Why Did the U.S. Watch Industry Disappear?

A number of explanations have been put forth for why in the 1950s and 1960s, virtually the entire U.S. watchmaking industry disappeared.  One by one, storied makers like Waltham, Hamilton, and Elgin all ended American production of high quality jeweled movement watches forever.  How did an entire domestic industry — selling in the world’s largest watch market — disappear?

Much of the discussion seems to center around personalities, corporate intrigues, and dramas (problems which exist within all big companies).  But the American watch industry wasn't run by yokels — it had smart and impressive businessmen at the top.  In 1958, for example, all 10 members of the Elgin board of directors had studied at Ivy League universities.  [1]  James Shennan, a Princeton graduate who ran Elgin from 1948 to 1960, also served on the boards of other major companies like Northern Trust, and was later President of the National Association of Manufacturers.  [2]

When an entire cohort of high quality, strongly established brands disappears, we need to understand the broader structural factors.  Three in particular stand out:  artificially low fixed exchange rates that benefited Swiss exporters from 1945 to 1971; illegal anticompetitive behavior by the Swiss watch cartel; and an unwillingness by most postwar U.S. presidents to use their tariff power to level the playing field (President Eisenhower was the notable exception).

(1) Artificially Low Currency Exchange Rates Benefited Swiss Producers

While the “lower costs” that Swiss makers enjoyed after World War II are often mentioned, the reasons for that advantage are either ignored or wrongly assumed to be natural.  In fact, one aspect of the postwar global economic system — artificially low fixed exchange rates — created a huge unfair advantage for Swiss makers.  

At the 1944 Bretton Woods conference, dozens of countries met to create the framework of a global postwar economic system.  [3]  Two main pillars — the International Monetary Fund and the World Bank — are still in existence.  A third pillar, fixed exchange rates, existed until the early 1970s.

Under the Bretton Woods system, the value of the U.S. dollar was set at $35 to 1 ounce of gold.  The currencies of other countries were fixed in relation to the U.S. dollar, with a maximum fluctuation of 1% annually.  While technically “Switzerland did not join the Bretton Woods institutions… [it] de facto fixed the exchange rate according to the rules of the Bretton Woods system.”  [4]

Switzerland emerged strong from the war — as a neutral country, it profited from selling to all sides — yet its exchange rate was fixed at a weak 4.3 Swiss francs to 1 U.S. dollar from 1945 to the early 1970s.  [5]  As a result, its production costs were low when converted to dollars.  For example, adjusted for exchange rates, “the wage differential between Swiss and American manufacturers was approximately 144 percent” in the 1950s.  [6]  This gave the Swiss a large advantage when exporting to the U.S., because they could undercut American makers on price.  

The rate of 4.3 francs to 1 U.S. dollar grossly undervalued the Swiss currency for over a quarter century.  This has been proven through empirical analysis by Swiss economists, who found that during “the Bretton Woods years… we clearly see the accumulated appreciation pressure of the Swiss franc against the dollar.”  [4]  Nonetheless, the Swiss currency was prevented from rising against the dollar due to fixed exchange rates.

When the Bretton Woods system finally collapsed in the early 1970s, the Swiss franc began a meteoric rise in value—a process that should have occurred more gradually and much earlier.  By 1978, one dollar was only worth 1.8 francs (60% less than at the start of the decade).  By the mid-1990s, one dollar was only worth 1.2 francs.  And since 2011, one Swiss franc has been worth more than one U.S. dollar.

The dollar has lost 80% of its value against the Swiss franc since the end of the Bretton Woods system.  In other words, one Swiss franc today is worth 5 times more than it was in 1971 against the dollar.  If we returned to the exchange rates of 1971, a Rolex that costs 21,000 Swiss francs today would cost an American $5,000 rather than $25,000.  No other currency has performed as strongly against the dollar since Bretton Woods ended.

Artificially low exchange rates plainly helped the Swiss destroy the U.S. high quality watch industry.  In fact, one of President Nixon’s stated reasons for ending the Bretton Woods system in 1971 was “unfair exchange rates.”  Nixon even imposed a 10% import tax to compensate American businesses that had been harmed.  [7]  While this may have helped other industries, by the 1970s the American domestic watch industry was essentially extinct.

(2) Illegal Anticompetitive Behavior by the Swiss Watch Cartel

While not widely known today, the illegal behavior of the Swiss watch cartel (“cartel” is a word the Swiss themselves use) was a major factor in the destruction of the U.S. watch industry.  The information below comes from what the Swiss themselves have said; investigations and reports to the President by the U.S. Tariff Commission; and a major federal court case brought by U.S. prosecutors which resulted in Swiss watch makers being forced to sign consent decrees (legal agreements) agreeing to cease their illegal behavior.

Fondation Haute Horlogerie (FHH) is an organization funded by Audemars Piguet, Girard-Perregaux, and Richemont, the parent company of major Swiss makers including Vacheron and IWC.  [8]  As one of FHH’s websites explains, after World War I, “Swiss watchmaking underwent a period of profound crisis, resulting in a State-led reorganisation of the sector.  This rescue operation took the form of cartel agreements that remained in place until the 1960s… [U]ntil the early 1960s, Swiss watch companies operated not in a free-market environment but within a dirigiste-type economy [characterized by government control].”  [9] These “cartel agreements prevented [Swiss] manufacturers from undercutting prices and imposed exclusively Swiss suppliers…. [This] prevented foreign manufacturers from using Swiss components.”

In 1954, after complaints from Elgin and Hamilton, the U.S. Department of Justice sued Rolex and other Swiss makers alleging a “conspiracy in unreasonable restraint of interstate and foreign trade and commerce of the United States in jeweled watches, [and] component parts… in violation of section 1 of the Sherman [Antitrust] Act and Wilson Tariff Act.” The U.S. government alleged that the Swiss watch cartel had sought to destroy the U.S. watch industry by prohibiting the export of watch parts made in Switzerland and those made in other countries to the U.S.; by preventing the export of watchmaking machinery into the U.S.; and by using means such as “boycotting, blacklisting, and fines… to enforce the terms of the conspiracy.”  [10]

The Swiss cartel had obtained “agreements from certain British watch manufacturers, French watch trade organizations, and German purchasers of Swiss watch parts, which prevented the purchase and sale of watch parts by U.S. watch manufacturers.”  The Swiss leveraged “their control of the major world sources of watch parts and watchmaking machinery” to force other countries to block American companies from buying components globally.  Because a high quality watch has hundreds of parts, this drove up up costs for U.S. watchmakers, preventing them from buying parts from more efficient overseas suppliers.

The U.S. federal court found that the illegal Swiss conduct had occurred from 1931 into the 1960s.  To resolve the matter, Rolex and other Swiss defendants voluntarily signed consent decrees that yielded to substantially all of the Government’s demands that they cease their illegal anticompetitive behavior.  [11]  Nonetheless, as recently as 2006, Rolex was forced to pay the U.S. government $750,000 for violations of the consent decree it had signed in 1960.  [12]

Unfortunately, by the 1960s, it was already too late for most of the American watch industry.  Elgin president James Shennan had predicted in 1952 that “in a decade Swiss imports might destroy all U.S. watch making firms.”  [13]  He was only off by a few years.  Of the big makers, Waltham fell first in the 1950s:  “In Waltham they said flatly — Swiss imports drove the company out of business.”  [14]  Elgin ended all U.S. watchmaking in 1967, followed in 1969 by Hamilton.  [15]

(3) The U.S. Government Failed to Effectively Counter the Swiss Cartel

Traditionally, the U.S. government used tariffs to level the playing field against unfair and predatory foreign competition.  However, after 1945 some claimed that “trade wars were a principal factor in causing… World War II,” and therefore the U.S. should not increase tariffs. [16]

As regards watches, that theory was always nonsense.  There has never been any serious prospect of the U.S. going to war with Switzerland, a small, landlocked country that has been neutral for centuries.  Even as regards the two main perpetrators of the war, Nazi Germany and imperial Japan, mainstream historians largely attribute World War II to racist-imperialistic ambitions by Germany (the doctrine of Lebensraum - conquering “living space” for ethnic Germans), and similar motivations by the Japanese. [17]  The biggest battlefront of the war was between the Nazis and Soviets, who had actually engaged in very substantial and friendly trade prior to Hitler’s surprise attack in 1941.  [18]

In fact, in the years immediately prior to World War II, the trend was toward more free trade, not less.  Starting in 1934 — seven years before the U.S. became involved in World War II — “the United States generally sought trade liberalization through bilateral or multilateral tariff reductions.”  [19]  The U.S. reduced tariffs on Swiss watches in 1936 by 36%.  [20]  As a result, annual imports of Swiss watches rose five-fold (from 2 to 10 million) between 1936 and 1954, while the three big American makers—Elgin, Waltham, and Hamilton—shrunk to only 20% of the market. 

Nonetheless, President Truman in 1952 rejected his own tariff commission’s recommendation to slap 50% tariffs on Swiss watches, claiming “we would be striking a heavy blow at our whole effort to increase international trade and permit friendly nations to earn their own dollars and pay their own way in the world.”  [21]  

Describing neutral Switzerland as a “friendly nation” is rather odd given its behavior during the war.  The Swiss themselves admitted that they “supplied munitions to the Nazis at the expense of the Allies…. [and] Germany became the main market for Swiss weapons components.”  In addition, “Switzerland was also the main clearing house for transaction of German gold… despite the fact that the Swiss central bank knew that some of the gold had come from victims of the Nazi’s extermination policy.”  [22]

During the war, Switzerland also made money by exporting huge numbers of watches to the U.S., while Elgin and other U.S. makers were forced to suspend production of civilian watches and instead manufacture goods for the war effort. [23]

When President Eisenhower took office in early 1953, the government finally slapped tariffs on the Swiss watchmakers and opened the U.S. Department of Justice antitrust case against the Swiss cartel.  [24]  Arguably, the Elgin 27 and 30 jewel automatics, as well as other new Elgin watches developed in the mid- to late-1950s, like the B.W. Raymond chronometer wristwatches, might not have been created without the confidence that came from President Eisenhower’s strong support.

Unfortunately, after Eisenhower left office, Presidents Kennedy and Johnson essentially returned to the “free trade” policies of Truman.  [25]  This allowed the jeweled U.S. watch market to be almost entirely taken over by the Swiss cartel.  It is not an exaggeration to say that the disappearance of the U.S. high quality watchmaking industry was largely the result of inept American tariff and exchange rate policy.

Today, “in the luxury segment… Switzerland enjoys a position of near-monopoly.… [In 2023] the global export value of mechanical Swiss watches amounted to over 22 billion Swiss francs,” or over $25 billion.  [26]  In America, the world’s largest watchmaking facility in Elgin was torn down in 1966 and replaced with a nondescript shopping mall: