So it was that, once the problems posed by the establishment of a banknote monopoly had been solved, the youthful SNB was quickly confronted, in 1914, with the problem of financing the military expenditure caused by the First World War and, after the end of hostilities, the difficulties related to normalisation. The social disruption of 1918 and the high level of inflation at the end of the war were bitterly felt and attributed to a failure of monetary management. This setback had a lasting effect on morale at the SNB and accounts to a considerable extent for the orthodoxy of the policies adopted in the decades that followed. This accounts for the determination with which the SNB worked to restore the rules of the gold standard once peace had returned. The pre-war gold parity was re-established in 1924. However, after a few good years, the economic situation again deteriorated, culminating eventually in the crisis of the 1930s. The devaluation of sterling in 1931, followed by that of the dollar in 1933, were the first episodes in the eventual collapse of the gold standard. In 1936, following the devaluation of the French franc, the Swiss federal authorities were forced, in their turn, to reduce the parity of the Swiss franc. A few years later, the challenge of administering a war economy again arose. The story of the Second World War, with its doubts, agonies and errors of judgement has been extensively analysed by historians over the past few years.
Since the start of the crisis, output per hour worked has fallen by around 5%, leaving it more than 15% below where it would have been if it had simply continued growing at its pre-crisis trend rate. As discussed in past Inflation Reports, as well as numerous speeches by MPC members, there are a variety of explanations for this weak productivity performance. These include: specific factors, such as the decline in North Sea oil production and an exaggeration of productivity growth in the financial sector before the crisis; the hoarding of overhead and skilled labour through the downturn; unusually low rates of investment on the back of heightened uncertainty about the outlook; the adoption of more labour-intensive production techniques, encouraged by the high degree of wage moderation; thick-market externalities, which make it easier to find and transact business when demand is strong; and a misallocation of credit as banks repair their balance sheets, with heightened forbearance shown on existing loans to low productivity firms, coupled with caution as regards lending to risky businesses that offer the prospect of higher productivity. Some of these mechanisms depressing productivity can be expected to unwind naturally as demand recovers. But others might take longer and require the restoration of the banking system to full health. And some of the lost productivity growth may prove to be permanent, for instance because of the foregone opportunities for learning by doing.