspect was that an inspector named by the canton and no longer the municipalities was in charge of enforcing the law. The canton of Zurich had even been earlier by prohibiting children at the age of school to work in 1837, but additional measures found only

21 The Grütli (today Rütli) is the mystic meadow on the Lake of Four Cantons (in the centre of Switzer-land) where the representatives of three of these cantons met on 1st August 1291 to seal a pact with the ambition to get rid of foreign rulers (such as the first descendants of the Habsburg dynasty) and, in particular, foreign judges.

approval in 1859. In 1877, a federal law inspired by the legislation in the canton of Glarus of 1872 came into effect. Only 9 of 26 cantons had adopted equivalent legislation by then. The re-form of the Constitution achieved by the demo-cratic movement of 1874 had conferred the right to legislate on labour issues to the Confederation. As a reaction, embroidery was transferred back to the family’s cottages in the canton of St.Gallen to escape the law … .

The evolution of industrial relations in the late 19th - early 20th century23

As indicated above, the Grütli Associations per-formed several functions for their members. These different functions were singled out in sep-arate organisations at the national level towards the end of the 19th century. Eight members of the Grütli association e.g. founded in 1851 the Kon-sumverein Zürich (Consumer Association Zur-ich), one of the organisations that placed them-selves under a common roof in 1890, out of which the Swiss retailer Coop emanated decades later. Grütli mutual health insurance, founded in 1872, continued to exist for decades before merging with two other mutual funds to become the health insurer Visana in 1996. As a first step to organ-ised labour on the national level, the (first) Swiss Labour Alliance (Schweizerischer Arbeiterbund) was founded in 1873, promoting actively the adoption of the Federal Law on Industrial Plants (Eidg. Fabrikgesetz; see above). The alliance fell apart because not all participating institutions (e.g. Grütli-Vereine) politically agreed with labour unions where the concept of class struggle gained some support. At its last congress in 1880, the dissolution of the Swiss Labour Asso-ciation was decided simultaneously with the foundation of the Swiss Labour Union (Schweizerische Gewerkschaftsbund). The sep-aration of the political wing from the labour mar-ket organisation occurred in 1888 with the foun-dation of the Swiss Social Democratic Party.

The first wave of globalisation did not spare the labour movement, rather it was then more open to external influences than today. Since prior cen-turies, fellow guild members used to tour Europe after completion of their apprenticeship; the Ger-man fellows met in towns like Zurich or Geneva and the associations they founded were often

22 Janser, Jaqueline (2010) : ‚Im Takt der Maschi-

nen‘ – Das Arbeitsrecht des Kantons Glarus im

19.Jhd. unter besonderer Berücksichtigung der

Fabrikgesetzgebung, St.Gallen : Diss. HSG. 23 The text is compiled out of numerous entries in the ‘Dictionnaire historique de la Suisse’. http://www.hls-dhs-dss.ch/f/home

16

(also) conceived to provide professional and po-litical formation to their members (Arbeiterbild-ungsvereine). The two labour leaders we will briefly portray below emanate out of this tradition.

This first stage of the evolution towards an organ-ised representation of labour interests with the Grütli Associations and the Swiss Labour Alli-ance had Hermann Greulich as the outstanding representative. He had a curriculum that couldn’t be more telling for the evolutions summarized in the preceding paragraph. Greulich was born in Breslau (Silesia, Germany) in 1842 under poor circumstances and went to Zurich for work after completion of an apprenticeship as typogra-pher.24 Here he first joined the labour formation association ‘Eintracht’ (concord) and soon, after reading early socialist writers, the International Labour Association in 1867. He became editor of the leftist journal ‘Tagwacht’ (literally: day rise), helped found the Swiss Labour Alliance (the lat-ter financing his journal), engaged for women’s emancipation but fought anarchism. Working for a certain time for the Konsumverein Zurich, he then established statistics on social conditions as a civil servant. He became head of the Labour Secretariat, an umbrella organisation subsidized by government, and helped shape in this capac-ity the elaboration of early social and labour leg-islation. He was a member of the National Parlia-ment from 1902 up to his death in 1925.

The next outstanding person is Robert Grimm who led the Swiss labour movement through the confrontational stage up to the end of WWI. He was born in 1881 as the son of a metal worker, his mother working as a weaver, and completed, like Greulich, an apprenticeship as typographer to become editor of the Bernese edition of the ‘Tagwacht’ in 1909, having been to Germany, France, Austria and Italy for work as a fellow of his guild. While Greulich had a paternalistic atti-tude marked by pragmatism, Grimm became an exponent in the fundamentally political discus-sions within the European labour movement up to the end of WWI. This political controversy fi-nally led to the separation of socialists or social democrats from communism with its multiplicity of strands (all criticising each other for the

24 Before WWI, the free movement of labour (per-sons) knew only limited restrictions. 25 Lenin was then allowed to cross Germany in 1917 in a sealed railway wagon for St. Petersburg to become an exponent of the October Revolution. 26 Translation: The requests of the national strike were: 1. Immediate re-election of Parliament based on a proportional vote, 2. Right to vote and of being elected for women, 3. Introduction of an obligation to work,

adoption of a ‘revisionist’ attitude …). Grimm led the general strike in Zurich in 1907 and partici-pated in the congresses of the 2nd International of 1907, 1910 and 1912 where he became member of the bureau in 1912. The 2nd International fell apart at the beginning of WWI upon the national-istic euphoria that made the labour movement in the countries participating in the war support the respective national coalition governments. Bene-fitting from the fact that Switzerland was not di-rectly involved in WWI, Grimm organised the so-cialist opponents of war in the conferences of Zimmerwald and Kiental in 1915 and 1916 (both places close to Berne) where Lenin, then a polit-ical emigrant to Switzerland, was among the par-ticipants. Lenin’s fraction lost the case for a dec-laration calling for the immediate transformation of an imperialistic war into a war of classes.25 Grimm, among the winners in Kiental, became the leader of the committee organising the na-tional strike of 1918. The requests of the commit-tee are indicated in the box:26

Die Forderungen beim landesweiten General-streik waren:

1. Sofortige Neuwahl des Nationalrats auf Grundlage des Proporzes

2. Aktives und Passives Frauenwahlrecht 3. Einführung der Arbeitspflicht 4. Einführung der 48-Stunden-Woche in allen

öffentlichen und privaten Unternehmungen 5. Reorganisation der Armee im Sinne eines

Volksheeres 6. Sicherung der Lebensmittelversorgung im

Einvernehmen mit den landwirtschaftlichen Produzenten

7. Alters- und Invalidenversicherung 8. Staatsmonopole für Import und Export 9. Tilgung der Staatsschulden durch die Besit-

zenden

Quelle: Flugblatt des Oltener Komitees mit dem Aufruf zum «allgemeinen Landesstreik» vom 10. November 1918 mit dem Titel "An das arbeitende Volk der Schweiz!"

This agenda was to shape Swiss politics for more than half a century, starting with elections in ac-cordance with the proportionality principle in 1919 and ending, finally, with the granting of vot-

4. Introduction of 48 hours of work per week in public and private enterprises, 5. Reorganisation of the Army to make it a people’s army, 6. Securing the provisioning of foodstuff in accordance with ru-ral producers, 7. An Old Age and Disability Insur-ance, 8. A government monopoly on imports and exports, 9. The pay-down of the public debt by the rich. The leaflet was addressed by the strike com-mittee on 10 November 1918 ‘to the working peo-ple of Switzerland’.

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ing rights to women in 1972, passing by the intro-duction of an Old Age and Disability Insurance (decided before WWII but introduced in 1948).

On the employer side, the evolution during the 19th century is more difficult to trace. Emanating from the tradition of crafts, eventually associa-tions by profession were founded. While some of these evolved towards unions, in others employ-ers had a final say. To organise advanced train-ing in the profession (e.g. master craftsman’s cer-tificates) remains important for many of them. On the other hand, already in 1870, industrialists from the textile industry had put up a common or-ganisation to defend their interest in tariff negoti-ations. Cantonal Chambers of Commerce plus employer organisations in other industries fol-lowed to constitute the Swiss Association of Commerce and Industry. This association re-leased statistics on commerce from 1878 on and constituted by 1882 a board that decided on the political positions the employers association(s) should defend, mainly in issues of foreign trade and economic policy in general. The Association of the Swiss Machine Industry was the first to es-tablish a parallel organisation, with quasi identi-cal membership, to deal specifically with organ-ised labour and legislation relevant for the labour market, the Employers Organisation of the Swiss Machine Industry. An association of such em-ployer’s organisation started in 1906 to edit the ‘Swiss Employers Journal’. Two years later, the constitution of the Central Association of Swiss Employers Organisations followed, integrating employer’s organisations and professional or-ganisations acting under the guidance of the em-ployer side.

To complete the picture of organisations relevant for the labour market, it is worth mentioning that the employees working for a fixed salary and therefore considering themselves as staff and not as part of the (blue collar) workforce founded their own organisation. Furthermore, the atheistic affinity of exponents within the Swiss Labour Un-ion was supportive of the constitution of labour unions with affiliation either to the catholic or

protestant church.27

27 With regard to the landscape of political parties within Switzerland, we have already seen that throughout the 19th century, the liberal movement was very broad. The Liberal Democratic Party was founded in 1896, only. It lost its monopoly on the liberal side (as opposed to the party close to the Catholic Church) with the transition in 1919 from the majority to the proportionality principle in the

The Peace Agreement in the Swiss Machine Industry of 1937

Today, Switzerland has a reputation as a country where strikes are an exception. The general opin-ion is that the peace agreement in the machine industry of 1937 paved the way to social partner-ship. Core to the “Peace Agreement” was an in-terdiction to go on strike in favour of the obligation to engage in a two-step arbitration procedure; this clause was supplemented by agreements on wages, holidays and the representation of the workers at the plant level. The duration of the agreement was initially limited to two years. The conclusion of this agreement marks an abolition of a confrontational attitude by the labour unions in the wake of WWII, also with the idea to prevent too strong government interference in labour re-lations as experienced in neighbouring countries. Economic prosperity reaching the whole of the population from the 1950ies on supported the evolution of a generally non-confrontational atti-tude at the working place. From then on, this at-titude was seen as being part of the ‘social capi-tal’ in Switzerland by a large share of the popula-tion.

Summary

When one looks at the evolution in the 19th cen-tury with respect to labour issues and compares it to contentious issues in the developing econo-mies today, the role of fighting child labour stands out as a primary concern then and today. To cur-tail the length of the working day or to give pro-tection to women in the weeks after they have given birth to a child appears as less prominent in the public debate today than 150 years ago. Presumably, safety at the workplace as a respon-sibility of the employer attracts today higher pub-lic attention than back in the 19th century.

A second feature worth mentioning is that con-cerns regarding the conditions at the working place were not articulated by organised labour. Unions needed first to constitute themselves. Ex-ponents of the leading society with strong liberal convictions promoted social legislation. Today, NGOs and other organisations of the civil society assume a similar role and risk, by promulgating their values, to be criticised for exerting a new

elections for the National Council (the Lower House), and had to relinquish part of the political power to movements with strongholds in particu-lar cantons (e.g. the Democrats in Zurich and the Grisons, the Citizen, Small Business and Peasants Party (strongest in the canton of Berne) and the anti-centralistic Liberals (in Basle and some French speaking cantons)).

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form of imperialism. This is in line with the fact that the inspectors of the industrial plants were at the time criticised by part of the labourers for de-priving poor families of an income by fighting child labour.

An interesting aspect of the evolution in Switzer-land and in particular in the canton of Glarus is therefore that labour legislation had a backing in popular votes. Occasionally, the constituency of the citizens of the canton adopted legislation with higher protective standards than the cantonal ex-ecutive proposed, the latter not only acting under the pressure of powerful entrepreneurs but also under the threat of losing competitiveness in the national market. In developing countries, similar elements of direct democracy are not present due to the different history these countries have known. One may argue that today international organisations give vote to populations that know difficulties in articulating their basic concerns and provide legitimacy to the banishing of child labour and the promulgation of decent conditions at the working place in general.

Finally, the cross-border interactions among la-bour movements appear as much stronger in the first wave of globalisation than today. This could not preclude the break-out of WWI, how-ever.

The Adoption of the Federal Law on Forests of 187628

A second extension of central government responsibilities for protective purposes

Wood is a renewable natural resource with many uses. It can be exploited in a cascading way, uti-lising the core of the trunk to gain building mate-rial while the outer layers serve for heating, an end to which old wood can also be used, today requiring an appropriate furnace. Not surpris-ingly, the progressing economic activity in the 19th century put the woods in Switzerland under increasing stress due to both uses. Given the fact that trees are best cut only after 60 to 180 years,29 a sustainable exploitation of this natural

28 This chapter is based on Bloetzer, Gotthard (1992): Zur Entwicklung der schweizerischen Forst-gesetzgebung, Schweizerische Zeitschrift für das Forstwesen, 143 (1992) 8: S. 607-627, except for the last paragraph before the summary and the summary itself which only reflect the author’s views 29 Leaflet: „Luzerner Wald im Gleichgewicht“ (see

www.lawa.lu.ch/prospekt_luzernerwald.pdf )

resource is not guaranteed. Furthermore, woods may be transformed into pastures or even arable land, and a growing population favours such transformation. Concomitant with industrialisa-tion on the Swiss Plateau, in the mountainous re-gions of the country, a non-sustainable exploita-tion of wood as a natural resource sat in, not with-out serious consequences. Sometimes, even the protective forests above the villages were thinned out.

The severe floods of 1834 and 1839 led to the adoption of first forest laws at the cantonal level but, particularly in the mountain regions, popular support was weak and did not allow for the adop-tion of cutting legislation. The federal constitution of 1848 changed the situation in three regards:

- The Confederation was given the power to es-tablish a Federal Polytechnical Institute. For-est Engineering was one of the departments created at the outset and the holder of the chair, Elias Landolt, significantly contributed to later legislation by proving the relation be-tween deforestation and floods.

- Secondly, the Confederation could grant sub-sidies and actually opened its purse after the grave floods of fall 1868. The decree on sub-sidisation of protective constructions along white waters and on reforestation of July 21st 187130 obliged the recipients to link these two approaches of adaptation and mitigation. The subsidies were hardly drawn on, also by the most affected cantons, however, and the more generously granted subsidies for the embankment of rivers might have had over-whelmingly negative effects, overcompensat-ing the effects of the decree.31

- Finally and most interestingly in the current context, liberalising trade i.a. by creating an internal market had complex effects on the environment which were also changing in the course of time, as we will immediately explain.

The immediate effect of liberalising trade was negative. The cantons in the Alps had more diffi-culties in limiting exports of wood from their re-gion to the prospering Swiss Plateau. These ex-ports became now more important as a primary source of income for the very poor local commu-nities of the time so that any restrictions of cutting woods met increased local resistance. While the

30 Bundesbeschluss (BB) betreffend Bewilligung ei-

nes Bundesbeitrages für Schutzbauten an Wild-

wassern und für Aufforstungen im Hochgebirge

vom 21. Juli 1871. 31 Embankment protects agricultural exploitation

on the spot but after embankment water is leav-ing a basin in a speedier way so that damage downside the river may be aggravated.

19

liberalisation of interstate trade achieved by the constitution of 1848 thus had rather dubious ef-fects, the liberalisation of cross-border trade pro-gressively attenuated the stress placed on do-mestic forests. Combined with technical ad-vancements in transportation, namely the con-struction of a railway network extending all over Europe, imports of competing sources of energy became possible. Switzerland possessing virtu-ally no coal deposits of its own could now better draw on the resources of the Ruhr area. 32 In-stead of rafting one form of energy down the riv-ers, a competing energy was now flowing up-wards on and along the Rhine.

Article 24 of the revised federal constitution of 1874 entrusted the Confederation with the gen-eral supervision of the exploitation of forests in the mountainous areas. A first federal law on for-ests was quickly prepared and on 24 March 1876 approved by the Federal Parliament. The essen-tial provision was an interdiction of clearcutting woods so that the surface of Switzerland covered by forests was from then on essentially protected. Other provisions required the measuring of the forests, an interdiction to split up or sell off par-cels of forest in pubic possession, and the re-demption of rights for secondary exploitations of forests. Plans for the exploitation of woods had to be established, considering also the exploitation of forests in private possession. The latter could only be expropriated conditional on appropriate compensation. Generous subsidies were in par-ticular granted for the reforestation of protective forests.

Increasing the rate of subsidisation from some 30-40% to 70% succeeded in increasing refor-estation from a meagre 30ha in 1870 to 370ha in 1900. Still, embankments continued to be fa-voured when one considers the allocation of pub-lic funds so that it became essential to link the granting of these subsidies to the adoption of pro-jects of reforestation. The melioration of terrains along the rivers also helped push back the sec-ondary utilisation of forests as pastures.

32 These assertions reflect the content of the

following quote out of the article by G.Bloetzer

on which this section essentially builds: „Trotz all

dieser Massnahmen wären aber die Resultate

wohl noch bescheidener ausgefallen, wenn nicht

gesamtwirtschaftliche Verbesserungen eine stär-

kere Schonung der Wälder ermöglicht hätten.

Von grundlegender Bedeutung war die nach dem

Bau der Eisenbahnen erhöhte Einfuhr von

Brennstoffen. Gleichzeitig ermöglichten die ver-

mehrte Einfuhr von Grundnahrungsmitteln sowie

A revision in 1897 of article 24 of the constitution made forests on the Plateau also eligible for fed-eral aid. An improvement of local air quality, a prevention of droughts and, for the first time, the recreational value of forests were indicated as the motives for the amendment.

Forest legislation in the 20th century

The outstanding provision in the law of 1876 was to prohibit deforestation except when reforesta-tion in a near-by region can compensate for it. This provision made the area covered by forests in Switzerland increase by some 30% or 250’000ha from 1902 up until 1990. The revised law of 1991 not only confirmed this provision, it followed the law of 1876 also in the sense that ever more activities linked to the exploitation of forests became eligible for subsidisation by the Confederation. When a general review of finan-cial flows between the Confederation and the cantons was decided, the law on forests had con-sequently also to be submitted to a revision. The solution found was to fix a global purse for four year programmes to be submitted by the can-tons, including a monitoring of the efforts accord-ingly undertaken.

While exploitation of forests increasingly suffered from serious over-administration,33 an interesting aspect of post WWII forest legislation is that EFTA-membership of Switzerland prevented for-est policy to run fully into the trap agricultural pol-icy had fallen into by stemming against structural change: The EFTA-colleagues of Switzerland, all heavy exporters of wood, insisted on considering wood as an industrial product and not an agricul-tural product. It thus fell under the obligation as laid down in the free trade agreements between the EU and the then member-states of EFTA to slash tariffs to zero.

Later, in the 1980ies, when the debate over a loss of vitality of the forests ran high, the frustra-tion interested groups in Switzerland felt due to not obtaining border protection for wood out of domestic forests made it necessary to calm inter-ested circles by launching (with a small purse of

die grossen Flusskorrektionen und die Meliora-

tion der versumpften Talsohlen die Reduktion

der landwirtschaftlichen Nebennutzungen in den

Bergwäldern. Der Holzaussenhandel entwickelte

sich allmählich von den früheren Exportüber-

schüssen zu bedeutenden jährlichen Mehrimpor-

ten.“ 33 E.g., only persons having completed a degree at the tertiary level are entitled to designate the sin-gle trees to be cut within a parcel of forest.

20

CHF 17mio) a stimulus programme “wood” . It pri-marily promulgated the use of wood as a con-struction material among architects, engineers etc., supported by technical expertises. Today, the sector lobby continues to emphasise that the annual increase in the volume of wood stocked in forests in form of trees remains higher than the cubic metres taken out of forests for commercial purposes. This concern led the canton of Grisons to subsidise a large sawmill, thereby seriously challenging the fairness of interstate trade. For-tunately, the Parliament of the Grisons refused with one vote difference a second subsidy for this plant which then shut down. Most recently, the point was made that there is an overprotection of the surface covered by forests in Switzerland. It should be made possible to cut forests back to former borders when former owners had allowed trees to grow in formerly agriculturally exploited land.

Summary

The case of forest legislation in Switzerland shows parallels to the debate on CO2 emissions. While, in the latter case, we have a juxtaposition North South, we had in the former case a juxta-position Plateau Alps. The latter region made also the point that they were submitted to strin-gent rules after the prosperous regions had run down their stock of a natural resource. As with CO2 emissions, in an early stage, the creation of knowledge played an important role, in the spe-cific case the relation between floodings and the reduction of the surface covered by forests. Sub-sequently, a period followed where in parallel mit-igation and adaptation measures had been taken. It is interesting to note that in these periods trade exercised effects on the environment that were ambivalent and correspondingly hard to predict. Government interference suffered right from the beginning of a lack of cohesion. Subsi-dies granted for other activities linked to the use of land (embankments) largely annihilated the ef-fects of the subsidies granted for the conserva-tion of forests. In the following years, there was a progressive degradation in the quality of govern-ment interference in the sector. Rent seeking led to regulations with increasing differentiation and consequent complexity in application. Good in-tentions combined with strong lobbying led to an economic sector suffering from extreme rigidities when exposed to structural change. The risk is considerable that legislation targeting specific sectors is neither sufficient nor even useful to at-tain given objectives, the latter risk increasing with the time such legislation is in effect. There is a strong case for sunset legislation when inter-

34 The information is from the homepage of the Central Commission for the Navigation on the

vening in single sectors, i.e. laws that expire au-tomatically after a certain time. At the same time, one should nurture no illusion regarding an effec-tive abrogation of measures whenever they have been introduced for a first time. Lobbies when-ever established will see to the contrary.

Developing Transportation

Infrastructure

Navigation on the Rhine34

Major efforts to liberalise navigation on the Rhine date back to the time of the Napoleonic Wars. In 1804, the various tolls in existence on the Rhine were abolished in favour of the institution of a Rhine toll, levied by a first international admin-istration located in Mainz. The Treaty of Paris of 30 May 1814 then laid down the principle of the freedom of navigation on the major international rivers of Europe, while Appendix 16 B of 24 March 1815 of the Final Document of the Con-gress of Vienna created the Central Commission for the Navigation on the Rhine. Its members were representatives of the States bordering the Rhine. The Mainz Convention of 31 March 1831 was replaced on 17 October 1868 by the Mann-heim Act, the Central Commission having changed its seat. This Act upheld both the princi-ple of the absence of tolls levied for navigation on the Rhine and the possibility for those States that were members of the Central Commission to adopt common regulations (subject to a veto by each State). Topics covered were and still are boatmen’s licences (Protocol of 4 June 1898), the transport of dangerous goods (1868), and further police regulations (1869). Due to the appurte-nance of the Alsace to the German Reich, France seized to be member of the Commission from 1871 up to 1919, when Switzerland, Belgium, the United Kingdom and Italy also became members and the Commissions’ seat moved to Strasbourg. Germany (and Italy) withdrew in 1936 from the Commission - but in essence continued to apply the provisions of the Mannheim Act - while the US became member for a limited period after WWII. Germany became member once more of the Commission in 1950 (while the UK changed membership into an observer status in 1993). In the immediate period after WWII, the Commis-sion worked on simplifying Customs formalities. It intervened with the military authorities for the removal of military bridges that were hindering navigation. Later, the signatory states concluded

Rhine CCNR, see http://www.ccr-zkr.org/10000000-en.html

21

specific agreements regarding the working con-ditions and social security arrangements for boat-men on the Rhine. Collaboration with other inter-national organisations developed, particularly with the High Authority of the European Commu-nity of Steal and Coal and subsequently with the European Community. From 1980 on, gradually, the principles and the rules governing navigation on the Rhine were taken up, according to various procedures, and extended to inland navigation throughout Europe. This is one explanation why currently eleven States (mainly from the Danube basin) hold an observer status in the Commis-sion, namely Austria, Bulgaria, Luxemburg, Hun-gary, Slovak Republic, Romania, UK, Ukraine, Poland and the Serb Republic. In fact, while the Rhine is today an integral part of the European network of inland waterways, it remains the most active and the most highly evolved section, and out of this leader position the Central Commis-sion is working increasingly on matters that con-cern not only the Rhine but also inland navigation in Europe as a whole. Accordingly, co-operation with the European Union is increasingly close.

For landlocked Switzerland, navigation on the Rhine is the only means of transport where free passage down to the Sea is fully guaranteed. All signatory states of the Mannheim Act hold equal rights and unanimity is required. If ships comply with police regulations, they are free to use the river, a number of side-rivers and the many ways to the Sea in the BENELUX States unim-paired provided these are declared navigable. All regulations are uniform and apply equally, and any undertaking that creates an obstacle to the navigation (such as a barrage) is held liable to construct and offer a costless bypass such as a sluice.

The Construction of the Gotthard Railway Tun-nel beneath the Alps

For Europe, the North–South transportation axis constituted by the Rhine finds its principal prolon-gation in the crossing of the Alps over the Gotthard. When engineering progressed in drill-ing tunnels, the extension of the railway network along this axis followed suit.

The railway tunnel beneath the Gotthard35 linking the regions north of the Alps to the Italian penin-sula is 15 km long and consists since its con-struction around 1880 of a single, double track tunnel, situated at an altitude of 1106 meters

35 Valuable information was taken from: Moor, Reto (2004): Ausbau der Bahn- und Strasseninfra-struktur am Gotthard von 1850 bis 2004. Hoffnun-gen, Befürchtungen und Auswirkungen im Kanton Uri. Institut für Verkehrsplanung und Transportsys-

above sea level. The northern ascent in the can-ton of Uri begins at 435 m above sea level and the southern ramp, in the canton and along the river Ticino, at 303 m above sea level. The massif above the level of the tunnel is between 400 me-ters and a maximum of 1800 meters high with an average of 1100 meters, pushing the tempera-ture within the tunnel up to some 33o Celsius.

The history of the construction of the tunnel reads as follow: On 19 August 1853, nine years after Switzerland had been connected to the Euro-pean railway net, nine cantons organised a Gotthard Committee. Engineer Koller developed a first project for the connection between the Lake of Lucerne and the Lago Maggiore (123 km). When Alfred Escher, president of Zurich-based Swiss North-Eastern Railway (NOB), ad-vocated the line over the Gotthard, the decision was fallen against constructing the railway tunnel more to the east, through the Grison mountains, and therefore closer to the Brenner, where the first railway line running North-South through the Alps operated from 1867 on. Politician and banker Alfred Escher, the most powerful and in-fluential Swiss personality of his time, vigorously pushed the Gotthard idea as president of the committee, nationally and internationally. At the Gotthard Conference in September 1869 in Bern under the chairmanship of Federal Councillor Emil Welti, Italy, Prussia with its German allies and Switzerland decided on the construction of the tunnel. Overall, the amount to be spent for the Gotthard route should be 187 million francs, of which around 60 million for the tunnel. Italy should assume 45 million, the new German Em-pire and Switzerland each 20 million, the rest should be raised in the capital market. Switzer-land and Italy formally signed in 1869 the so-called Gotthard contract while the German-French war delayed the signing by the northern neighbour. On 28 October 1871, finally, the newly installed German Kaiser mandated his Chancel-lor Bismarck with giving his signature.

The agreement has detailed provisions beyond the sharing of costs, e.g. the line should be built as a continuous double track adhesion railway with a maximum gradient of 26 ‰, 23 ‰ in tun-nels and a minimum radius of 300 meters. Swit-zerland also assumes the obligation to let run in the summer at least three and during winter at least two passenger trains daily. These trains should run without transfer to another train and one of them should circulate as an express train.

teme, Eidgenössische Technische Hochschule Zü-rich (2004 http://e-collec-tion.library.ethz.ch/view/eth:28881?lang=de . The entry and links provided in Wikipedia under the keyword „Gotthardtunnel“ as of 20.8.2014 proved also useful.

22

Maximum prices fixed in the contract on a most favoured nation basis were well below the prices a ticket finally costed. The provision saying that if the interest on the share capital exceeds 9 per-cent, the company is held to a reduction in prices, remained void.

On 6 December 1871, the Gotthard Railway Company (GB) was established under the chair-manship of Alfred Escher who had founded in 1856 the Schweizerische Kreditanstalt (today Credit Suisse), he still chaired, and which played an important role in the financing of the Gotthard Railway. The fact that he signed the contract for both sides is an early expression of deficient cor-porate governance. After an incredibly short deadline for the submission of six weeks arrived seven offers. The contract was awarded to the Geneva-based company "Entreprise du Grand Tunnel du Gothard" of Louis Favre and signed on 7 August 1872. The primary competitor was the Italian company "Società Italiana di Lavori Pub-blici" led by Severino Grattoni. Grattoni had al-ready created the then longest 12-kilometer tun-nel in the world, the Mont Cenis Tunnel, linking Torino and Lyon. Favre, who had previously not built a tunnel longer than 1000 meters, bet on re-cruiting miners and engineers from the Mont-Ce-nis tunnel and bought also the tunnel construc-tion equipment from there. He undercut the fellow competitors with his price, accepted ruinous con-ditions and deposited a guarantee of CHF 8 mil-lion, to experience later the curse of the winner. He promised a construction period of eight years, given the unknown geology a risky undertaking. A fine of CHF 5’000 threatened per day in the first half year and 10’000 francs in the following pe-riod, if the agreed construction time had passed, and if the delay were more than a year, the de-posit paid should be forfeited (in case of early completion, the CHF 5’000.- and 10’000.- would have been due as a premium).

At the beginning, the engineers were fighting with great technical difficulties, particularly on the southern side. The rock changed sometimes every dozen meters his texture, enormous water inrushes occurred repeatedly, stopping for weeks the construction activity, and, in places, the tem-perature in the tunnel rose to 40°C. The toxic fumes of dynamite caused diseases in the respir-atory tract and the eyes of the miners, so that the shift length had to be reduced to five hours. Favre got more and more behind his schedule and in-creased the number of workers constantly. In Göschenen worked up to 1’645, in Airolo up to 1’302 workers, mostly Italians from the poor rural areas of Piedmont and Lombardy. The workers lived in squalid and overcrowded lodgings and were financially exploited. Minors earned in a shift about 3.90 francs but two-thirds of their sal-ary was deducted for food and accommodation,

and additionally they had to pay out of their own pocket 30 cents a day for the lamps and the oil these needed. Five francs were stripped them also monthly for clothes and two francs for the residence permit in Switzerland. A portion of the earnings were paid in coupons that could be re-deemed only in the company's own shops.

On 27 July 1875, the workers in Göschenen went on strike and blocked the tunnel entrance, de-manding one franc more per day. A hastily put together, overwhelmed militia unit, 21 men from Altdorf, shot into the crowd, killing four workers and seriously injuring several others. An official investigation proved the worrying situation, but the required better working conditions were never enforced. 7½ years after the launching, the Gotthard was penetrated on 29 February 1880 with deviations laterally only 33 centimetres and 5 centimetres in height. Of the 171 deaths that are mentioned in the casualty list in the Federal Archives, 53 workers were crushed by wagons or locomotives, 49 smashed by rocks, 46 killed by dynamite, and 23 lost their life in other ways, one of them drowning. The official statement put the blame of each accident on the victim himself. Many more men died over the following years due to the injuries they had suffered during the tunnelling or of silicosis.

The inauguration occurred in May 1882 with fes-tivities starting in Lucerne on the 22nd and end-ing in Milano two days later, but neither Favre nor Escher were present at the party. On 19 July 1879, Favre was attacked during a visit in the tun-nel at kilometre 3 of a malaise and died a few minutes later at the age of 53 years due to heart failure. After completion of the construction, the Gotthard Railway Company sued Favre's enter-prise for arrears in the millions and ruined his es-tate. Total costs for the tunnel amounted to CHF 66.67 million, 7 million more than initially budg-eted, but 19 million more than offered by Favre. Later, his daughter should receive a life annuity of 10’000 francs, allowing her to establish as a middle-class family. Due to the delays, also the prices of the shares fell through the floor and at times the building was called into question. A supplementary financing was only possible thanks to Italy and Germany granting new pay-ments after another international conference. Al-fred Escher, by his function responsible for the financial debacle, was forced to resign from chairmanship of the Gotthard Railway Company under pressure from the Federal Council.

The undertaking was an immediate success. In 1897, 61 trains a day passed through the tunnel. The fare for the 20 minute ride was CHF 2.70 in the first class, CHF 1.90 in the second class and CHF 1.35 in the third class, an amount to be com-pared with the CHF 3.90 paid to a minor a day.

23

New tunnels follow 100 years later

One hundred years later, the Gotthard was to be penetrated for a second and another quarter of a century later for a third time. From 1970 to 1980, a road tunnel was constructed parallel to the rail-way tunnel. The construction time was the same, but the profile of a road tunnel is considerably larger than the one of a railway tunnel, so that it would be hastily to conclude that there was no technical progress in tunnelling. Currently under construction is a 57 km long double track railway tunnel through the Gotthard at some 400 m above sea level. After exploratory drillings, the construction began in 2002 with the installation of the two tunnel construction machines, each as long as four football fields, reflecting a general in-crease in capital intensity over the decades. The breakthrough in 2010 also came 8 years after drilling started, but for a tunnel three times as long. The opening took place in 2016 only. One reason is public procurement legislation. The ten-der for the equipment of the tunnel was launched in 2005 and the contract worth CHF 1.69bio was awarded on 4 May 2007. However, the losing consortium appealed to the Federal Administra-tive Court, the latter denying in November 2007 a suspensive effect of the appeal, whereupon the plaintiff and the building owner agreed on with-drawing the lawsuit against payment of compen-sation. The cost of a delay having been estimated to CHF 10 million per month, a political discus-sion started to exclude the suspensive effect of appeals against award decisions by law, but the idea did finally not pass. As of 2010, the esti-mated final costs for the base tunnel will amount to CHF 12bio, CHF 4.63bio or 60 per cent more than anticipated in 1998. A cost-benefit analyses estimated in 2010 the recurrent economy-wide benefits of the tunnel at CHF 18mio, a meagre annual return of 0.2% over investment costs.36 Considering the currently low interest rates, this is no longer the same concern as when the addi-tional costs became known, however. The future of the tunnel of 1882 after the opening of the base tunnel is still open.

Summary

The rapid deployment of a railway network in the 19th century put Switzerland at risk to be circum-vented and to suffer a competitive disadvantage. While a private initiative had been driving the

36 See Suter, Stefan and Christoph Lieb and Philipp Walker (Ecoplan)`: Volkswirtschaftliche Beurteilung von Finanzierungslösungen für Verkehrsinfrastruk-turen, Staatssekretariat für Wirtschaft, Reihe Strukturberichterstattung Nr. 48/3 37 This assertion is motivated in the Chapter 9 in the underlying text.

construction of the Gotthard Tunnel, the asser-tion37 that public planning and support is a pre-condition for the realisation of such works is con-firmed also by this example: The conclusion of a treaty among Switzerland, Italy and Germany preceded the launching of the construction. To put public construction work at tender is nothing new since it happened, as shown, already when the first tunnels through the Alps were con-structed one and a half century ago. While at the time, the private decision fell against a competing project (a Splügen-Tunnel across the Grisons), in recent times, it was decided to construct simulta-neously two base tunnels North South (addition-ally also one on the Lötschberg-Simplon line), to comfort all regions of the country. We encounter a problem inherent in public infrastructure spend-ing, namely over-investment and consequently poor returns. On the other hand, due to the low financing costs the Government faces, Public-Private-Partnerships never became important in Switzerland and the inherent problems of incom-plete contract specification were therefore never as prominent as in other countries. A major un-settled problem with public procurement legisla-tion is judicial protection: While competitors re-main interested in obtaining the contract, the pub-lic interest consists in avoiding delays in infra-structure development. To pay simply a fine to competitors when their offer was not examined in a fair way would enhance the risk of favouritism in the adjudication procedure, however.

The Unfolding

The Construction of the Churchyard Quarters in Bern38

Urbanisation in the 19th century as background

Bern is built on a river loop, the northern, eastern and southern riversides along this loop climbing relatively steeply and by about 40m above the level of the river, the Aare, before giving way to flat terrain. Accordingly, the onset of population growth, the demand for commercial space and the general urbanization in the first half of the

38 The text is mainly an extraction and translation

of an article prepared by the ‘Stiftung Kulturgüter-

schutz’. http://www.sgkgs.ch/fr/Biens-culturels-

/Monuments-historiques/Bern/Bern-Villenquar-

tier-Kirchenfeld

24

19th century led to a westward expansion. The fortifications were razed and a disorderly settle-ment along the outward roads sat in. In spite of being much closer to the centre of the town, and made up of large flat fields, the Hospital Yards in the north (Spitalacker) and the Churchyards in the south (Kirchenfeld) remained virtually un-touched, even after the construction of bridges at river level. In order to contribute to the revitaliza-tion of the Old Town, in 1844, the Nydegg-Bridge was opened, extending the east-west axis of the town beyond the river. In 1856, the community of the families having Bern as its town of origin took over the Churchyards in the south, which had passed to municipal ownership in the aftermath of Reformation. Within this civic community (ex-isting side by side with the municipality of Bern) soon voices were heard who desired an exploita-tion of these idle assets. Main obstacle to the re-alisation of profitable projects were the high costs for constructing a bridge over-arching the river at a height of some 40m. Due to the financial losses the corporation had suffered when funding the Nydegg-Bridge, caution had spread in the local community. But the idea remained.

Architectural inspirations from all over the world

A first concept for the urbanisation of the Church-yard Quarters was submitted in 1859 by Friedrich Studer and his partner Edouard Horace Davinet, based on a checkerboard pattern aligned in east-west direction, similar to the towns erected in the US founding period, the quarters being sur-rounded by English gardens, including also the Dählhölzli Forest. But continental influences were also present. In 1865, a project baptized "Rond-Point" thus showing the source of inspira-tion proposed a square in the area of present-day intersection Thunstrasse/Dufourstrasse with ra-diating roads. The author, the engineer-topogra-pher Philip Gosset had been born 1838 in Berne as an Englishman, but received his engineering degree in Paris; he later built up a reputation as a glaciologist. In 1870, as a next step, a Church-yard Committee got constituted by businessmen, bankers and wealthy citizens, but also some en-gineers and architects plus a representative of the municipality. This committee submitted its proposal in 1875, a grid plan with irregular quar-ters, broad avenues and a polygonal square, the whole aligned to a bridgehead located at the ex-tension of main axes of the ancient town. How-ever, all these projects failed to address the con-cerns of the conservative civic community. The

committee was successful only when a proposal could be submitted to the authorities not requiring “any substantial sacrifices" by the city. Philip Vanderbyl, a financier from London, declared "on behalf of a group of English capitalists" who joined forces for the "Berne-Land Company" tobe ready to build the bridge for free, as long as the Churchyard fields (approx. 80 ha ) were sold to the Company at a price of CHF 425'000 -. The Company also committed to cede land for free for public buildings and churches, and to create all roads according to an agreed plan.

Helvetia Square, Jubilee Place and Thun-Square should become the points where the new roads would meet. The Thun-Square was located at the intersection point of the two visual axes: House of Parliament - Helvetia Square – Thun Avenue and Minster Platform - Mermaid Street – Bernese Alps. Similar considerations determined the loca-tion of the Helvetia Square and the Jubilee Place. The project found the approval of all authorities and in 1881 began the construction of the bridge. It was opened two years later with cannon fire, a folk festival and the first Bernese bike race.

So clearly the grid plan of 1881 was fixed in the contract, it said nothing on the subdivisions of the single yards and the architecture of the new buildings. Only the construction of factories was prohibited close to the riverside. And the propa-ganda brochure of the committee declared clearly that no "proletarian quarters" would be constructed, the high prices of the terrain making this for sure. The residential building type of the 19th century, the villa, should dominate. The most significant change to the plan of 1881 af-fected the Helvetia Square where - following the spirit of a subsequent period - the Historic Mu-seum was placed in the extension of the southern bridgehead, a building with uncut stone walls and towers, suggesting a medieval castle.

To the surprise and chagrin of the Company, the sale of building lots was more than sluggish. However, despite faltering sales, the target was in the end substantially achieved: the Churchyard quarters became a district of villas and residential buildings, supplemented by "upscale" services such as several museums, the National Library and the Federal Archives. It is more than symp-tomatic that the only major industrial facility, in-cluding a high chimney, erected in the Church-yards was a money factory, namely the Federal Mint.

25

.

In order to accelerate the sale of building lots fi-nally a construction company was founded which created turnkey villas and sought buyers. The “Berne-Land-Company” also launched an archi-tectural competition for villas, to gain ideas and to attract the attention of the "real estate commu-nity". Among the submissions, in an age of stylis-tic pluralism, projects representing different tendencies were chosen: one type was repre-sentative of the generally popular English cottage style, another design was in a rural style, finally two urban building types found approval. Archi-tectural quotes were taken from the whole world, “style” in these times meaning attitude, general impression. The bumpy rhyme which survived well into the 20th century confirms this "Who thinks highly of himself, lives on the church yards." 39

The Company later admitted a number of tract houses, which, however, had to dispose of sym-metrical corner buildings and a prominent central building, suggesting a palace-like construction.

39 „Wer etwas auf sich hält, wohnt auf dem Kir-chenfä[e]ld“.

Comment

Three aspects deserve attention:

- to launch a large scale project allowed for sys-

tematic planning, the westward expansion of

Bern never having achieved comparable ar-

chitectural quality,

- the project is an early example of a successful public-private partnership with injection of for-eign capital into land ownership, and

- with growing prosperity, ownership was grad-ually dispersed over a broader population group.

The experience with the venture of the Berne-Land-Company questions the economic sound-ness of the provisions know all around the world which make access to land for foreigners much more difficult than access to other assets with which the owner can effectively run away. To date, the Churchyards remain the city's em-bassy district. When it is argued here that for-eigners cannot escape the reach of the jurisdic-

26

tion in which their land is located, this is there-fore not entirely true: Embassies are extraterri-torial!

The Extension of Electricity

Infrastructures

The potential of electricity to revolutionize the way businesses and homes were illuminated be-came obvious as early as 1881, when Thomas Edison amazed visitors at the Paris World Expo-sition with his incandescent lighting technology.40 Edison offered a complete system, from genera-tors and conductors to fuses and light bulbs. The Electrical Exposition at the Crystal Palace in Lon-don in 1882 gave further impetus to the spread of civilian applications such as power stations, street lighting, electric tramways, and electro-chemical factories. Financing manufacturers of electrical components was a volatile business, however, and the horizon of such industrial in-vestments was not congruent with the life span of the facilities in the energy sector.41 Manufactur-ers had an obvious strategic interest in the devel-opment of power grids and installations, but needed the funds they earned to expand their own production sites.42 They therefore turned to Europe's biggest banks for help with capital fund-ing, forming electrical holding companies.

Elektrowatt

Elektrobank, founded in 1895, quickly developed into one of these big financing companies. In the early days, the principal investors were Allge-meine Elektricitäts-Gesellschaft (the General Electric Company of Berlin) and Schweizerische Kreditanstalt (today Credit Suisse) of Zürich. The German company withdrew its stake after World War I, but the Credit Suisse holding company still owned 42 percent of Elektrowatt as of 1991. El-ektrobank went global already in its first years of operation, developing projects in countries as far afield as Russia and Argentina, as well as closer to home in Spain and Germany. The nationalisa-tion without compensation of all Russian busi-nesses in the wake of the October Revolution of

40 The text in these paragraphs is taken from

http://www.fundinguniverse.com/company-histo-

ries/elektrowatt-ag-history/ 41 The turbines BBC constructed for the run-of-river power plant Beznau near Zurich in 1902 were still operating 100 years later. 42 BBC, the manufacturing company founded in 1891 by Charles E. L. Brown and Walter Boveri,

1917 led to a significant loss in property and earnings for Elektrobank, which was forced to re-trench briefly. Nevertheless, in the early 1920s the company was able to develop a number of new facilities and take over existing facilities in Spain, France, England, Belgium, Austria, and Hungary. Reducing its stake in the German elec-tricity sector before the Wall Street Crash of 1929, Elektrobank built up an important invest-ment portfolio primarily in electrical utilities and natural gas companies in the United States, and therefore successfully weathered WWII. In the post-war period, however, the losses incurred as a result of nationalisation among private Euro-pean companies particularly in Eastern Europe forced Elektrobank (re-baptised Elektrowatt in 1946) to reconsider its strategy. It focused on in-vestments within the domestic energy sector. One of the most important developments in these years was the constitution of Elektrizitäts-Gesell-schaft Laufenburg (the Electrical Company at Laufenburg on the Rhine). In addition to produc-ing and procuring electrical energy, it serves as a vital junction in European grid operations up until today. Secondly, in the 1960s, industrial engi-neering projects became increasingly important, these activities extending beyond the borders of Switzerland. Finally, the provisioning of services mainly in the real estate business became a third pillar of Elektrowatt. In 1991, the energy division, the industry division, and the services division contributed 35 percent, 47 percent, and 18 per-cent to total sales respectively.

Tighter banking regulations and a general re-vamping of Swiss industry in the 1990ies led Credit Suisse to break down the company and to sell off its component parts: The energy sector was taken over by a Swiss and two German elec-tricity producing companies, the services division was integrated as Siemens Building Technolo-gies in the German group, and Electrowatt Engi-neering AG was sold in 1999 to the Finnish group Jaakko Pöyry.

Motor Columbus

In these years, the other large Swiss Bank, UBS, reconsidered also its stake in the electricity sec-tor and liquidated Motor Columbus AG along the same lines as CS did with Elektrowatt.43 Indeed,

started with 125 employees, but counted in 1910 already 3000 employees and subsidiaries in all im-portant countries in Europe. See Lang, Norbert (2014): Aus der Frühzeit der Schweizer Elektroin-dustrie, Bulletin 4x/2014, Verband Schweizerischer Elektrizitätsunternehmen 43 Kupper, Patrick and Tobias Wildi (2006): Motor Columbus from 1895 to 2006 -111 years of Motor Columbus, Baden: Motor Columbus

27

the fate and life span of Elektrowatt and Motor Columbus show many similarities.

Having formed BBC (Brown Bovery Company; today ABB Ltd.) with Charles Brown in 1891, Walter Boveri soon arrived at the conclusion that a vehicle separate from the manufacturing activ-ities was needed to finance, plan, design and construct generation facilities. When Boveri es-tablished Motor AG in 1895, two-thirds of the cap-ital stock was subscribed by German financial in-stitutions and close to one-third by BBC itself. Then, in 1896, when the capital was increased for the first time, the shareholders were joined by Bank in Winterthur, a predecessor of UBS, today’s largest Swiss bank. While other invest-ment companies concentrated on financing, Mo-tor accompanied its projects from the idea to commissioning. Also, while the former invested almost exclusively in other countries, Motor fo-cused its energies first on developing the Swiss power supply system. Reflecting its affinity to en-gineering and not only finance, Motor AG oper-ated some of the new facilities for its own ac-count, while others were sold off, in whole or in part, to free funds for new projects.

Motor entered the Italian market before WWI, where local competitors were far weaker than in Germany, benefitting from the cultural expertise of the company’s first technical director, Italian-Swiss Agostino Nizzola. As part of this expan-sion, in 1912, Motor acquired a stake in Com-pañía Italo-Argentina de Electricidad (CIAE) which, in the same year, won the extremely lu-crative license to build up the power supply for the Argentine capital of Buenos Aires. To in-crease its interest in CIAE, Motor joined forces with Swiss, Italian and Argentine banks and in-dustrialists to establish a sister company, Colum-bus AG für elektrische Unternehmungen in 1913.

The exchange rate disruptions of WWI plunged Motor into a severe financial crisis. In 1920, the Italian lira stood at barely one-third of its pre-war rate, while the German mark was no longer worth much more than one-tenth of its 1914 value. In-debted in the Swiss currency, Motor incurred heavy losses. At the end of 1922, its balance sheet showed more than CHF 11mio in «foreign exchange losses to be amortized», an amount to be compared with a capital stock of CHF 36mio. Furthermore, write-downs of 21 million francs were required in other countries. Faced with this situation, the board decided to absorb Motor into its prospering younger sister company, Colum-bus.

44 Later, at the end of the 1970s, MC was forced to transfer these interests to local institutions in the wake of Argentina and Peru’s nationalizations.

After the merger, the company was instrumental in forming Südamerikanische Elektrizitätsgesell-schaft (Südelektra, 1926) and Schweizerisch-Amerikanische Elektrizitäts-Gesellschaft (SAEG, 1928). Peru became another focus country alongside Argentina. From the 1930s onward, Motor-Columbus saw the capital in its South American investments depleted several times and endured years of no returns. The investment companies, Südelektra and SAEG, had to be re-capitalised on several occasions.44 In 1937, Mo-tor-Columbus had to be put back on its feet as well. Its capital stock, raised to CHF 93.5mio in 1929, was reduced by nearly 40 % to CHF 55.25mio.

Simultaneously, an important electricity generat-ing facility in southern Switzerland went into ser-vice but had no customers. The Great Depres-sion stopped the planned industrialisation of the canton of Ticino while the Italian market was also regressing. The solution was to construct trans-mission lines over the Alps. In 1932, Motor-Co-lumbus accomplished this undertaking in less than six months, building a 55 km long high-volt-age line over the Gotthard. By this project, Motor Columbus repeated an earlier achievement of the company in the field of electrical transmis-sion. In 1903, Motor was pioneer in interconnect-ing a run-of-river plant (Hagneck) with a plant dis-posing of water storage facilities (Kanderwerke) and therefore capable of delivering supplemen-tary energy in peak times. The company also won distinction with some technical innovations, in-cluding a porcelain insulator called the «Motor in-sulator» and a steel-saving concrete-filled tube pylon, which were successfully patented. Li-censes for the latter were granted to Japan, e.g..

WWII affected MC little due to its geographical scope, Switzerland and Latin America, and after the war, projects to develop «white coal», as hy-dropower was commonly called, moved ahead at a rapid pace. A series of large reservoir dams were built in the Alps between 1945 and 1975. Later, nuclear power took over. Motor Columbus was heavily involved in launching the Kernkraft-werk Kaiseraugst AG in 1974. However, this nu-clear plant never got built due to local opposition of the anti-nuclear movement. In 1989, 25 years after the project had been started and three years after the serious accident at the Chernobyl nu-clear power plant, the venture was abandoned. The write-off totalled some CHF 1.3bio, minus CHF 350mio paid by the Swiss Government to compensate the investors for the politically de-cided withdrawal of the construction permit.

28

Starting in the 1960ies, Motor Columbus experi-enced two attempts of diversification: Frst the company launched its transformation into a tech-nology group, and somewhat later, it was to lose money as a general contractor in the real estate business. The latter experience was rather short-lived. In spring 1974, Motor-Columbus acquired a majority stake in Mobag, then one of the largest general contractors in Switzerland. The acquisi-tion occurred in a market that was plummeting. Demand in the Swiss construction sector shrank by almost 40 %, forcing the company to go abroad. In summer 1976, the company won a promising Iranian contract to build a total of 6’000 dwellings in Teheran. Two years later, in autumn 1978, the Islamic Revolution erupted in Iran, ulti-mately leading to the overthrow of the Shah’s re-gime. Mobag had to stop construction work in February 1979. The CHF 71mio investment in Mobag had to be written off in full.

The company’s engineering departments had been spun off in 1969 into Motor-Columbus Inge-nieur-Unternehmung (MC ING). Partly driven by the slump in the domestic market in the 70’, MC ING operated at the beginning of 80’ not only in Europe and South America but also in the Middle East, Southeast Asia and Africa, so that Motor Columbus soon had a staff recruited from more than 30 countries. In 1986, Motor-Columbus ac-quired its first communications systems, a market where it saw great potential for development, es-pecially in broadband networks and information services. One of its purchases was Teleholding, a firm that operated cable television networks. Teleholding was the germ for TeleColumbus, which expanded rapidly through acquisitions to number more than 60 companies by 1990. Like the electricity business, the telecommunications industry was very investment- and capital-inten-sive. Alongside «Energy» and «Communica-tions», Motor-Columbus built up two more divi-sions: «Systems» and «Capital Investments». The systems business encompassed electrical engineering, environmental engineering, biotech-nology and automation. The capital investment operations were integrated in Motor-Columbus Tecinvest. Tecinvest was created as a separate company dedicated to the venture capital busi-ness, entering the USA not just to make a finan-cial profit but also to gain an insight into new ap-plications in information and telecommunications technologies.

Then the international debt crisis erupted in the late 80’ and business abroad slumped massively. MC ING experienced also heightened competi-tion from low-wage countries. In 1991, it became evident that the diversification strategy launched in the 80’ was not taking hold. The four divisions headed in too many different directions and not

enough time had been allowed to properly inte-grate the many new companies into the Group. The broad-based strategy had already had its day when Ernst Thomke, widely known as the «trouble- shooter» of the Swiss watch industry, joined Motor-Columbus in 1992. Under Thomke, Motor-Columbus started to divest many compa-nies, some only integrated shortly before, and fo-cused again on energy. Cases in point were the divestiture of the underground mining activities (Gähler & Partner) and the entire Motor-Colum-bus Ingenieur-Unternehmung (‘Colenco’ since 1990). By 1994, Motor Columbus had sold virtu-ally all companies except those engaged in the energy business. Since engineering activities in the latter sector were transferred to its subsidiary ATEL, Motor-Columbus became a purely finan-cial holding company. During the restructuring phase from 1992 to 1994, Union Bank of Switzer-land (UBS since 1998) acquired a 77 % stake in Motor-Columbus, becoming its principal share-holder.

In 1996, Union Bank of Switzerland entered into cooperation agreements with Electricité de France (EDF) and Rheinisch-Westfälisches El-ektrizitätswerk (RWE) with a view to building up a European electricity holding company under the umbrella of Motor-Columbus over the long term. The two foreign partners each acquired 20% of the shares, leaving UBS with 37% of the company’s capital stock. The strategy was not congruent with the EU Directive on the Liberali-zation of the Electricity Market that came into force on 1 January 1997. With the opening of the electricity markets to competition, the two power giants, EDF and RWE, became rivals. Motor Co-lumbus’ activities were restricted to manage fi-nancial investments, electrical engineering hav-ing been transferred to its subsidiary Atel, which increased in the years from 1996 to 2005 its sales from CHF 1’609mio to more than CHF 8’580mio. When RWE sold its 20% stake to UBS on July 1, 2004, the bank again became the majority share-holder. This opened the way for the Board to ac-tively seek solutions for Motor-Columbus within a broader restructuring of the Swiss electricity sec-tor. The merger of the parent company Motor-Co-lumbus with its subsidiary Atel, effective by 2006, made the name of Motor-Columbus disappear af-ter 111 years.

Comment

The following remarkable points appear through the history of Elektrowatt and Motor Columbus:

A delicate aspect for global finance is the incon-gruence of the currency denomination of assets and debt. The problem affected the two compa-nies considered here for a first time already in the aftermath of WWI. Since then, exchange rate vol-

29

atility remains a major obstacle for channelling fi-nancial funds from countries with a saving sur-plus to those in need of capital deepening, inde-pendently of whether this occurs within compa-nies or through financial markets. Furthermore, it is frequently the case that unsustainable public indebtedness precedes exchange rate turbu-lences. At the company level, this translates into investment opportunities in the utilities being fol-lowed by losses when the formerly expansionary fiscal policies have to cede to austerity and de-valuation becomes necessary. Such periods of boom and bust obstruct the equalisation of real interest rates across the globe. Also, the interest rates demanded on financial markets rarely re-flect such risk in an adequate way. This favours an investment of domestic savings within the country.

In the history of the two engineering and financ-ing companies considered here we find several episodes conforming to this pattern. At times, to focus on the domestic market was seen as the best strategy after losses had been incurred abroad. On other occasions, to be invested in dif-ferent regions of the world made the companies under examination more stable. Rescue opera-tions for one part of the company could be launched based on the assets of other entities in the group. While geographical diversification thus often proved helpful, diversification in other activ-ities than electricity was seldom successful.

Finally, an unintended effect of banking regula-tion becomes also evident through the history of Elektrowatt and Motor Columbus. Own capital re-quirements made it very costly for banks from the 90’ on to acquire ownership in industrial under-takings. Truly, the valuation of shares knows a high volatility. At the same time, sovereign debt was considered as riskless, a costly error. It is an irony of history when non-conventional monetary policies adopted after 2008 induced central banks, i.e. the banks of banks, to acquire stakes in equities of private companies. This did not oc-cur to the extent of obtaining control over invest-ment companies, however. Such business is left to Sovereign Wealth Funds which today assume alongside Multinational Enterprises the risks of channelling financial funds from countries with a saving surplus to those in need of capital deep-ening.

45 Most of the text is taken from the Kulm Hotel’s home page. See: http://www.kulm.com/hotel-por-trait/tradition-geschichte/johannes-badrutt.html

The Hotel Pioneer Johannes Badrutt45

A radical and a series of incremental innovations

For centuries, families in the Engadin, an ex-tended valley in the South East of Switzerland, high up in the Alps, had to leave the region to es-cape poverty. They made money abroad, first as mercenaries, later typically as confectioners. The father of Johannes Badrutt, who should launch winter tourism, had moved from another region in the Grisons to Samedan, in the Engadin valley, at 1721m above sea level, to construct houses for the successful emigrants returning back to their place of origin. From 1830, Johannes Snr. offered guest rooms and a large hall for dancing, festivals and weddings, which became a popular venue in the Engadin. Johannes Jnr. went to school in Chiavenna, a near-by Italian town close to the Lago di Como, and became a craftsman and locksmith, working alongside his father. In 1843, he married Maria Berry, the sister of Peter Robert Berry who later became the spa doctor in St.Moritz. He could not have found a better wife, Maria supporting Johannes all along his life’s work. After their marriage, the couple took over the «A la Vue du Bernina » inn in Samedan (the converted former workshops) and received finan-cial support from Maria’ s father, the town coun-cillor and baker Johannes Berry in Chur. It was here that the Badrutt family’s connection with the hotel business began.

In 1856, the couple visited the Faller residence and guesthouse in St.Moritz, and rented the house with its 12 beds for CHF 2’000 a year, to buy it two years later at auction for CHF 28’500. He renamed it «Engadiner Kulm», Kulm meaning culmination, since the hotel is located at the up-permost place on the road running through the valley, at 1850m above sea level. As early as 1860, the former Faller residence was raised by two storeys and given a gabled roof. The crenel-lations and small towers bestowed a castle-like hint of romance. Johannes then began to buy up excellently located plots of land, the Kulm Park alone measuring 400’000 square metres (99 acres) and hosting since 1891 the hotel’s 9 hole golf court.

In those days, the Engadin hotels received visi-tors only in summer. However, Johannes Badrutt knew that winter had just as much to offer. On the recommendation of his brother-in-law, Dr. Peter Robert Berry, Badrutt took in a sickly son of an English priest in order to restore his health during

30

the winter in St.Moritz - nota bene, in the Badrutt family’s private quarters since it was too costly to heat the hotel in winter. Subsequently, in the au-tumn of 1864, he made a wager of crucial im-portance with the last of his English summer vis-itors. He told them that winter days in the Engadin were sunny and pleasant enough to go out with-out a hat and coat. The English could not believe this, as winter at their latitude was foggy, damp and cold and they imagined it would be much worse in the mountains. To convince them to the contrary, Johannes Badrutt promised them they could stay free of charge if they didn’t like the win-ter in St.Moritz.46 The English accepted the bet and returned to the Engadin in winter. Johannes was proved right and the English were full of en-thusiasm. Their return to London in spring, tanned and bursting with health and joie de vivre, marked the beginning of winter tourism in St.Moritz and beyond. The Engadiner Kulm, as a result of Badrutt’s initiative, is considered to be the cradle of winter seasons in the Alps.

As winter tourism increased, all kinds of winter sports began to appear on the Kulm grounds. First sledging on the Lake Run which began in front of the hotel and ended on the frozen lake, then skating with the Skating Club founded in 1870. In 1880, the Curling Club was established and Badrutt built sunny pavilions for spectators beside the ice rinks. The English founded ‘The St.Moritz Tobogganing Club in 1885, having built its Cresta Run in 1884 with the help of Johannes’ son Peter Robert, who assisted with its mainte-nance and was himself a Cresta rider. From 1891, bob sleighs drove down the Bob Run which, like the Cresta Run, is still today prepared by hand with snow and water, assisted by cold temperatures. Both club houses and the upper stretches of both ice channels are situated on Kulm property. The St.Moritz Tobogganing Club’s traditional home has always been the Kulm Hotel, in which it has its office and holds its daily lunchtime prize-giving ceremonies in the Sunny Bar. Today, the prestigious club arranges during the year a social gathering in London and one in New York.

Johannes Badrutt also provided cultural enter-tainment. A 24-piece orchestra from the Scala in Milano played, with the great Arturo Toscanini as cellist. Theatre, pantomime and variety shows were offered or one watched the pictures on the magic lantern and cinematograph. The elegant masked balls were very popular; one could see and - depending on the mask - be seen there. Playing billiards and bridge as well as reading in

46 There is also a version of the plot saying that ac-commodation was offered for free, the guests as-suming transportation (the last part on sledges,

the well-stocked library were among the amuse-ments on offer. There were daily newspapers in English, French, Italian and German and of spe-cial interest were the latest stories and lists of vis-itors in the local «Alpine Post».

Johannes’ quest for innovation and his interest in technology were astonishing and were an ex-pression of his talent as a craftsman. In 1878, ac-companied by his son Caspar, he visited the World Exhibition in Paris, where he admired an electric lighting installation. He was so fascinated by this that, in the same year, he constructed a small hydroelectric power plant, fed by water from the Brattas brook above the hotel. So it was that at Christmas 1878, Switzerland’s first electric arc lights burned in the Engadiner Kulm’s dining hall. Badrutt had also a street lamp erected on the hotel forecourt and people flocked from the entire Engadin to marvel at this latest acquisition. The hotel’s electrician, Giacomo Caffuri whose job it was from the age of 14 to adjust and change the carbon rods in these lamps, worked for an in-credible total of 80 years at the Kulm. In his bro-chures, which were written in English, Johannes featured the newest water closets from England, hydraulic lifts, warm-air heating and electric ven-tilation. His artistic flair was a big advantage when it came to furnishing the hotel elegantly. From his trips to Italy, he brought back selected pieces of furniture, some of which can still be seen in the hotel today. An English physician was available for those who might become ill and vis-itors’ religious needs were catered for. Anglican church services were at first held in the hotel then, from 1871, in the English church, which had been constructed on land donated by Badrutt.

Difficult times came for Badrutt and his hotel: his wife died 1877, as did his first son Johannes in an accident in 1883, and his second son Caspar left the family to establish the Hotel Caspar Badrutt and later to build the Palace Hotel. Jo-hannes died in 1889 at the age of 70 years. In December 1890, given the number of 8 children left behind, a limited partnership company, Badrutt & Cie., was formed and became the owner of the Kulm. Son Peter who was one of the promoters of a railway line up to St.Moritz, led the hotel up until 1905, when a new joint-stock com-pany ‘AG Grand Hotels Engadiner Kulm’ was founded.

An up and down in the 20th century

After Peter’s death in 1907, the company ap-pointed managers for the Kulm. The hotel’s sec-ond large extension, the east wing, was opened in 1912. However, during World War I visitors

muffled in furs, over the then barely practicable Julier Pass (2283m)) but that Johannes Badrutt recouped costs by the drinks he sold in the Bar.

31

stayed away and there were no funds available for essential renovations. The company’s main shareholder became, as was so often the case at that time, the bank.

The 1920s saw a fast upturn, which reached its height with the Olympic Games of 1928. The opening ceremony for the games was held in the Kulm Park’s stadium. The figure-skating and speed-skating competitions as well as the ice hockey matches took place on this wonderful nat-ural terrace with its magnificent panoramic view. In 1932, Anton Robert Badrutt (1888 to 1967), grandson of Johannes and son of Peter Robert, suffering from homesickness, returned with his wife Erna and their three children to the Engadin, where he first ran the Hotel Margna in Sils during the summer seasons. He had a lot of experience in the hotel industry; since he had run 5 hotels in Egypt over a period of 16 years. From 1922 on, he had spent winters there and summers as a manager of five star hotels in Switzerland, the Palace Hotel Lucerne and the Bürgenstock. In 1935, “Toni” was appointed manager of the Kulm, a hotel heavily indebted, barely refurbished and suffering from the Great Depression. Erna and Toni hoped to have a peaceful life with their chil-dren on a reduced income, but there were only five years in which to build up the business.

During WWII, the hotel remained closed and the couple managed the Kurhaus & Grand Hotel des Bains in St.Moritz. After the war, it took the Kulm many years to recover from this second heavy blow. The Olympic Winter Games of 1948 were an important contributory factor in the recovery of the hotel, as well as of heavily indebted St.Moritz in general as a tourism destination. Anton Robert Badrutt died in 1967 as the last Badrutt offspring to date to have had a managing function in the Kulm Hotel.

It was in these years that the Club Mediterranée group was pursuing a fierce acquisition strategy in the Engadin. The Club quickly took over the Hotels Stahlbad and Victoria but when he wanted to grab the Carlton, Kulm and Chantarella too, Dr. Peter Robert Berry III helped out. With his long-time friend Stavros Niarchos, the Greek owner of a fleet of oil tankers as the main investor, he in a few days successfully brought together a strong financial group to acquire the hotel. Stavros Niar-chos was also the main investor in the cableways on the Piz Nair, opening in 1955, and on the Corvatsch, opening in 1963, these amenities consolidating St.Moritz’s position as a leading and prestigious winter resort.

Comment

This historic episode not only portrays an innova-tion of radical nature, namely to launch tourism in a completely new season of the year; the list of innovations of a more incremental nature in the

sense of new sports offered is also long. Interest-ingly, we do not only have product innovations but also process innovations, the major example being the introduction of electricity. The depend-ence on public infrastructures appears through the interest the hotel had in the construction of a railway line up into the Engadin valley. The fol-lowing view may be contested based on the way holidays in the Alps are marketed, but, additional to the landscape, essentially an urban style of life is sold to the clientele. This appears through Ar-turo Toscanini giving concerts. The provenance of the guests but also the fact that the hotel man-ager had acquired professional experience in Egypt are expressions of the first wave of global-isation. The high exposure of tourism to geo-po-litical risks, currently experienced e.g. by Kenya, is also far from being a new phenomenon, WWI and WWII leading more or less into the hotel’s bankruptcy. Finally, a trend newly appearing in the area of luxury hotels, namely patronage and sponsoring by very rich people (“Mäzenaten-Ho-tels”), appears through the rescue operation by the Greek ship-owner Stavros Niarchos.

Upgrading the Tourist Offer

The Lyceum Alpinum in Zuoz (Grisons)

Zuoz is a small historic town located a few miles

away from the famous Winter Resort St.Moritz in

the Engadin Valley. The Engadin Valley in the

east of Switzerland, half way on the geographical

line linking Munich and Milano, had become a

meeting point for wealthy tourists in the course of

the 19th century. From the 1860ies on, St.Moritz,

the major location in the valley, pioneered winter

tourism (see above). In the next decades, the

destination diversified also into the provisioning

of health care services, but not to the extent Da-

vos – another resort in the Grisons – did (see be-

low). The beautiful landscape - enchanting the

parents - and the possibility to practice a wide

range of sports - enchanting the young - qualified

the region also as a place where education at an

upper level could be offered.

The families in the Engadin Valley had a tradition

to emigrate to all major towns of Europe where

they usually ran as a business a coffee house

serving pastry to the local nobility that could af-

ford it. To offer schooling to the offspring of an

elite of people appeared therefore as quite logic

when these families started to reflect what they

32

could add to the high touch touristic offer devel-

oped in the 19th century in the valley. Founded by

locals, the school started 1903 under Director An-

ton Velleman. He was a pioneer in writing a

grammar for the Romansh language and should

later, in 1941, found the school for interpreters in

Geneva. The first class was composed of ten

Swiss, four American, three English, three

French and two Russian students. It took more

than 80 years and the breakdown of communism

until a next Russian student was attracted to the

Lyzeum.

The Lyceum Alpinum responded early to the

needs of its clients, i.e. its students represented

by their parents, and offered the possibility to

complete the German Abitur in Zuoz. The school

then timely reacted to the opening up of the world

after the historic turning point of 1989, making it

necessary to recruit also a corresponding staff.

Since October 1996, the Lyzeum Alpinum Zuoz

is authorized to offer the International Baccalau-

reate (IB) Diploma Programme. The programme

is taught in English. In the examination session

of 2013, students completed the exams in biol-

ogy, chemistry, economics, history, mathemat-

ics, physics, visual arts and a number of lan-

guages in different ramifications (e.g. as a mother

tongue or a foreign language, literature only etc.),

the list of languages reflecting also the origin of

the students (Bulgarian, Chinese, English,

French, German, Italian, Portuguese, Russian,

Spanish, Turkish).

Thomas Mann’s “Magic Mountain”

We meet Hans Castorp, the central protagonist of the famous novel ‘Zauberberg’ by the German writer Thomas Mann, at Landquart, at the entry to the Grisons, where he climbs on a narrow-gauge train that will bring him up to Davos, 1560m above Sea level, where his cousin under-goes treatment for tuberculosis. We encounter him when he is in his early 20s, about to take up a shipbuilding career in Hamburg, and when he is transported away from the mundane obliga-tions he has known to the introspective little world of the sanatorium where, in the end, he will spend seven years of his life, since symptoms of tuber-culosis are detected during his stay, initially planned to last three weeks only. The disease ends fatally for many of the patients, such as the Catholic girl Barbara Hujus whose fear of death

47 Whereas the classical Bildungsroman would con-clude by having "formed" Castorp into a mature member of society (see also part IV of Chapter 12 on Martin Salander, a novel by Gottfried Keller),

is described in a doleful scene, and cousin Ziemssen who leaves this world bold like an an-cient hero. Essential, during his stay, Castorp meets and learns from a variety of characters, who together represent a microcosm of pre-WWI Europe. These include the Italian secular human-ist and encyclopedist Lodovico Settembrini, the totalitarian Jew-turned-Jesuit Leo Naphta, the di-onysian Dutch Mynheer Peeperkorn, and his ro-mantic interest, the Russian Madame Clavdia Chauchat. Like the protagonist of a typical Bild-ungsroman, the immature Castorp leaves his home and learns about art, culture, politics, hu-man frailty and love.47 The Magic Mountain pro-vides him with a panoramic view of pre-war Eu-ropean civilization and its discontents.

Thomas Mann gained the inspiration for the story describing a decadent mixture of death and amusement and thereby representing a disorien-tation typical for a general mood in Europe in the late 19th and at the beginning of the 20th century from his own stay in Davos. His wife, Katia, was suffering from a lung disease and travelled in 1911 to the recuperation spa at the Waldhotel Sanatorium Davos. This afforded Thomas Mann extensive first-hand information on life in such an institution. Having visited his wife in spring 1912, he wrote his novel between 1913 and 1915 and completed the work in 1924, following the tense years of WWI (which, sadly enough, gave ‘life’ a sense in a completely different way). Five years after the novel was published, the author re-ceived the Nobel Prize for Literature, rendering his entire works immortal. The novel is not lo-cated in the Waldhotel, but on the Schatzalp, overlooking the valley of Davos, where readers can still find in the Sanatorium, transformed in an ordinary hotel in 1954, amidst pure art nouveau architecture the ambience of life 100 years ago. The terraces, where once the Sanatorium pa-tients recuperated from their tuberculosis, serve today the hotel guests for sunbathing.

The treatment of tuberculosis was for decades big business for the remote valley in the Alps. It was the German doctor Alexander Spengler who, when arriving in Davos in 1853, observed that the population did not suffer from tuberculosis, a dis-ease that then carried off each year tens of thou-sands of people of all ages in Europe. Sanatoria were built also in a number of other Alpine vil-lages in the following years, but Davos remained the major health resort where to treat lung dis-eases. Half of Europe opened a clinic up in the mountains, the Germans, the English, the Dan-ish, the Dutch, the Hungarians, the Russians,

The Magic Mountain ends for the young man as an anonymous conscript, one of millions, under fire on some battlefield of World War I.

33

and also a number of Swiss cantons ran their own institution. Accommodation was offered for people of all income levels and of different reli-gious beliefs. At the time when Thomas Mann visited Davos, an endogenous population of 8’000 people cared for 25’000 patients.

The end came with the detection of Streptomycin in 1941. This antibiotic allowed the treatment of tuberculosis in the “lowlands”. Out of the 50 san-atoria, in 2014 only three were left, the large ‘Ger-man High Alps Clinic’ employing 220 people at the verge of going bust. The two others had suc-cessfully reoriented their offer towards asthma and rehabilitation, the treatment of burn-outs, a promising new business field offering long-term stays, having been missed by Davos and left to a clinic in the neighbouring valley. At the time of the detection of the new medicine, the essential relief for the town of Davos came from winter tourism. In 1934, timely before Streptomycin was de-tected, the first T-bar ski lift in the world started operating on the Bolgen in Davos.

Conclusion

From an economic point of view, boarding schools and sanatoria compare favourably to ho-tels since the spectrum of professions they offer falls into another range. Most workers in a hotel have salaries not far from the lower bottom of the scale. A boarding school or a sanatorium offers a considerable number of occupations for which a university degree is needed, with corresponding salary. To implant in tourist regions health care facilities is therefore a resolution to the challenge of moving up the value added chain. The obsta-cles consist in the fact that education and health are regularly offered by government or social se-curity institutions. Clients are not free to choose where to be treated. Usually, they are confined to accept the local offer. A peripheral region has therefore difficulties to attract this business and risks emigration. If this didn’t happen in the case of Davos and the Engadin, this was due to unique locational factors, such as germ-free air. To de-velop an export-oriented service sector instead of manufacturing is therefore an option hardly open to every region.

48 The present paragraph is based on the entry „Banken“ in the Historical Lexicon of Switzerland. 49 After the occupation of Switzerland by revolu-tionary France in 1798, the invaders then drove

The Raiffeisen Banks

The history of the Swiss banking sector48

Banking first developed in Lombardia, but spread over the Alps as Italian bankers created subsidi-aries in towns with important fairs such as Basle, Geneva and Lyon. Money exchanges run by towns later gave way to private bankers. These private banks were primarily active on the inter-national scene and financed, given solid public fi-nances within Switzerland, foreign governments. The outstanding example is Jacques Necker, a citizen of Geneva, who founded banks in Paris and London and became Minister of Finance of Louis XVI with the mission to establish order in France’s public finances at the wake of the French Revolution.49 Starting in the 1830ies, the public sector got once more involved in banking since a first series of cantonal banks were launched. In the middle of the19th century, a se-ries of commercial banks were founded, inspired by the business model of the Crédit Mobilier in France. Their major focus was the financing of the railway network and the nascent big industry by domestic funds. In Switzerland, the outstand-ing example is the creation of Schweizerische Kreditanstalt (SKA) in Zürich (today Credit Suisse) by Alfred Escher, founded in 1856. As in-dicated in one of the preceding sections, Escher became the promoter of the railway through the Gotthard in the 1870ies. The over-subscription of SKA’s shares testifies of an excess of capital seeking investment in Switzerland already in these times. In the 1860ies, once more cantonal banks were founded. Revelatory of this second wave is the Zürcher Kantonalbank which was fa-voured by the democratic movement, the latter fighting i.a. the dominance of the financial sector by big capital. Also numerous local finance insti-tutes focussing on the needs of the crafts and the middle income classes in general started operat-ing in 1860-1880 in accordance with the motto that popular banks should replace the banks of the seigniors. The launching of Raiffeisen Banks which we consider below, occurred in these times. A central bank, the missing element in the Swiss banking system, became operative finally in 1907; prior, cantonal banks had emitted gold backed bank notes, an anchor for the whole mar-ket in Swiss Francs having been provided by the emission of coins through the Federal Mint.

The history of the Raiffeisen Banks

away the large gold reserves of the mighty town of Berne.

34

The model of cooperative banks emerged in Great Britain and Germany during the 19th cen-tury. An outstanding pioneer is Friedrich Wilhelm Raiffeisen (1818-1888). First an officer in the Prussian army, he became later mayor of a num-ber of towns in the northern part of the Rhineland-Palatinate. He launched the construction of schools, roads, railways and fought deforesta-tion. Raiffeisen recognised the needs of the rural population which, in the advent of bad harvests, risked to fall in the hands of shylocks. Generally favourable to the idea of cooperatives, he founded the Flammersfelder Hülfsverein. The lat-ter helped destitute peasants to constitute some savings but supported them also with credits to acquire life-stock and equipment. The field of ac-tivity was then extended beyond the area of agri-culture on the occasion of launching, in 1864, the Heddesdorfer Darlehnskassenverein. His busi-ness model (“System Raiffeisen”) spread to the rest of Germany, Austria and Switzerland. Today, there are in 41 countries cooperatives adhering to the International Raiffeisen-Union. Different from the national Raiffeisen Bank Groups, cross-holding of assets and backing within the Group hardly occur at the international level. Banks based on a cooperative model exist in numerous other countries and their number is remarkably high.

The functioning of a Raiffeisen-Bank illustrated by an example

The balance sheet of an average Raiffeisen Bank in a rural area of Switzerland is displayed below. The indications are taken from the brochure when the Raiffeisen Bank Wolfwil celebrated 100 years of existence in 2007 and reported on this occasion on its history. 50 The indications are in Swiss Francs. At the end of 2007, to which the indications below refer, CHF 1.10 had to be paid for US-$ 1.-, so that no conversion is needed to apprehend the amounts.

The balance sheet has a very simple structure. More than 90% of credits granted are backed by a collateral in the form of a mortgage. The mort-gage portfolio of the bank serves also to secure the loan of SFR 32.8mio the bank needs given that credits exceed deposits. The own capital is (apparently) critically low, so that the backing by other group members, appearing on the first line, is essential.51

The income statement reflects the preponder-ance of the interest differential business in the Raiffeisen banks when considering the local level. It makes up some 90% of total earnings. The income out of fees and commissions is only 1/3 of the gross amount the bank earned in this area, since 2/3 went to service providers (pre-dominantly within the group). The knowledge of

Balance Sheet of Raiffeisen Bank Wolfwil, End 2007

Credit to Group Members 7 029 383 Credit from Group Members 17 831 443

Credits to Customers 175 236 131 Deposits 123 321 342

(mortgage backed) (162’208’884) Loans 32 800 000

Own Capital 2 804 014

Total 185 196 478 Total 185 196 478

Income Statement of Raiffeisen Bank Wolfwil, 2007

Interest earned 5 503 325 Total Earnings (repeated) 2 757 311

Interest paid –3 042 353 Personnel –762 888

Interest Business net 2 460 972 Other Charges –601 818

Fees and Commissions 116 465 Gross Profit 1 392 605

Trading Business 44 395 Provisioning and Losses –862 583

Other Returns 135 479 Taxes –305 921

Total Earnings 2 757 311 Annual Profit 2007 105 160

corresponding instruments is of limited im-portance for the local board since, as the right

50https://www.raiffeisen.ch/Raiffeisen/Inter-net/rb0027.nsf/webpag-esbytitleall/7DF66DBBEC184253C125739800355C7B

column exhibits, essential for success is to limit the amount absorbed by provisioning and by

51 See, however, also the following footnotes, sug-gesting an underreporting of own capital, matched by written down credits to customers in excess of what is needed.

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losses on outstanding credits. However, the high tax bill suggests that the amount for provisioning and losses was far exaggerated in this favoura-ble year52 and that, as the report indicates without giving details, considerable disguised reserves were built up.53 The reporting standards applied were therefore not convincing.

Today’s importance of the Raiffeisen-Group for the Swiss economy

In 2014, the Raiffeisen Group in Switzerland was made up of 306 cooperatives. 54 The Group as a whole had in recent years become somewhat bigger than the largest cantonal bank and there-fore ranked third behind the two large Swiss Banks, UBS and CS, which used to have a bal-ance sheet total a factor 10 higher than the one of the Raiffeisen Group, before the banking crisis of 2008 required deleveraging.

The key balance sheet figures for the Group re-semble highly those of the Raiffeisen Bank Wolfwil in 2007 shown above, except that the fig-ures have to be multiplied by a factor 1000.55 The significant difference appears in the income statement where only one fifth of commission in-come was spent on commissions paid to third parties.56 The Group had 2014 indeed CHF 197bio of clients assets under management, an amount slightly higher than the Group’s total as-sets. As the Annual Report 2014 of the Group highlights under the heading “important events in 2014”, the Group had responded to the growth of

52 Typically, such positions are kept in line with the amount in prior years so that the 200 members owning the cooperative raise no questions. Given the rapid expansion of the bank’s total balance sheet (some 7% p.a. over a 10 year period) the constitution of reserves was a necessity but it should have been made transparent. 53 Applying, as a rule of thumb, a tax rate of 20% on corporate earnings would push the tax base above gross profit, so that the bank might even have made a benefit on this position, i.e. past provision-ing was higher than the losses that were finally in-curred. The report (p.11) contains corresponding hints. 54 https://www.raiffeisen.ch/web/financial+re-ports#tab-2 55 Besides, losses making up 0.012% of loans to cli-ents at the Group level confirm our hints regarding the appropriate reading of the income statement of Raiffeisen Bank Wolfwil. Albeit the years need not be comparable, this percentage applied to the credit volume of this cooperative would yield an amount of losses of some SFR 20 000, compared to a provisioning of SFR 862 583.

the wealth management business by organisa-tional reform, most recently by acquiring Noten-stein Asset Management Ltd.57

A second major evolution occurred also in 2014. The Group held 2014 16.6% of the Swiss mort-gage market and 18.7% of the Swiss savings market. This led the Swiss National Bank on 13 August 2014 to classify Raiffeisen as a system-ically important institution. Its equity ratio was 6.4%, its total capital ratio (where asset posi-tions are weighted according to liquidity and risk) 15.3%. The corresponding figures for the Kantonalbank Zürich, which deploys compara-ble activities and was classified as a systemi-cally important institution on 11 November 2013, read for 2014 as follows: 6.0% equity ratio and 16.6% total capital ratio.58 The correspond-ing figures for the two Swiss Banks which are considered systemically important on the global scale were for 2014: UBS 4.1% and CS 4.9% equity ratio and UBS 18.9% and CS 20.8% total capital ratio, reflecting the smaller requirements for provisioning with own capital applicable ac-cording Basel III outside the interest differential business. In 2014, the balance sheet totals of UBS were CHF 1’062bio and of CS CHF 921bio, compared to CHF 189bio for the Raif-feisen Group and CHF 158bio for the Kantonal-bank Zurich. The balance sheet total of all Swiss banks according to the Swiss National Bank

56 Net interest income was 2’133mio and commis-sion income from the lending business 15mio. Ad-ditionally, the Group totalled a net commission in-come out of the securities and investment business of 325mio and a net commission income out of other service transactions of 197mio plus a net trading income of 158mio. 57 Notenstein was created out of Bank Wegelin. The latter crashed 2012 due to fines imposed in the US for helping US citizens committing tax fraud. 58 The extension of the number of banks declared systemically relevant is to be seen in the context of the high credit volume in Switzerland. Mortgage credits by banks stood 2014 at 138% of GDP and total bank credits at 189%. Assets from domestic persons managed by banks stood at 463%, how-ever, showing that the high credit to GDP ratios are a concern to the extent that there are highly lever-aged creditors. An obligation to pay back mort-gages in annual tranches also when the credit to collateral ratio is below 60% was only introduced in recent years. Households therefore often have simultaneously a considerable portfolio of shares and bonds and a substantial mortgage loan, miti-gating the problem of a high credit ratio.

36

was in 2014 CHF 3’131bio or 4.8 times the GDP, a high value in international comparison.

Co-operatives as an alternative to ‘corporate globalisation’?

Clearly, due to the wealth of the nation, the Raif-feisen Group Switzerland has moved out of the sphere of activities the founding fathers had in mind. What may be retained from this example is that the idea to support development by the launching of cooperatives is nothing new and had considerable prominence as a counter-model of the democratic movement to big finance already in the first wave of globalisation.

In the Anglo-Saxon world, cooperatives are often traced back to Robert Owen and the mode he made operate a factory in New Harmony, Indi-ana. More prominently than in the U.S. and in the UK, in Continental Law, cooperatives are a re-cognised form for incorporating a business, the Company Code stipulating some basic organisa-tional principles cooperatives have to adhere to. In Germany, even a Governance Code for Co-operatives was elaborated. The major difference between a cooperative and a share-holder com-pany appears right at the start when putting down the organisation’s statutes since the board of the latter has to act in the sole interest of the com-pany and its share-holders whereas the persons heading a cooperative have also to consider what the cooperative’s decisions mean for the mem-bers of the cooperative who are typically major contracting parties of the cooperative, either as suppliers of the cooperative or as customers of their products or in both functions simultane-ously. The interests to consider do not only con-sist in the economic well-being of the members, but typically englobe also the respect of some moral and/or social principles.59

To assess the comparative advantages of share-holder companies and cooperatives for the econ-omy as a whole is not an easy task. Clearly, at the level of the firm, corporations and coopera-tives have their respective advantages and dis-advantages, and their relative importance changes from sector to sector. In areas where moral hazard is a major problem, the solidarity principle of cooperatives has some positive effect if handled in a way that the single member cannot escape individual responsibility. A disregard of personal liabilities is less likely when member-ship in a cooperative is voluntary and members can be excluded, elsewise the repressive fea-tures of collectivism are prone to appear. There

59 For other organisational aspects see: Leuschner, Carl-Friedrich (2005): Genossenschaften: Zwischen Corporate und Cooperative Governance, Westfäl-

is also an ambiguity with respect to the effects cooperatives can have with regard to expanding a business and to innovate. A combined effort may allow for an expansion of a business that an ndividual undertaking cannot achieve, and cer-tainly so when the entrepreneur cannot offer a collateral for eventual credit; a democratisation of business opportunities is achieved, bringing in additional talents. But limits in the exploitation of economies of scale are likely to appear and to fi-nance industrial ventures into new areas is usu-ally out of the scope of activities allowed to coop-eratives by their own statutes. It shouldn’t be for-gotten that the shareholder company was praised as a major innovation in the middle of the 19th century on a background where cooperatives at the municipal level had been cultivating the land for centuries in a very traditional way. It may also be argued that only the creation of a com-munity of anonymous shareholders allowed for a transnational investment project, namely the con-struction of the Suez Channel.

The Swiss Chocolate Industry –

A History of Mergers and Acqui-

sitions since the Beginnings

How chocolate emerged as an industrial product

The cocoa plant is endemic in Central America and a chocolate drink was consumed as a bever-age by the Toltecs, Maya and Aztecs. Knowledge of chocolate was brought to Europe by Hernan Cortés in 1528. First primarily considered a med-icine, cocoa became known throughout Europa in the 17th and 18th century but was sipped mainly by the aristocracy. Chocolate in solid form was manufactured in an artisanal way before industri-alisation sat in, lowered its price and led to a de-mocratisation of its consumption. Fry in the UK, Baker in the US, van Houten in the Netherlands and Menier in France are early pioneers of the industrial manufacturing of chocolate, but throughout the 19th century, a number of path-breaking innovations in this industry occurred in Switzerland. It is said that François-Louis Cailler from Vevey learnt about the production of choco-late in Torino and overcame the artisanal fabrica-tion by constructing appropriate machines as early as 1819.

sche Wilhelms-Universität Münster (WWU), Insti-tut für Genossenschaftswesen, Arbeitspapiere No. 47.

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List of Swiss Chocolate Manufacturing Pioneers

Francois-Louis Cailler (1796-1852) – Founded a chocolate company in 1819. Used technology to make chocolate. First chocolate maker to mold chocolate into a bar. Daughter Fanny married Daniel Peter.

Daniel Peter (1836-1919) – Created the Peter Cailler et Compagnie with the Cailler family in 1867. First chocolate maker to produce a milk chocolate bar. Son in law of Francois-Louis Cailler. Friend and neighbour of Henri Nestle.

Henri Nestle (1814-1890) – Invented a milk based infant cereal. Friend of Daniel Peter. Sold license to Nestle milk chocolate bar to Peter Kohler & Sons in 1904. In 1905, Nestle merged with Anglo-Swiss and in 1929 with P.C.K. (i.e. Peter, Cailler, Kohler, Chocolat Suisse)

Charles-Amédée Kohler (1790-1874) – Lived in Lausanne and opened a chocolate shop there. First chocolate maker to make hazelnut chocolate. His son trained Rudolf Lindt as a chocolate maker.

Phillipe Suchard (1797-1884) – Was a great customer of Cailler. Opened a chocolate shop in Serrières (Neuchâtel). Invented the mélan-geur (a chocolate machine for grinding and mixing cocoa beans). By 1883, he was produc-ing half of all chocolate produced in Switzer-land.

Rudolf Lindt (1855-1905) – Studied chocolate making with cousin Charles Kohler. Opened chocolate factory in Bern in 1879. Invented the conch. Was purchased by Rudolf Sprüngli- Amman.

Rudolf Sprüngli-Amman (1816-1897) – Opened first chocolate factory in the German speaking part of Switzerland in 1845. Pur-chased Lindt’s factory in 1899 forming Choco-ladefabriken Lindt & Sprüngli.

Jean Tobler (1830-1905) – Owned a choco-late shop in Berm selling other chocolate mak-ers’ products. Was one of the first customers of Lindt. Opened his own chocolate factory in 1899. His son Theodor invented the famous tri-angular Toblerone chocolate bar in 1908.

60 See: Kostyk, Annmarie (2010): Swiss Chocolate Pioneers, Part I to III, Internet Newsletter, to be re-trieved at

The Swiss Chocolate Pioneers that became his followers are named in the list below.60 It is a story of family ties, knowledge transfer to future competitors and important mergers. As we will later show, the history of mergers and acquisi-tions found a continuation at the threshold to the 21th century, this time at the global level.

How chocolate production became part of the Nestlé Group

Alexandre-François-Louis Cailler, the grandson of François-Louis Cailler, engineered the rapid expansion of chocolate manufacturing at the turn of the century. In 1887, he had taken over the family business with only eight employees and two machines. He transferred the production in 1897-98 to Broc, close to Gruyère, a milk produc-ing region from where a famous cheese origi-nates, thus launching industrialisation in the rural canton of Fribourg. The factory expanded quickly (1898 120, 1913 1'400 employees); so he trans-formed in 1900 his business into a shareholder company to mobilize additional funds for the con-struction of new buildings and the acquisition of additional machines. In 1911, he succeeded in merging Cailler with Peter and Kohler to Peter-Cailler-Kohler (PCK) to better match competitor’s strength in export markets. In 1928, he decided to merge with Nestlé, Nestlé having been en-gaged with Peter-Kohler in a joint venture since 1904. During the big depression of the 1930ies, he successfully managed to keep the company afloat and was elected in 1933 Vice-Chairman of the board of Nestlé. The merger with Peter-Cailler-Kohler was a second decisive merger in the history of Nestlé on the company’s way to be-come today’s largest Swiss-based manufacturing company. Prior to the expansion into chocolate production was the merger of the baby food pro-ducer Nestlé with the rival milk powder producer Anglo-Swiss in 1905.

Mergers and Acquisitions continue to mark the food industry

The history of two other traditional Swiss choco-late manufacturers is also marked by mergers. Here, the sequence of takeovers reached vertig-inous speed at the turn from the 20th to the 21th century, and this time M&A’s occurred on a global scale. Back in 1970, the manufacturer of To-blerone in Bern merged with Chocolat Suchard S.A. in Neuchâtel to become Interfood SA. In 1982, Klaus J. Jacobs bought up Interfood and merged it with his Bremen based coffee group to

http://annmariekostyk.com/2010/09/26/swiss-chocolate-pioneers-part-daniel-peter-heinrich-nes-tle-chocolate-crinkle-cookies/

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become Jacobs Suchard SA. In 1990, he sold Ja-cobs Suchard to the tobacco manufacturer Philip Morris, Philip Morris having taken over Kraft Foods shortly before.

Kraft Foods had been founded back in 1903 by farmer James Lewis Kraft in Chicago with 60 $ as a cheese dealer, that expanded thereafter rapidly by a series of M&A, before having been taken over himself in 1930 by the National Dairy Prod-ucts Corporation. Financed by a consortium of Wall Street investment bankers, the latter com-pany started in 1923 to roll up the US ice cream industry and was in 1931, after 55 M&A, the larg-est dairy firm in the US. Later, the merged com-pany was occasionally re-baptized Kraft. At the end of 1988, Philip Morris Companies purchased Kraft for US-$ 12.9bio. In 1989, Kraft merged with Philip Morris' General Foods unit - makers of Os-car Mayer meats, Maxwell House coffee, Post Cereals a.s.o. - as Kraft General Foods. The price for Kraft made headlines as one of the larg-est mergers in the US, but the amount was topped a few years later when Philip Morris added in 2000 Nabisco Holdings for US-$ 18.9bio, a producer of cookies and snacks (Nabisco stands for National Biscuit Company). Philip Morris (by then renamed Altria) split into two companies, probably to shield the food busi-ness from the risks in its traditional tobacco busi-ness. Having acquired part of Danone and trans-ferred its European headquarter from England to a place near Zurich in 2007, Kraft acquired in 2010 the British candy producer Cadbury, selling its U.S. Pizza business to Nestlé. Finally, in 2012, Kraft split into two companies, the Kraft food group, responsible for the grocery business in the US, and Mondelēz International, responsible for snacks and sweets globally and for the grocery business outside the US. Tobler and Suchard are therefore today part of Mondelēz International, the name Mondelēz being composed of (in French) “monde” et “délicieux” (or their syno-nyms in other Latin languages).

The Swiss chocolate market today

Surprisingly, number one in the Swiss chocolate market is neither one of the companies men-tioned, but Chocolat Frey AG. The company R. & M. Frey was founded 1887 by the brothers Rob-ert and Max Frey in Aarau. In 1950, Migros took over 56% of Chocolat Frey AG and secured Chocolat Frey AG a large share of the domestic market. Later on, Migros bought up the remaining 44%. A decision to export Frey chocolate was only taken in 1981. In fact, the two giants in the Swiss retail sector, Migros and Coop, stand out by the characteristic of a large “own industry” while in most other countries, retailers are barely vertically integrated. The cartelisation among the producers of the leading brands in a number of

Swiss consumer goods markets is said to have supported expansion of retailers in production activity, partly by setting up their own factories, partly by buying up producers that had been ready to serve (also) those distributors which had not been ready to cooperate with the brand man-ufacturers’ cartels.

Summary

M&A are marked by the “business rational” ad-vanced by the promoters of the undertaking in a first phase and the often disappointing results showing up later.

One of the most often advanced reasons for M&A are synergies among the joining companies. Such synergies are presumably best illustrated by the merger of Peter and Kohler. Their compet-itive advantage in terms of products was not iden-tical (Kohler confectionary, Peter milk chocolate bars); furthermore, the expansion of each of the two partners had occurred in different markets, so that in target markets the distribution networks could profitably expand the range of products.

Complementarity – this time along the value added chain - explains the “joint venture” con-cluded in 1904 between Peter-Kohler and Nestlé, the former having had the knowledge in choco-late production whereas the latter, even more so after its merger with Anglo-Swiss, had a world-wide distribution net and also better financial ca-pacities. As this is often the case, the joint ven-ture was later followed by a merger.

The merger of Cailler with Peter-Kohler appears to have been driven by considerations of critical firm size in the export business (family ties be-tween A.F.L.Cailler and his uncle Daniel Peter appear not to have been the best and do not ex-plain this merger).

Finally, the merger of Nestlé and Anglo-Swiss had been driven by competition considerations and was, not surprisingly, inspired by banks. To add market shares gives a better price. Indeed, the two merging companies in this case contin-ued for 15 years in a rather loose cooperation be-fore the financial strain resulting from the break-down of the war business and the fall of commod-ity prices made a common headquarter under a new CEO necessary.

Although the distinction between a merger and an acquisition is never clear-cut, a reason for the latter – acquisitions - may be that strong brands create a demand that cannot be served from one single spot, for logistical reasons and constraints in local sourcing of raw materials. As the time is often not at disposal to proceed to a Greenfield investment abroad, to merge with a less success-ful existing producer in the target market is often

39

the swiftest way to expand production. To under-cut protectionist trade regimes by producing lo-cally is also important in this regard. Protection-ism may actually have contributed to the pres-ence of weak companies in target markets, eager to save themselves by way of being taken over when an opening of the domestic market occurs. On the other hand, places with high financial ca-pacity and low corporate taxation are likely to at-tract the headquarters of the merged companies as well as functions with high value added per person employed. An illustration is provided by the global research centre Nestlé located near Lausanne.

While the value added chain of chocolate produc-tion is in principle global due to the tropical origin of the main ingredient, the structures emerging in Switzerland in the early decades of the 20th cen-tury tell another story and do not show the fea-tures of the wave of M&A a century later. Essen-tially, growth and M&A occurred within national borders. The image of the product, chocolate from Swiss milk, made it difficult to expand abroad also into production activities. The same problem is besides encountered by the watch-making industry. Nestle, to the contrary, built its reputation on the company’s name and could ex-pand with production facilities around the world early in the company’s history. Nestlé had there-fore better opportunities to expand business when increasing tariffs penalised the export busi-ness and favoured undercutting of tariff barriers by FDI. The different nature of FDI in the interwar period and in recent times deserves attention.61

In the following chapter, we will show that the build-up of protective tariffs occurred already when the first wave of globalisation still deployed its effects. Economic liberalism as the driver of the first wave of globalisation was also already on retreat before WWI due to the increasing carteli-sation of the economies. Within the collusive agreements concluded, cartelists often reserve a privileged position for themselves on their do-mestic market, thus also favouring the nationalist policies that marked the interwar period after the devastating effects of WWI on global monetary relations and the slump in global demand after Black Friday 1929.

61 As expressions of the nationalist policies that marked the interwar period, we have already en-countered in other chapters the nationalisation of electricity providers and the increased protection of agriculture starting in the1930ies. The changing nature of FDI will further be illustrated by the ex-ample of the Bata Shoe Company in the last chap-ter.

Increasing Tariff Protection

and Cartelisation

Tariff protection

The evolution of tariff protection is indicative for a turn from liberalism in the initial phase of the first wave of globalisation to increasing protec-tionism towards the end of this period.

The first half of the 19th century had been marked by a dismantling of mercantilist policies, the latter relying not only on border protection but also very much on prohibiting many activi-ties to a majority of economic agents while granting concessions to single agents (keyword “purveyor to the court”) or categories of agents. The accent in these years was on reaching the freedom to contract (see the 1830 emancipation of rural areas in Switzerland), tariffs became pri-

mordial around 1850. For 1848, Tena et al.62

calculate a world average tariff applicable on manufacturing trade of 48%. According to their calculations, the rate fell to 20% in 1863 to stay there for a decade. Simultaneously, world trade knew much higher growth rates in these years than in the decades before.

An important event in this phase of liberalization is considered to be the Cobden-Chevalier agreement between Britain and France of 23 January 1860. The treaty reduced French du-ties on most British manufactured goods to lev-els not above 30% and reduced British duties on French wines and brandy. These reductions are indicative for the typical pattern of tariff pro-tection of the time. While an advanced nation like Britain practiced low tariffs on imports of manufactures and had little to offer in trade ne-gotiations, it still levied comparatively high tariffs on imports of tropical products, and also on al-coholic beverages, primarily for fiscal reasons, and this allowed to strike the deal with France. The treaty is remarkable for a second reason since it contained a Most Favoured Nations clause. Consequently, Cobden-Chevalier was conducive to negotiate additional tariff reduction agreements on the continent (e.g. between France and Switzerland), so that manufactures paid on the Continent around 1870 a low duty of some 10% (according to the calculations of

62 Tena-Junguito, Antonio and Markus Lampe and Felipe Tâmega Fernandes (2012): How Much Trade Liberalization Was There in the World Before and After Cobden-Chevalier?, The Journal of Economic History, Cambridge University Press, vol. 72(03), pages 708-740, September.

40

Tena at al. from where all these indications are taken). Imports of agricultural products were regularly hardly taxed in advanced nations, one political economy reason being the interest of the leading liberal circles to reduce living costs of an increasing industrial workforce. Outside Europe, tariffs were uneven. China and Japan were forced by military means by the UK and the USA respectively to practice low tariffs on imports while colonies with settlers which had some sovereignty in setting tariffs or became in-dependent such as Latin America collected ra-ther high tariffs.

The long recession of the 1870ies marks the turning point. It led to a marked increase in tar-iffs in many countries. France, e.g., ended the Cobden-Chevalier agreement in 1892, mainly to maintain a large agricultural workforce. The in-crease in tariffs should not only be attributed to protectionist tendencies, however. Financing needs of the government played also a role. In Switzerland, e.g., the Constitution of 1874 charged the central government with additional tasks, and tariffs were its main financing source at the time. The newly constituted association of industrialists had of course an interest in a fi-nancing of increased government activities that fell on foreign producers.

At the turn of the century, the situation for free trade had degraded further. In Switzerland, not only the leader of the peasants’ movement, Ernst Laur, was successfully lobbying for the adoption of the tariff scheme of 1902. 63 With re-spect to manufacturing, tariffs suited for fighting trade wars had spread in numerous countries, i.e. the ordinary tariff rates were rapidly in-creased in order to have “concessions” to offer in a second time when tariff reductions were ne-gotiated on a bilateral basis. Also formerly lib-eral nations such as Switzerland fell in this pris-oner’s dilemma.64 Of the 1164 lines in the tariff code of 1902, some 700 positions could be re-duced within the next four years in tariff negoti-ations.

The infant industry argument reconsidered

Throughout the 19th century, Britain remained the outstanding adherent of free trade. To the contrary, in the US, after the War of Secession, the industrialised North wanted to reserve the

63 http://www.hls-dhs-dss.ch/textes/d/D13765.php 64 See Submission of the Ministry of Economics to the Federal Council for the Meeting of 5 November 1925 where this mechanism appears clearly. Stored at www.amtsdruckschriften.bar.ad-min.ch/viewOrigDoc.do?ID=60004144 . 65 Lehmann, Sibylle H. and Kevin H. O'Rourke (2008): The Structure of Protection and Growth in

rapidly opening new opportunities of industrial expansion within the country for itself and im-posed its protectionist interests over the cotton exporters in the defeated South where formerly an interest prevailed to import consumer prod-ucts at low costs. Over this experience recently a scientific debate emerged questioning whether to protect manufacturing by high tariffs was conducive to high growth in the late 19th century.65 First hand calculations of correlations between levels and/or changes in levels of tar-iffs applicable on manufactures and growth sug-gest such a relation. In principle, tariffs are per-nicious for welfare since they allow industries with inefficient producers to stay in business in-stead of releasing resources to the sectors in which the country has a comparative ad-vantage; they thus reduce the static gains from trade. This picture changes, however, once one hypothesizes that manufacturing, distinct from agriculture, allows for learning by doing and similar mechanisms conducive to endogenous growth. Then policies are indicated that make the agricultural sector shrink as fast as possible, e.g. also by a tariff scheme protecting domestic manufactures but allowing for the duty free im-port of agricultural commodities. The high tariff- high growth nexus appears primarily to be a cor-

relation, however.66 Too many factors tend to interact but may not adequately be controlled for in the small samples available once empiri-cal investigations go beyond calculating simple correlations. Countries which increased tariffs from the early 1870ies to the late 1880ies tended rather to grow less than those not in-creasing duties, e.g., suggesting that one should look at other determinants than tariffs in explaining improved growth. For instance, countries with high tariffs are those which could attract numerous migrants thanks to the abun-dance of land. They presumably exploited more than other countries could economies of scale from within their internal market and this may primarily explain their good growth perfor-mance. Furthermore, technical advancements may have made it easier to surmount even in-creasing tariff barriers. Increasing tariffs can e.g., be more than compensated for by either reduced transportation costs and/or a higher im-portance of an enriched choice among products and product varieties thanks to trade. The latter

the Late 19th Century, National Bureau of Econo-mic Research Working Paper Series No. 14493 66 The following text interpretes the findings in Schularick, Moritz and Solomos Solomou (2011): Tariffs and economic growth in the first era of globalization, Journal of Economic Growth (2011) 16:33-70

41

factor may have been particularly important in a period where economies rapidly diversified into new industries. The considerations just made could in fact have interacted positively in the fast growing economies to generate the observed correlation. Important in this regard is that trade exposure (imports and exports as a share of GDP) did not suffer up until 1910.

Politics serving organised interests

An impact of increased tariffs on industrial or-ganisation is likely to have occurred, however. A breaking up of value added chains was made difficult. Where an adequate internal production was in place, reduced import competition due to tariffs was welcome and sought for by national industries that showed also an increasing ten-dency to collude. Tariff schemes became a hot bargain. Losers were producers less well organ-ised as an association and not well anchored politically to defend their interests. 1923, when preparing the dispatch for a renewed general tariff schedule the Ministry of Economics re-ceived some 1’000 submissions, most of them pronouncing an opinion on more than one of the more than 1’000 tariff positions. 67 84 meetings with industry associations and other organisa-tions followed suit. Furthermore, the tariff com-missions of the chambers of Parliament heard in detail the positions of organised interests to the executive’s proposal although the associa-tions had, as indicated, already been exten-sively consulted when the proposal was elabo-rated. Beyond defending fiscal interests, the ad-ministration negotiating tariffs had difficulties to pursue an overarching ideal of free trade in the situation of the prisoners’ dilemma described where countries had to build up negotiating po-sitions. Rather, negotiators felt a pressure to act at the mercy of organised interests.

A century later, consultation of organised inter-ests remains important. In Swiss economic pol-icy, the agricultural lobby, the banking lobby and the pharmaceutical lobby are considered the strongest lobbies. The strength of the former, the peasants, topped the one of the bankers in the negotiations of a FTA with Chile when in the services chapter access for Swiss banks was

67 Botschaft über das Bundesgesetz betreffend ei-nen schweizerischen Zolltarif vom 25. Januar 1925, Bundesblatt I 109ff, Bern, page 115. This dispatch provides besides the confirmation for the historical assertions made in the present section. 68 Krajewski, Markus (2014): The Great Lightbulb Conspiracy, IEEE spectrum, Volume 51, No.10, p.56-61 69 D’Alessandro, Michele (2007): Seeking govern-ance for world markets - The League of Nations be-tween corporatism and public opinion 1925-1929,

sacrificed in order to avoid a guarantee for duty free imports of Chilean wine in the agricultural chapter. With regard to the third lobby it could recently be read in the press that the pharma-ceutical industry annoyed machine manufactur-ers in the FTA negotiations with India by insist-ing on inclusion of so-called TRIPS+ provisions, i.e. intellectual property protection beyond the WTO standard, protection which India was not ready to offer in the agreement.

Increasing cartelisation

While collusion at the level of the crafts was practised all along the 19th century, at the turn to the 20th century, the economies of the indus-trialised world got increasingly under the influ-ence of large industrial trusts. And these trusts increasingly also agreed on dividing up the global market.

How far collusion had destroyed free market en-try in the interwar period is illustrated by the Phoebus cartel, created on 23 December 1924 “under the sparkling bulbs of Christmas light-ing”68 in Geneva by Germany’s Osram, the Netherlands Philips, France’s Compagnie des Lampes, and the subsidiaries and licensees of General Electric from the US, including also the Japanese manufacturer Tokyo Electric. This cartel of national champions became famous for having agreed on cutting the life expectancy of an electric bulb from up to 2000h to 1000h, the first known example of engineered obsoles-cence of a product. It was enforced by fines manufacturers had to pay when samples of their production sent to the Geneva based Phoebus S.A. showed a longer burning time than agreed.

In these years, cartels were not necessarily seen as negative. At the International Economic Con-ference held under the auspices of the League of Nations in May 192769 in Geneva, Louis Loucheur, the head of the French delegation, saw the transnational division of markets as a way to dismantle protectionist tariffs and to real-ise an industrial organisation in depressed Eu-rope capable of facing the dynamic economy of the US.70 He was opposed by Gustav Cassel, professor of economics at Stockholm University,

contribution to the XIth Annual Conference of the European Business History Association, Geneva, 13-15 September, 2007 70 Hidvégi, Mária (2011): Internationale Kartelle und der europäische Wirtschaftsraum der Zwi-schenkriegszeit, Essay, Clio Online, Themenportal Europäische Geschichte, www.europa.clio-on-line.de/2011/Article=482

42

and famous up until today for his work in the area of monetary theory. These conflicting views pos-sibly translate deeper and long lasting convic-tions of nations about appropriate economic pol-icy: In 1931, Scandinavia’s ‘North European Luma Co-op Society’ produced and sold lamps at a considerably lower price than Phoebus’ mem-bers, economic and legal threats by Phoebus not achieving the desired effect. On the other hand, the French government sticks up until today to the idea of creating national champions, as the Sanofi-Aventis merger testifies.71

After WWII, the US exported their economic or-der and convictions, anti-trust legislation not con-stituting an exemption. Indeed, in the USA the profits and practices of big business had made it politically necessary to adopt the Sherman Act in 1890 which was completed by the Clayton Act of 1914, prohibiting additional strategies of domi-nant firms and cartels to monopolise markets. Reflecting the US experience and position, the stillborn International Trade Organisation (ITO) negotiated in Havana in 1948 included provisions on restrictive business practices. At that time, the memory of the damaging effects of international cartels during the 1930ies was still alive. Follow-ing the failure of the ITO, competition did not fig-ure in the GATT, in part because most govern-ments were often keen to promote economic con-centration with the idea of enhancing interna-tional competitiveness by the constitution of lead-ing firms within one’s border. These tendencies marked also the evolution of the oligopolistic pharmaceutical industry once it had grown out of the artisanal manufacturing of dyes.

How the Pharmaceutical Indus-

try moved to Basle

A case of harmful over-extension of intellectual property rights

In 1854, William Perkin discovered at the Royal College of Chemistry in London the aniline

71 Sanofi-Aventis was formed in 2004 when Sanofi-Synthélabo acquired Aventis. In early 2004, Sanofi-Synthélabo had made a hostile takeover bid worth €47.8 billion for Aventis. Initially, Aventis rejected the bid because it felt that the bid offered a value inferior to the company's due share value. The board of Aventis went so far as to enact poison pill provisions and to invite Novartis to enter merger negotiations. The three-month takeover battle

mauve, the first dye obtained from coal tar. His wealthy father allowed the 19 year old to build im-mediately a factory. Later, his professor and other researchers came across other aniline col-ours. Leading in this development were in addi-tion to English French scientists. The first discov-eries were obtained on an experimental basis, sometimes randomly. For instance, father and son Gerber-Keller in the then French town Mul-house wanted to bring out a blue dye, but discov-ered the red Azalein. But it was in Germany where the profound scientific penetration of dye chemistry occurred. Local researchers were par-ticularly motivated since Germany had no colo-nies from where to import natural dyes such as indigo. Also, Germany knew patent protection only from 1877 on. All the more consequent were the investments of the Badische Anilin und Soda-Fabrik (BASF) and the Hoechst works. In addi-tion, Justus Liebig had launched on a broad front the training of chemists, starting from Giessen, where he developed among other fields agro-chemicals and where, moreover, A.W.Hofmann, the professor of William Perkin, had obtained his PhD in 1845.

Opposite to Germany, patent law in France knew just the opposite characteristic. Here, patent law did not protect the manufacturing process, nor the chemical formula but went as far as to protect the function performed by the product (i.e. dying in blue). Because the Azalein of the Gerber-Kel-ler’s in Mulhouse produced similar results com-pared to the Fuchsin of the manufacturers Re-nard Frères in Lyon, they were sued and lost the patent dispute. From then on, chemists in France had no longer any incentive to develop a better product with a simpler method to capture the French market. The ruling had curtailed the field of potential commercial applications by too much. They emigrated in large numbers, especially to Switzerland (where, more than 200 years earlier, another group of French emigrants, the Hugue-nots, had launched the watch and textile industry after having been expulsed by the Edict of Nantes). Basel, adjacent to both France and Ger-many, benefited particularly from the influx and has since then remained the centre of the chem-ical industry in Switzerland.

ended when Sanofi-Synthélabo launched a friendly bid of €54.5 billion in place of the previously re-jected hostile bid. The French government played a strong role, desiring what it called a "local solu-tion", by putting heavy pressure on Sanofi-Synthélabo to raise its bid for Aventis and for Aventis to accept the offer and by rejecting Avent-is' poison pill proposal (see e.g. http://en.wikipe-dia.org/wiki/Sanofi).

43

CIBA

Switzerland possessed up until 1887 no patent law and carved out chemistry from patent protec-tion up to 1907. This was partially inspired by the industry itself, but corresponded also to the inter-ests of downstream industries, the chemical in-dustry producing out of the tarry residues from emerging gas works (road lighting!) the dyes for the important local textile industry. Furthermore, the own goal of France in patent protection led also to the technical and organisational stagna-tion in the dye industry in nearby Alsace and in Lyon, so that soon better products were cheaper to buy in Basel. In addition to exports to Ger-many, also smuggling into France sat in.

Alexandre Clavel, born in Lyon, but for some time already resident in Basel, became a major man-ufacturer by launching here the production of Fuchsin in 1859. Related to the Renard Frères by family ties, he had been able to acquire the man-ufacturing secrets. Soon, the city council ex-pelled him before the gates of the town because of groundwater pollution and odour emissions, an event that proved to be useful in the long term since it allowed an easy expansion of the industrial plant in later decades. Clavel sold in 1873 his business of 30 employees to his com-petitor in the Fuchsin-business, Bindschedler in nearby Schweizerhalle. After eleven years, the latter could no longer finance the company’s ex-pansion by his own funds, so a shareholder com-pany was established, the "Society for Chemical Industry Basel" or just CIBA.

Before the turn of the century, CIBA bought the company Gerber & Uhlmann in Basel, the latter having been founded by Armand Gerber, the son of the Azalein-explorer in nearby Mulhouse. After a further acquisition in Basel, CIBA reached in 1913 a workforce of 2’156 employees, of which 459 held employee status or were chemists. The great importance of economies of scale and hu-man capital thus appeared soon as a character-istic of the chemical industry. Economies of scale should later lead to the merger of Ciba with Geigy, another Basel-based chemical company, which we portray immediately.

Geigy

Compared to CIBA, Geigy evolved along some-what different lines. Of similar openness to the world as the Basel Mission,72 the Carl Geigy Company was already in the middle of the 19th

72 The Basel Mission was founded in 1815 by mem-bers of the local Protestant Church and sent, start-ing in 1821 missionaries stemming mainly from Switzerland and Southern Germany into the Cauca-sus Region, to Ghana, to India (e.g. the grandfather

century fully globalised. As a trading house for drugs, spices and vegetable dyes, it had pur-chasers or representatives in Egypt, the Levant, Persia, the East Indies, China, Java, Jamaica, and in the main European ports and distributed its goods throughout Western and Central Eu-rope. Geigy then began its own production with a mill for imported dyewoods. Almost 30 years old, Johann Rudolf Geigy broke out colour manufac-turing from his father's commercial business, and started in 1859 the manufacturing of Fuchsin. His procurator had obtained the manufacturing knowledge by unexplained ways from Clavel. Ei-ther due to scepticism regarding the toxic produc-tion methods of Aniline dyes or to take over his father’s business who died soon after, J.R.Geigy transferred the factory already in 1860 to his procurator, J.J.Müller-Pack. The latter engaged the Alsatian Schlumberger, who had acquired as a chemist at Gerber-Keller and Clavel manufac-turing knowledge. He helped with other chemists expand the colour palette. When in the neigh-bouring house of the former paint mill seven peo-ple suffered from arsenic poisoning, it came to a process that ended with a fine, high pension and compensation payments and the instruction to derive the toxic residues in tubes into the Rhine.

In 1864, Müller was ruined, by reputation and fi-nancially. J.R.Geigy re-entered the now techni-cally rehabilitated company. He was also far bet-ter anchored in the narrow circle of leading Basel families. In 1901, the family business was con-verted into a family corporation. Only the younger generation relinquished completely trade in natu-ral colours and colonial goods and consistently pursued the line of industrial production.

The easy way knowledge circulated among com-panies may have contributed to the extensive for-mation of cartels in chemistry. Already in 1882, Geigy had struck a deal with Hoechst Farben: supported by cross-holdings of capital, the com-panies agreeing on the mutual provisioning with products. It was in 1918 when the three greatest manufacturers of colours in Switzerland, CIBA, Geigy and Sandoz formally decided to form an interest group (IG). Sandoz had been founded also in Basel in 1886 by a chemist who had for-merly worked with CIBA and a financial investor. The Swiss chemical industry colluded therefore before in 1925 in Germany the giant IG Farben was founded (which should leave during WWII some dubious but still not fully explored tracks in Swiss history).

of the writer Hermann Hesse) and to China. It spun off a global trading company, UTC (Universal Trad-ing Company) and played some role in bringing co-coa to Ghana (see Chapter 3).

44

Pharmaceuticals, an oligopolistic industry

Most companies producing dyes from tar be-came sooner or later also active in the production of pharmaceuticals. Initially, they relied on for-eign inventions, but more and more and in ac-cordance with the extension of patent protection in Switzerland also based on their own research. In particular, Hoffmann-La Roche, founded in 1894, was from the beginning on established as a pharmaceutical company. It should soon be-come the fourth major chemical company located in Basel and earning international recognition. It remained independent, a considerable part of the capital under control of the Hoffmann family.

The three others, CIBA, Geigy and Sandoz, fi-nally merged, Ciba and Geigy went together in 1970 to constitute “CiGy” and after “CiGy”’s mer-ger with Sandoz in 1996, Novartis was born. The merger was accompanied by a spin-off. Ciba Spezialitätenchemie, where the business with chemicals for industrial use was concentrated, was acquired by BASF effective in 2009. One year before merging with Ciba, Sandoz spun off its own division fabricating chemicals for indus-trial use, under the name of Clariant AG. Going through many turbulent years, Clariant pursued a policy of growth through acquisitions.

Comment

The history of the Swiss Chemical Industry illus-trates how delicate it is to strike a balance in de-fining the scope of a patent. To confer excessive rights made the innovative capacity of the cor-responding French industry limb while only the progressive introduction of patent protection in Switzerland led to the build-up of own research doing more than just reverse engineering.

This possibility of easily copying products may have had further reaching consequences than just to provide to patent protection an outstand-ing role in the chemical and pharmaceutical in-dustry. It may also have favoured collusion in the industry. Pervasive cartels – Switzerland entered in the late 1980ies the negotiations of the EEA (i.e.EU+EFTA) with the illusion of ob-taining an exemption from EU competition leg-islation! – gave way to a new wave of M&A in the 1990ies. Given costs of developing a new medicine that may exceed US-$ 1bio, an oligop-olistic market structure is pre-programmed. The efficiency of this market structure cannot be as-sessed given the many possibilities by which the players in an oligopolistic game may inter-act.

A possible advantage of this market structure resides in the fact that the ‘escape competition’-motive is strong in this particular industry (indi-cation: what is in the product pipeline is essen-

tial in the valuation of the shares of pharmaceu-ticals companies). This fact motivates R&D ef-forts which may bring fundamental improve-ments to human health. That R&D is not only geared towards ephemeral incremental innova-tions hinges also on the articulation the legisla-tors and the courts give to intellectual property laws when broken down into ordinances and case law.

The End

Watches replace Cars -

the Absence of a Swiss

Automotive Industry

A spotlight on today’s industry structure in Switzerland

The comparatively high wealth of Switzerland originates essentially in an export oriented sector of high value added services. At the same time, for a country with this level of per capita income, Switzerland continues to have a high employ-ment share in manufacturing. This is one reason why well paid jobs are not only available in the financial centres of Zurich, Geneva and Lugano, but – at a somewhat lower level - throughout the country. Biel/Bienne with a population of some 100’000 inhabitants at the district level is the sec-ond largest town in the canton of Bern and the 12th largest agglomeration of Switzerland in gen-eral. Opposite to the town of Bern, where the fed-eral and cantonal administrations are located and where continuity in economic expansion at de-pressed rates prevails, the bilingual town of Biel/Bienne has a tradition in manufacturing with corresponding periods of boom and bust. To the gold plating of buildings where company head-quarters were located followed years where the town often suffered from one of the highest un-employment rates in the country.

Among industrial centres in Switzerland, the town of Biel/Bienne is of particular interest since its his-tory is revelatory of a feature in Swiss industry structures that appears only when statistics of employment and value added are analysed at an advanced level of disaggregation. Within the in-dustrial sector, Switzerland stands out with a high share of the precision machine industry. This is, of course, not a surprise, since according to in-ternational statistics watchmaking is part of the precision machine industry, and Switzerland’s

45

tradition in watchmaking is known, but the preci-sion machine industry is larger, comprises today also an important number of firms producing medical devices, and corresponds therefore in a larger sense to the image of Switzerland as a manufacturer of very reliable, small but costly, still indispensable apparatus. An aspect not im-mediately apparent are the parts of the machine industry that are underrepresented in Switzer-land when set in relation to an international aver-age. This is the automotive industry which in many countries has grown out of the classical war industries, coal and steel, resources that are hardly found within the country. For this reason, large industrial plants are missing in Switzerland, and industrial production can even be located in multi-story buildings as this is the case with watchmaking.

The history of watchmaking

Watchmaking has grown out of an artisanal pro-duction that was geographically concentrated in the Jura, a range of mountains running along the northern-western border of Switzerland, from Basle to Geneva. While Basle hosts today every year with the exposition ‘Baselworld - The World Watch and Jewellery Show’, the trade fair where the worldwide watch industry meets, the impulse for building up a watchmaking tradition originated in the town at the opposite end of the watchmak-ing arch (“Uhrenbogen” in German), in Geneva. Huguenots, religious refugees from neighbouring France, founded the tradition shortly before 1600. Biel/Bienne, together with Neuchâtel are located in the middle of this arch and provide the urban infrastructure for the small enterprises where watches were assembled. Such ‘eta-blissements’ could be found in almost every vil-lage within this region. The town of La Chaux-de-Fonds73 needs also to be mentioned. It is located a few kilometres north of Neuchâtel, up on the Jura range, and was at the beginning of the 20th century the sixth or seventh largest town of Swit-zerland.74 Testifying of the boom periods through

73 Given the juxtaposition of watch- and car-making operated in this chapter, it may be worth noting that Louis Chevrolet who became famous as a rac-ing driver in the U.S. and was (co-) founder of Gen-eral Motors in Detroit, was born in La Chaux-de-Fonds in 1878. 74 Zurich, Basle, Geneva, Berne and Lausanne were larger, St.Gallen the same size. Today, the agglom-eration of La Chaux-de-Fonds / Le Locle is ranked 29th in Switzerland according to population size. 75 https://fr.wikipedia.org/wiki/La_Chaux-de-Fonds 76 See http://www.memreg.ch/dos-sier.cfm?show=text&id=9613&dossier=true&ac-tion=showDetail

which the watchmaking industry went, population had doubled in this town from 1860 to 1910, when with 37’751 inhabitants quasi the same number of inhabitants as today was reached.75 At the end of 2013, La Chaux-de-Fonds counted 38 694 inhabitants, slightly above the level of 1980, after the fall from 42’347 in 1970. This is in stark contrast to the evolution of the Swiss popu-lation in general which doubled in the years from 1910 to 2010. La Chaux-de-Fonds can therefore serve as an example in economic geography. The high value added activities of the watchmak-ing industry such as R&D and headquarters are today concentrated at the foot of the Jura range where accessibility is better.

A rapid succession of periods of boom and bust is characteristic of the 2nd half of the 19th century. In the 20th century, two periods where economic hardship affected also the middle classes stand out. The first period was the period of WWI where Switzerland experienced in 1918 its first and sin-gle national strike. This strike may not be reduced to a result of leftist agitation, it has serious eco-nomic roots. While wartime profiteers earned for-tunes, the consumer price index more than dou-bled in the period 1914 to 1918. In Biel/Bienne as a manufacturing town, the events in 1918 were of course particularly dramatic.76 Of more interest in the current context77 are the 1930ies as they give rise to an attempt to diversify the industry struc-ture of Biel/Bienne out of the watchmaking indus-try (see immediately below). Within the watch in-dustry, the crisis of the 1930ies obliged Switzer-land’s central government to launch one of the rare attempts to implement an industrial policy. The ‘statut horloger’ was adopted in 1934.

The watchmaking statute78, or how industrial policies degenerate

In the 2nd half of the 19th century, the Swiss watchmaking industry came for a first time under serious pressure by US competitors but up until WWI achieved to dominate the world market again. Growing protectionism after WWI then had

77 For the functioning of the Swiss labour market, see part IV in Chapter 7. 78 Except for the last three paragraphs, the text

stems from two contributions by Pierre-Yves Donzé

to an industry journal: Part one. Towards the

watchmaking cartel (1900-1930), Watch Around

009, and Part two: From the cartel to the SMH

(1930-1983), Watch around 010. The last three

paragraphs reflect the author’s professional experi-

ence.

46

a devastating effect on watch exports. To under-cut tariff protection, watches were exported as unassembled kits of parts and put together in the country of sale, but this entailed the risk of knowledge transfer to such competitors as Bulova in the United States and Citizen in Japan. A second motive to set up a new and particularly rigid corporatist structure during the 1920s and 1930s was to preserve the industry structure. For this to happen, three reasons can be advanced: (1) Family businesses are primarily a source of income and not a financial investment, creating larger companies deprives members of an upper social class of jobs; as a consequence, in 1923, there were 972 watchmaking enterprises with an average workforce of just 35 people. (2) A wide-spread desire to preserve Swiss watchmaking’s diversified production system; thanks to the frag-mented structures, the industry could bring a large number of products of widely differing styles, functionalities and prices to the market. (3) Socialist members of the cantonal parliaments opposed assembling abroad to protect jobs and were heard by political leaders not only due to concerns for social peace but also by the fear that a decline of the decentralised production system would lead to depopulated regions.

The constitution of the cartel occurred with the support of the banks and eventually the federal government in three stages. First, three groups were formed according to their activity: watch producers came under the umbrella of the Swiss federation of watchmaking associations in 1924; firms making movement blanks joined the Ebauches company in 1926, and component manufacturers gathered in the Union of asso-

ciated watchmaking activities (UBAH) in 1927. In 1928, these three groups adopted a set of con-ventions, including a ban on assembling abroad. Chiselling with regard to assembling abroad could not be suppressed and called in the banks and the government which funded in 1931 an overall holding company, ASUAG (Allgemeine schweizerische Uhrenindustrie AG), which ac-quired the Ebauches company, most of the independent dissidents and the principal manu-

facturers of the essential balances, springs and escapements of a watch movement.

The economic crisis of the 1930ies encouraged continuing disobedience to the cartel’s policy and it took, as the second step, direct federal inter-vention in 1934 “to close the ring”, as the eco-nomics minister Edmund Schulthess put it. The federal decree of March 1934 gave legal backing to the 1928 conventions, forcing dissenters to comply, and made the export of movement blanks, watch parts and kits subject to an official permit. Further legislation in 1936 constituted the third step of cartelization and tightened govern-ment control, enforcing the minimum prices fixed by the 1928 conventions on the dissidents, and regulating employment at home. From then until the mid-sixties, the Swiss watch industry was governed by a state-controlled cartel – the Statut horloger -, enforced by Fidhor, Fiduciaire hor-logère suisse, launching investigations into com-panies at the behest of the executive body uniting the Federation of Swiss watchmaking industries (FH), the Ebauches company and UBAH.

The federal decree of 1934 made a comprehen-sive bunch of entrepreneurial decisions subject to government approval. A watch firm could not be opened, enlarged, moved nor change its name without permission from the Ministry of the Economy. The same applied to increasing the workforce; each enterprise had its quota of work-ers. Any change in activity was likewise subject to government authorisation. A manufacturer of silver watchcases, for example, had to apply for a permit to make them in steel.

While the number of watches exported rose from 15.2 million in 1935 to 40.9 million in 1960, the government did its best to protect established in-terests (see table below): New businesses were rarely allowed (25.9%) and the attitude to new ac-tivities was hardly more generous (34,9%), appli-cations to extend premises were generally ap-proved (87.6%), however. Protected from com-petition by restrictions on new business start-ups and by fixed prices on the sale of parts, industry bosses grew rich during the cartel period and played a major political and social role locally and at a regional level.

Licences applied for and granted by the ministry of the economy, 1937-1959

Permits Applied for Granted % Granted

Starting a new business 4464 1160 25,9

Enlarging premises 1965 1722 87,6

Diversification (new activities) 1373 541 39,4

47

This regime was generally well seen by manufac-turers, even though some found themselves in conflict with the decisions of the arbitration tribu-nals. It gave, however, rise to dubious industry structures. According to the federal business census of 1955, there were 2,806 firms involved in watchmaking. The majority – 79 % – had fewer than 20 employees; 312 companies (11%) em-ployed between 21 and 50 people; 127 (5%) had between 51 and 100 on their payroll and the re-maining 5% (126 firms) had more than 100 em-ployees. It was not until the growth of new com-petition from the United States and Japan in the 60’ that the grip of the Statut horloger started to relax. The ensuing crisis of the 1970s then led to the transformation of a cartel into a near-monop-oly.

From cartelisation to concentration

The initial threat came from the United States in the 1950s and especially from the Timex Com-pany. Timex, founded out of Waterbury Clock company, produced munitions during the war, but turned in 1949 to the mass production of wrist-watches, expanding output from one million watches in 1949 to 22 million in 1969. These watches dominated the lower price range into the 70’ when even cheaper quartz watches replaced them. Japanese firms, such as Seiko, had intro-duced assembly lines to manufacture self-wind-ing watches in large series in the 50’ and adopted the new electronic technologies early.

Watchmaking circles in Switzerland were by no means unanimous in favour of dropping the statut horloger to allow for a restructuring of the indus-try. ASUAG was particularly vocal against repeal-ing the manufacturing restrictions and export controls on movements since its monopoly posi-tion as supplier of movements to the Swiss watch industry was at stake. For other industry suppli-ers, the cartel offered the comfort of not having to compete. In the Federal Parliament, a deputy of the liberal party (Freisinnig-demokratische Partei) criticised that reform would bring back “Manchester-school liberalism” and argued that reform proponents do not even ”attempt to grasp the realities of the watch industry with its unique features that make it all too vulnerable to the slightest economic fluctuations.”

The assembly companies producing the finished watches and therefore in direct touch with the in-ternational markets finally achieved in 1961 a first reform of the statut horloger. Only exports of movement parts and blanks were from then on restricted. When in 1971 the statut horloger was

79 http://www.ne.ch/autorites/DEAS/STAT/popula-tion/Pages/RCP.aspx

officially abandoned, the adoption in the same year of the “Swiss made” protective measures ensured that production activities would remain in Switzerland.

In 1971, four leading watch groups accounted for more than a quarter of the national production. The SSIH (Société suisse de l’industrie hor-logère), owner of the Omega and Tissot brands, emerged after a series of mergers as the coun-try's premier enterprise in terms of watch produc-tion. The number-two watch group in 1971 was the General Watch Co (GWC), established that year by ASUAG, the company seeking vertical in-tegration in response to the end of the statut hor-loger which called into question the monopoly it had enjoyed since the 1930s. The third group, the SGT (Société des garde-temps), founded in 1968, brought together a variety of manufactur-ers of low-cost mechanical and electronic watches and was the only group to make foreign direct investments. Finally, a finance company - Chronos Holding SA, established in 1966 - had its own watch-making group.

The general economic crisis into which Switzer-land fell in 1974 after the inflationary end of the Bretton Woods Regime, the ensuing appreciation of the currency and misled macro-economic pol-icies lasted in the case of the watch making in-dustry well into the 1980ies. The industry struc-tures, conserved over decades, were swept away in a few quarters. The consequences for the region in which the watchmaking industry was concentrated were heavy. The population of the canton of Neuchâtel fell by 5.7% between 1970 and 1980, and the districts in the Jura Mountains, where watchmaking was dispersed, knew a re-duction in the number of inhabitants from 10% to 20% in these years.79

Finally, the banks decided in 1983 to set up a new group to rationalise production and market-ing. SMH – the Société suisse de microélec-tronique et d’horlogerie – was founded to become the Swatch Group in 1998. Government refrained n these difficult years from intervening with com-mand and control measures as it had done in the 30’ but concentrated on supportive measures. Coverage by the unemployment insurance was granted for extended periods in these regions, re-gional policy was created and focused on the Jura range, a research centre of the industry was supported (the CSEM), and a so-called “impuls programme” helped develop critical parts such as long lasting batteries.

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In recent years, new episodes of public interfer-ence were added to the dodgy history of watch-making. They are easily understood on the back-drop of past regimes. One episode was the inter-vention of the Competition Authority addressed to the component manufacturer ETA of the dom-inant watch making company (the Swatch Group) not to cut off smaller producer of watches from the provisioning with electronic clockworks.80 A second episode occurred when a new law on “Swiss Made” was deliberated in Parliament. The Swatch Group, supported by parts of the rest of the industry, pushed for exceptionally high stand-ards regarding domestic content needed to qual-ify for the “Swiss Made” label. 81 In doing so, a differentiation was e.g. required regarding the components that have necessarily to be of do-mestic origin between electronic watches and mechanical watches, the requirements in the for-mer case being lower, a possible reflection of the retarded entry of Swiss watchmaking into the fab-rication of electronic watches.

The missing automotive industry - General Motor’s assembly factory in Biel82

The World Depression after the Black Friday in 1929 led to protectionist policies throughout the industrialised world, and this helped Biel to get for a few decades the foot in the production of automobiles, as we will explain below. The situa-tion in Biel was in these years particularly dra-matic, since production of watches, rather a lux-ury good, was badly hurt, also by high tariffs. The town of then 35’000 inhabitants had to care for 5000 unemployed persons. This induced the Ma-jor to look out for new activities that might be brought to Biel.

In these years, General Motors decided to relo-cate its European Headquarter to Geneva. The Federal Ministry of Justice and Police was reti-cent in granting residence permits to just a few Americans and suggested that a direct invest-ment of GM in Switzerland would change the sit-uation. Dr. Guido Müller, the Major of Biel, learned about the presence of the general man-agement of GM in Geneva and their eventual in-terest in constructing a plant in Switzerland. The managers had already visited other places in Switzerland, e.g. Winterthur, where idle factory

80 The case was solved in 2004 with an amicable so-lution. In 2013, the competition authority then de-cided that the obligation of ETA regarding provi-sioning of competitors of the Swatch Group in the final goods market may be phased out up until 2022. See https://www.news.admin.ch/mes-sage/index.html?lang=fr&msg-id=50702 81 http://www.nzz.ch/wirtschaft/uhrenindustrie-definiert-swiss-made-1.18447035

halls were at disposal. Biel topped this offer by a generous package that stressed public finances of the town to the utmost. General Motors was offered land for free very close to the city’s rail-way station (some 30’000m2). The town also promised to undertake the construction of the factory building, worth some SFR 2mio (this credit was approved in popular vote by 5000 against 200 votes). GM had to pay an interest of 8%, comprising a write-down of 3.5%, relevant since the company obtained also an option-to-buy (which was exercised in 1961). Furthermore, GM obtained tax holidays: During five years, no municipal taxes were due. Electricity was pro-vided at a favourable rate.

This all happened in a few weeks in Fall 1934. No later than 5 February 1936, the first automobile left the assembly line (it was a Buick with an eight-cylinder engine). A few hundred people fab-ricated 1600 cars in the first year. The assembly line was long 150m and within the building the final production steps were located towards the windows83 so that pedestrians on their way to the railway station were enticed to buy a car, alt-hough this was out of reach for most of them in these difficult years. In fact, the assembly factory in Biel made a considerable part of the turnover in Austria and Italy where GM constructed as-sembly factories only in the 60’.

In the early years of WWII, Switzerland could im-port wheat from Hungary and eggs from Bulgaria by selling cars to these countries. But soon, the stock of parts was exhausted and domestic de-mand collapsed on gasoline shortage, so that the factory in Biel had to look for other activities. The saddlery fabricated knapsacks for the army, rails were put in the assembly hall so that railway wag-ons could be overhauled, and GM started to pro-duce refrigerators. A GM Frigidaire should be-come a prestigious equipment for any household in Europe in the period immediate after WWII.

Car production resumed soon after the war, and in the booming 50 and 60’, production expanded quickly. In 1970, out of the 28’017 cars sold by GM Switzerland, 17’102 had been assembled in Biel. The assembly line had increased ten times in length. And a spacious distribution centre had been constructed a few kilometres out of town. Employment had grown to some 500 persons.

82 All the information is taken from Marcel Motzet, Klaus Brommecker: “Montagewerk General Motors Suisse SA, Biel”, in Lukas Märki (ed.): ‘Mit Vollgas ins 20. Jahrhundert‘, Vereinigung für Heimatpflege Büren, Hornerblätter 2010. 83 The building is today under the protection of monuments as an outstanding construction in steel and glass.

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The local engineering school had opened a de-partment specialised in the automotive indus-try.84

The end came quickly. An essential aspect was that the protectionist measures which had helped bring GM to Biel in 1934 were gradually phased out. In the 1930ies, while final goods, particularly luxury consumer goods, were exposed to high tariffs, intermediates were often admitted without any significant tariffs with the idea to encourage final production in the country. And this had worked in the case of Biel. Remarkably, local sourcing proved also successful. It was esti-mated that the share of local value added in the cars leaving the assembly line in the 1930ies was a high 64.9%. This can only be explained by the considerable degree of sophistication in the in-dustrial sector Switzerland had already reached in these years. In 1960, the launching of the Community of Six in 1956 obliged the other Eu-ropean countries to react and, led by the UK, they founded the European Free Trade Association.85 When the UK intended to become an EU mem-ber, the other EFTA member states sought com-pensation for the threatening loss in market ac-cess. Free trade agreements were negotiated between the EFTA states and what the EU es-sentially was in these times, a customs union. The FTAs entered into force in 1972.

The early 70’ were turbulent years for car manu-facturers in many regards, and the slashing of tariff protection within Europa was only one of the problems to address. Japanese cars started to penetrate the European market in large scale, and the OPEC cartel made the price of gasoline ‘explode’ in October 1973 from US-$ 3 to US-$ 5 a barrel. Initially, it had been planned to relocate the assembly of expensive cars to the factory in Biel, so that GM works in Rüsselsheim and Bo-chum (Germany) could concentrate on the pro-duction of large series, to better face Japanese competition. Thanks to the FTA of 1972, such re-location of production would no longer have been hindered by tariff considerations. But the rising oil

84 Long after the assembly line had been closed down, the Technikum Biel (today a University of Applied Sciences) could revel big success in the World Solar Challenge, a race on the Stuart High-way North-South across Australia, 3000km long. The solar cars developed by teams of professors and students finished 3d in the first race of 1987 (after a GM and a Ford team), won the race in 1990 before Honda, and finished 2nd after Honda in the 1993 and 1996 challenges. The parsimonious use of electricity is also a challenge in watchmaking. The average speed of the winner is – besides - an illustration of the often encountered logistic curve of technological progress. The average speed of

price meant a blow to these plans and the factory in Biel had to close. Demand for cars with 350PS under the hood dropped to virtually zero. On 14 October 1975, an Opel ‘Rekord’ was the last to leave the assembly line. Most of the 450 people employed had already another job at this mo-ment, thanks to concentrated efforts by the man-agement.

The assessment of this venture into industrial policies is mixed. In the presence of a well-trained industrial workforce, the first years of GM in Switzerland proved to be a success. On the other hand, the episode found after four decades a definitive end when the protectionist measures which had brought GM to Biel ran out and the global landscape for car manufacturing changed. Watchmaking, although going through numerous periods of boom and bust, proved to be more re-sistant. Later attempts of the watchmaking indus-try to diversify in car manufacturing did not suc-ceed. Nicolas Hayek who had led the watchmak-ing industry out of the crisis of the 70’ by launch-ing inter alia the Swatch wristwatch did not suc-ceed in launching a Swatch-Mobile. The joint venture put in place in 1994 with Daimler (i.e. Mercedes) was later taken over by the German partner, and the production of the car, now bap-tised ‘smart’, occurs today mainly in France.

Summary

Dani Rodrik, Economics professor in Harvard, is an advocate of industrial policies and has set up a set of rules to which industrial policy should abide. In this section we test these rules against the experiences made in Switzerland with the ‘statut horloger’, and also with the episode of the GM assembly factory in Biel.

The only recommendation of Rodrik to which we subscribe is the first: “Public support must target activities, not sectors”. The assembly factory in Biel proved to be a success limited in time. A new industrial tradition did not emerge and the abol-ishment of the instrument in industrial policy used, namely tariff protection, meant also the end

the winner team was a low 66.9 km/h and 65.2 km/h in 1987 and 1990 and then quickly went up to 85.0 km/h in 1993 and 89.8 km/h in 1996. The highest speed reached was not very much higher, 102.8 km/h in 2005. Particularly thereafter, changes in the rules of the race render compari-sons impossible. 85 British Vauxhall cars proved to be a headache for GM Switzerland and GM car dealers, however, be-cause they never were sure whether the UK facto-ries were on strike or not and whether they could serve their customers or not, so that the favoura-ble EFTA tariffs did not really matter.

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of the activity. Public support for R&D, to the con-trary, proved more successful, both in watchmak-ing (see CSEM, Centre Suisse d’Electronique et de Microtechnique, Neuchâtel) and, to some ex-tent, also in the automotive industry (solar cars).

The second recommendation reads: “Incentives should be provided only to “new” activities.” In Biel, watchmaking is now present for more than 150 years, car manufacturing disappeared. To im-plant activities without an industrial tradition on which to build is a risky business.

“There should be clear benchmarks/criteria for success and failure; there must be a built-in sunset clause”. Although the assembling factories in the watchmaking industry knew that the regime of the ’statut horloger’ should be abolished, the re-sistance of the upstream producers to end the agreement proved politically too powerful.

“Activities that are subsidized must have clear po-tential of providing spill-over and demonstration ef-fects”. Admittedly, watchmaking as a precision industry helped in the development of a medical devices industry in the region, and so it was not wrong to avoid that watchmaking went bust. On the other hand, the CSEM proved difficulties to reach clients of other sectors. Engineers sought support in the well-established Federal Polytech-nical Institutes in Zurich and Lausanne, where they had graduated, whereas the CSEM contin-ued to be viewed as a R&D facility of the watch-making region in spite of the fact that the CSEM had knowledge to offer for all industries using electronic components. Zurich, and to a lesser extent Lausanne, long missed this train. High voltage attracted engineers, a male profession, more than the ridiculously small amount of elec-trons circulating on a wafer.

“The authority for carrying out industrial policy must be vested in agencies with demonstrated compe-tence”. A look at how differently the permits to ex-pand production, to diversify production and to enter the sector were handled, proves high ad-ministrative capacity; the discretionary power of the agency was simply exclusively used in the in-terest of those already present in a market, and we think this degeneration is inherent to industrial policies.

“Implementing agencies must be monitored closely by a principal with a clear stake in the out-come and who holds political authority at the high-est level”. In the national parliament it was a rep-resentative of the liberal party, where traditionally entrepreneurs gathered, who acted as the last defender of the ‘statut horloger’.

86 Migros was innovative in the sense that it sold a selection of basic nutritional goods at low prices from sales wagons.

“The agencies carrying out promotions must main-tain channels of communication with the private sector”. How can one contact the exponents of a nascent industry? A status quo bias is inherent in this recommendation.

“The objective should not be to minimize chances that mistakes will occur — which would result in no self-discovery at all — but to minimize the costs of the mistakes when they do occur.” Government intervention in the watchmaking in-dustry held structural change back, so that change finally occurred in a drastic way. The re-fusal of permits to enter the sector is revelatory and political economy arguments suggest that this bias in the case of the ‘statut horloger’ may be found worldwide in other attempts to imple-ment an industrial policy. All efforts will be con-centrated, if at all, on a smooth transition, and this will not be enough in the advent of radical change in the technological sphere and in global markets.

“Promotion needs to be renewable, so the cycle of discovery continues”. Rent seekers will know how to exploit this recommendation to their benefit.

To us, rent seeking is the core factor that deems industrial policy to failure. Clusters will start to be-come a problem at the very moment when they are identified as such by the politicians, because from then on, exponents of the sector will pro-gressively switch from reacting to the market to reacting to political incentives, and the status quo bias of the latter was illustrated above.

Fighting Bata, the Intruder in

the Swiss Shoe Market

The preceding chapter already reflected the end of the first wave of globalisation and the spread of nationalist tendencies. The following section describes a culmination point of government in-terference in a sector, since even the distribution network of successful innovators producing within the country was cut back. Besides Mi-gros,86 a shoe manufacturer, Bata, was particu-larly targeted.

The case of Bata is of interest beyond what hap-pened to the company in Switzerland. Effectively, the company successfully continued its globali-sation strategy also in the interwar period but with FDI taking on another form. Later, when produc-

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tion progressively shifted to low income coun-tries, the within-company rigidities resulting out of this protectionist period meant an obstacle to the evolution of the firm examined.

Bata – a success story from the Czech Republic with close ties to Switzerland87

In 1894, the T. & A. Bat’a shoemaker company was founded by Tomáš, Anna and Antonín Bat’a in Zlín, then a small town in the Czech part of the Austro-Hungarian Empire.88 They were shoe-makers in the 8th generation, but the new com-pany should soon profoundly change the land-scape of shoemaking worldwide: away from the craftsman working in his atelier full of cobbler’s lasts producing shoes on order, to producing shoes in an industrial manner, output being driven by the cadence of the assembly line. Anna marrying in 1895 and Antonín joining the army the same year, it is Tomáš Baťa who wins the palm for first applying Taylorism (or “scientific management”) to shoe manufacturing. Pushing the division of labour to the extreme, confining the worker to perform a limited task with tailored tools, Taylorism was also characterised as a “manufacturing system designed to spew out standardized, low-cost goods and afford its work-ers decent enough wages to buy them".89

The first Bata shoe out of industrial production was put on the market in 1897 and by 1905 pro-duction had already reached 2500 pairs a day, manufactured by 250 workers. Meeting strong demand, sales were expanded before WWI to Germany, the Balkans and the Near East. By 1917, output stood at 2 million pairs a year and the workforce totalled 5’000 people. To the Post-WWI recession, Bat’a reacted by slashing prices to 50%. In the ensuing time of rapid expansion, Tomáš Baťa put into effect his conviction that an appropriate education of the workforce is condu-cive to nothing less than global prosperity. A strict discipline was imposed in the factories (e.g. the consumption of alcohol was prohibited) and the team working on an assembly line was made par-tially financially liable for the output. Rigorous training of the staff, starting at the lowest hierar-chical level, was key in imposing the new way of industrial production. At the same time, Bat’a en-gaged in the construction of dwellings, shops and recreational areas for his workers, and supported

87 The information is taken from Bata’s homepage in Switzerland (see http://www.bata.ch/bata-his-tory ) as far as the success story is concerned and from the book of Ehrenbold, Tobias (2012): Bata – Schuhe für die Welt, Geschichten aus der Schweiz, Baden (Verlag für Kultur und Geschichte) with re-gard to the more involved aspects of the firm’s his-tory.

the construction of schools and hospitals in the neighbourhood of his factories.

The early 1930ies obliged Tomáš Baťa to a pro-found change in the structure of his company. Despite the onset of the Great Depression, Bata remained successful at the retail level. Between 1929 and 1932, Bata opened a total of 666 Shops in 37 countries. However, in reaction to the global depression that sat in after Black Friday 1929, countries started to impose prohibitive tariffs. Production had to be moved out of Czechoslo-vakia into the countries where the costumers live. Factories in Germany, France, England, Poland, Yugoslavia, the Netherlands, the US and India were created, production sites in Indonesia and Singapore followed, but also one in Switzerland. The factory in Möhlin was conceived along the same lines as the Bata towns erected in the Neth-erlands (Batadorp), in Slovakia (Baťovany), in the Czech Republic (Baťov), in Canada (Batawa), in France (Bataville) or in India (Batanagar). In these towns, the size of the dwelling offered to the workforce reflected also the hierarchical level attained by the tenant. While most of the build-ings in Möhlin are in brick, the director’s villa was painted in white.

The town of Möhlin had been chosen due to the fact that employment prospects in the pharma-ceutical industry in near-by Basle had not yet at-tracted away the local workforce whereas land prices did not reach the level on the Swiss Plat-eau. It was the leading business lawyer of Swit-zerland, George Wettstein, who had suggested to look for a production site north of the Jura range. Wettstein, a co-founder of the Swiss branch of the Rotary Club, met Tomáš Bata in 1929 in the highly fashionable winter resort of St.Moritz where Wettstein owned the Villa Genti-ana. The relation with Wettstein proved decisive in mastering the challenges protectionism in the Great Depression and World War II with its after-maths created for the Bata Company, since he constructed for Bata a holding structure.

Tragically enough, Tomáš Baťa died in a crash of his airplane in Zlín when he was leaving his na-tive town for the opening of the plant in Möhlin where Tomas J. Bata, his son, aged 17, assumed core responsibilities for the establishment of the production site. According to the last will of Tomáš Baťa, his half-brother Jan Antonín Bata

88 We keep the spelling Bat’a (pronounced Batja) for the first generation of the dynasty. Tomáš Bat’a was followed in 1933 by Thomas J. Bata and 2001 by Thomas G. Bata. 89 De Grazia, Victoria (2005), Irresistible Empire: America's Advance Through 20th-Century Europe, Cambridge: Belknap Press of Harvard University Press

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was given the opportunity to buy Bata for a very small amount; at the same time, it was clear that Tomáš Baťa did not want to curtail the heritage of his son. This contradiction gave rise to a long-lasting and deep conflict in the family after WWII. But before, the challenges of WWII had to be met.

George Wettstein’s worry was that the Nazi re-gime would conquer new countries and confis-cate the Bata plants located there. In addition to disguising the ownership structures in the local subsidiaries like the one in Möhlin, he put the holding structure 1940 under the umbrella of a family foundation. The construct is valid up until today. On the one hand, the national companies founded in the 30’ were given considerable au-tonomy; also their marketing emphasised for decades the national character of the firm. There-fore, Bata is considered a national producer by the population in several countries up until today. Coordination among the national units took es-sentially place by convening the responsible per-sons of the national companies to seminars or-ganised by the owners at the global level, the lat-ter also visiting regularly the national companies. The superstructure consists of the Bata founda-tion90 - which was founded by a ‘Wettstein Cor-poration’ located in New York -, the former own-ing the shares of the “Leader SA”91 where the es-sential of the national companies are attached. The “Leader SA” has a ridiculous share capital of CHF 200‘000.-. In the Swiss registry of com-merce, the following additional units may be found.

- Bata Brands SA, in Lausanne, with a share capital of SFR 50‘000.-. The field of activity of this society is the 'acquisition, exploitation and the licensing of (intellectual) property rights’. Bata Brands SA emanated 2009 out of Bata Westhold AG, in Zürich. The field of activity of this company had been defined in a larger way, namely to consult companies belonging to the Bata-Group.

- Bata Schuh AG in Basel. This company has a share capital of CHF 6 Mio. It is the Swiss sales company within the Bata Group.

90 „Verwaltung und Verwendung des Stiftungs-

vermögens und -ertrags, zur Förderung der

Fabrikation und des Vertriebes von gutem und

preiswertem Schuhwerk und damit verwandter

Produkte in allen Erdteilen, hauptsächlich

durch die von Thomas Bata sel. ins Leben geru-

fene Industriegruppe, hiernach Bata Schuh Or-

ganisation (BSO) genannt, durch finanzielle Un-

terstützung einzelner, diesen Zweck erstreben-

der Unternehmungen, Forschungsarbeiten,

Personaltraining usw., sowie zur Förderung

Finally, there is the

- Fondation Bata Programme pour les enfants, in Lausanne. This is a welfare organisation of the family.

The structure set up 80 years ago with operating companies in the single countries under the um-brella of a holding company, the latter steered by a family foundation, has all the ingredients of what would today be criticised as a tax saving company structure. The motives for setting up this structure at the beginning of WWII had been different, however.

From 1940 on, Thomas J. Bata steered the com-pany to the extent possible from Batawa, the Bata-town near Toronto in Canada, developing production in North America with workers from Zlín. Since the factories in Zlín and all other parts of the company in the East European countries were confiscated by the Communist regimes in 1945, Toronto remained the company’s head-quarter up to the end of the century. Just after WWII, Thomas J. Bata came again to Switzer-land where he took interest in the grown up beau-tiful and brilliant daughter of George Wettstein, his father’s lawyer who had died at the beginning of 1945. They married in 1946. Instead of becom-ing an architect, Sonja Bata, twelve years younger than her husband, assumed increasing responsibilities within the company (she will take over the presidency of the Bata foundation in 2008 when Thomas J. Bata died).

For years, the dispute over the control of the en-terprise between Thomas J. Bata and the half-brother of his father, Jan Antoni Bata, went on, but at the end of numerous litigations in courts all around the world, Thomas J. Bata won the case, also due to the fact that Jan Antoní Bata was compromised based on contacts he had before WWII with Nazi leaders (Jan Antoní Bata was re-habilitated in 2007 by the Czech Republic from the allegations of collaboration with the enemy, allegations which had earned him a conviction to 15 years of imprisonment but which presumably should make it easier for the Benes-government to confiscate the Czech factory after WWII).

von wissenschaftlichen, kulturellen, erzieheri-

schen, künstlerischen und philantropischen

Unternehmungen und Tätigkeiten, insbeson-

dere in der Schweiz, im weitesten Sinne in al-

len ihren möglichen Formen.“ 91 „Verwaltung von Beteiligungen und Kapitalanla-gen sowie Tätigung von Finanzgeschäften aller Art; die Gesellschaft kann ferner alle Geschäfte tätigen, welche mit dem vorgenannten Zweck direkt oder indirekt verbunden sind.“

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In the 1970ies, Bata reached new customer seg-ments with own brands like Bubblegummers, Power, Marie-Claire or North Star. Marketing was a weak spot of the company, however. As a leg-acy of the company’s restructuring in the 1930 and the following advertising campaigns empha-sising the national character of Bata subsidiaries, Bata proved difficulties in establishing its name as a global brand. Presumably with the idea to change gently this perception, Bata was sponsor-ing the football championships of 1982 and 1986 but the commercial success of these events went to competitors, Michel Platini and Giorgio Ar-mando Maradona wearing Adidas and Puma, re-spectively. The marketing problem was only the expression of deeper rooted conflicts within the company, however. Thomas J. Bata had difficul-ties fighting the power of the national directors who were reluctant in switching to global sourc-ing, a restructuring imposed by production costs in the industrialised world and made possible by the progressive dismantling of tariffs also in the area of textiles and shoes.

The historical turning point of 1989 affected Bata in several ways. On the one hand, the new Pres-ident of Czechoslovakia, Václav Havel, wel-comed Tomas J. Bata back in Zlín.92 The eastern European countries were reintegrated in the Bata Company but Zlín would not reassume the role the location had before WWII for Bata. Rather, Thomas G. Bata, the son of Thomas J. and Sonja Bata, who had – similar to his father – assumed in young years responsibility for the Swiss sub-sidiary, moved the factual headquarters to Lau-sanne in Switzerland. Thomas G. Bata had as-sumed major responsibilities for the company al-ready in the 1980ies but then left temporarily the company, considering the company’s restructur-ing as too hesitant. His father had, e.g., been re-luctant in closing down the production facilities in Möhlin which he had personally built up in the 30’. Finally, one may mention that in the spirit of global sourcing also with regard to R&D, devel-opment of innovative shoe products was decen-tralised around the world in Bata Innovation Cen-tres, the one in Europe being located in Padova (It). Today, Bata sells about 270 million pair of shoes through companies in more than 70 coun-tries.

Bata’s entry in the Swiss market in the wake of WWII was ruthlessly opposed

In 1926, the first shoes made by Bata reached the Swiss market. In these times, Bally was the leading Swiss manufacturer. Bally occupied in its

92 Anecdotally, a grandfather of Havel had been one of the three leading directors in Zlín back in the 1930ies.

country of origin a record number of 7500 work-ers, far more than half of all the employees in Swiss shoe manufacturing. Bally, founded 1851 in Schönenwerd, and Bata, deciding on an estab-lishment in Möhlin in reaction to prohibitive tariffs, would soon dispute the Swiss market in a tough fight. The roaring twenties having come to end, the ensuing overproduction had immediate con-sequences for the prices. In 1929, a pair of shoes cost CHF 12.50, but soon the price declined to 10, then to 9, then to 8, and after 1934, the price remained below CHF 7.50 francs. And Bata un-dercut the prices of competitors consequently by 2 to 3 francs.

In fall 1933, the formerly disagreeing associa-tions of the shoe-industry joined to launch their first coup against the intruder Bata. Following a proposition by the shoe merchants, the Federal Council prohibited the opening up of new shops. The decree of 14 October 1933 was even put into force with retroactive effect in order to force Bata to close the shop recently opened in Lucerne. In July 1934, the government of the canton of Lu-cerne indeed ordered the shutting down of the shop on the Schwanenplatz, Lucerne’s major shopping square, rejecting the objections ad-vanced by the Wettstein Lawyers.

To circumvent the interdiction to open new shops, Bata offered his shoes to existing shops at preferential conditions. In reaction, the alliance of shoe producers, merchants and retailers fighting Bata decided at an extraordinary general assembly of the associations on a further escala-tion of the trade war, a boycott. Interestingly, the secretary of the Association of Shoe-Industrial-ists was in these times the son in law of Federal Councillor Schulthess, the Minister of Economics who himself was a former business lawyer well established in the region around Schönenwerd, Bally’s headquarters. In the foreword to the boy-cott leaflet, the son in law lost all composure, de-faming the workers at Bata as “a small army of exhausted and enslaved, anti-patriotic and non-species-appropriate creatures.” The proclama-tion to the boycott red as follows (translation by the author):

“Important Notice! The professional associations of the Swiss shoe-industry, of the shoe-mer-chants and of the shoe-retailers have agreed on a convention stipulating that the fabrics of our do-mestic plants may no longer be distributed by re-tailers alongside products of the brand BATA. Any infraction of this decision will lead to the im-mediate cessation of all provisioning. An efficient control will secure the strict enforcement of this

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agreement. The convention is essentially moti-vated by the consideration that it is detrimental and not supportable for the Swiss high quality product to be put on the shelves alongside the cheapest mass merchandise. We call on the readers to inform on a current basis the partici-pating associations of any infringement of the provisions as stated above. Kreuzlingen, Basle, Zurich. Association of the Swiss Shoe-Industry, Association of the Shoe-Merchants and Associa-tion of the Shoe-Retailers.”

On 31 August 1934, already the 13th list of shops selling Bata-products was made public, naming 20 outlets.

The depressed incomes in the Great Depression made the products of Bata all the more attractive. A third escalation in fighting Bata saw the estab-lished producers once more supported by the ex-ecutive branch of the Swiss government. On 11 July 1934, a decree by the Federal Council pro-hibited the transformation, construction or exten-sion of buildings for shoe manufacturing. For months, at Möhlin, the skeleton of a building pro-truded in the sky since the government of the Canton of Argovia had decided on the spot on a building freeze. 92% of the voters living in Möhlin should protest against this decision in a submis-sion to their government.

What was the economic rationale of the alliance in the industry? Clearly, the producers feared Bata who had all the advantages economies of scale provide. Löw, another Swiss shoe-industri-alist who had visited Zlín warned that Bata’s pro-duction was so large that he could withstand all losses due to a boycott in Switzerland. Addition-ally, the production of shoes with rubber soles, the specialty of Bata, allowed considerable ra-tionalisation of production; it was claimed that a worker produces 12 pairs when made with rubber sole as compared to 3 pairs when the sole was of leather. Due to the extended network of shops, Bata was also a threat to retailers. While the shoemakers‘ association had agreed on a „tariff“ (i.e. a cartel price) from 5.50 to 8.50 francs for re-soling a shoe, Bata shops offered the same ser-vice for 2.90. Finally, the vertical integration of Bata left shoe merchants without an opportunity to strike a deal.

It is also interesting to note who seconded the es-tablishment of shoe producers. One ally were the workers’ organisations. It is regularly the case that the budget constraint of the household (even when so tight as in the early 1930ies) remains second to the fear for existing working places and the hope for some rent-sharing with the organ-ised producers. The Journal of the Argovian Workers wrote, e.g.: “The Shoe-Industry plays in the Swiss economy such an important role, the

material existence of such a large group of the population depends on its flourishing and pros-perity that any attempt to expose it to competition and to undermine the industry amounts to an enormous damage for the Swiss population. This should be known also to a patriot like Dr. Wettstein.” The attacked lawyer of Bata was not hesitant to respond. He answered: “According to your article, one is inclined to believe that the Swiss population is only composed out of shoe-producers and shoemakers. I like to draw your attention to the fact that the number of those not fabricating shoes, but buying shoes, is a multiple of the former, and that it is in the interest of the latter to be in a position to acquire shoes at a price as favourable as possible. Therefore, the interest of the large majority consists in the pos-sibility to import Bata-shoes.”

Secondly, within the scientific community, regu-larly institutes may be found ready to give support to established interests. The Institute of Hygiene and Bacteriology of the Federal Polytechnical In-stitute in Zurich supplied a scientific expertise saying that galoshes are detrimental from a hy-gienic point of view and may lead to a defor-mation of the foot. Based on this expertise, the association of shoemakers polemicized that a fu-ture generation will suffer from flatfeet and no longer be fit for military service.

Finally, the nepotism appearing at the level of the Federal Council is extraordinary by Swiss stand-ards. In general, the Federal Council was reluc-tant in giving up the freedom of contract. The two exceptions concerned the department stores (al-legedly in foreign hands, but the interdiction pri-marily hurt Migros) and the shoe industry to which the Minister of Economics, representing the Liberal Party, held as seen “special relations”. The Canton of Argovia succumbed also to the pressure of the regional elite, despite the fact that Bata made an investment in the part of the can-ton which was economically lagging behind.

Iwan Bally, president of the board of the Bally Corporation, left the field of honesty in pursuing his company’s interest. He had several times vis-ited the US and was leading in introducing scien-tific management in the group, co-sponsoring the foundation of the Institute for Management at the Federal Polytechnical Institute in Zurich which then built up a reputation in measuring handling times at the assembly line. As he was himself in-troducing similar production methods, Bally was far from ignoring the success of his new compet-itor and the way these results were achieved; still, he discredited Bata publicly. In accordance with his own plans, he called for a hold in the polemic against shoes with rubber sole in 1935, however, and was successful in obtaining, in 1937, an

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allowance to produce, together with a competitor, 250’000 pairs of galoshes per year, this despite the decree prohibiting the expansion of shoe manufacturing facilities. His firm establishment in the Liberal Party which he represented from 1938 to 1943 in the Federal Parliament was presuma-bly not innocent in this regard.

Overall, the experience of Bata in Switzerland is telling of the hanky-panky going on and the downgrading of the political system occurring once the principle of free trade is given up in fa-vour of protectionist policies. Secondly, the case of Bata is extraordinary against the background that the interwar period marks the end of the first wave of globalisation and the establishment of nationalist tendencies. Bata, by appropriate re-structuring of the company, achieved a rapid ex-pansion of the company also in the difficult years of the Great Depression.

Conclusion

The history of the Bata Company lends support to the affirmation that the 2nd wave of globalisa-tion should be assessed based on changing trends in industrial organisation. To be present with its product around the globe is an achieve-ment of many companies already in the first wave of globalisation and this did not fundamentally change in the interwar period. It is the breaking up of value added chains that characterises cur-rent globalisation. The changing nature of FDI within the Bata Company is revelatory in this re-gard. The evolution went from producing in Zlín and exporting to achieving vertical integration within the national markets in the 1930ies to the setting up of global value added chains in the 80’ to decentralising shoe innovation in centres dis-persed around the world at the turn to the 21st century.