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Monetary Policy and Politics in Mid-Eighteenth-Century Sweden

Published online by Cambridge University Press:  03 February 2011

Robert V. Eagly
Robert V. Eagly
Affiliation:
University of Massachusetts
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NEXT to John Law's Banque Royale, the most important mercantilist monetary experiment attempted in western Europe during the pre-Adam Smith era took place in Sweden. The Bank of Sweden (Riksens Ständers Bank), which had been established as a national bank in 1688, was used by the Swedish government in the mid-eighteenth century as an engine for economic development. Sweden's experiment in paper money mercantilism gave rise to an active debate which may be called the “Swedish bullionist controversy” because of its similarity to the monetary debate in England at the outset of the nineteenth century. This controversy took place in a highly charged political environment. Political power in Sweden from 1739 to 1772 was centered in the Swedish Riksdag, a representative body composed of the Four Estates: burghers, nobles, clergy, and peasants. Within this organization, the mercantile class predominated by virtue of its control of the influential House of Burghers when the Riksdag was in session and its control of the Secret Committee, which directed government policy when the Riksdag was not in session. The two political parties—the Hats and the Caps—vied with one another for control of the government from 1739 to 1772, a span including most of the epoch known in Swedish history as the “Age of Freedom,” 1719–1772. Participants in the bullionist controversy typically fell into one or the other political camp, and the political element is strong in most of the economic literature of the period. The two political parties locked horns on the issue of the “correct” monetary policy. At stake in the struggle was not only the correctness of economic theories and policies but, ultimately, also the viability of the Swedish parliamentary form of government. It is the purpose of this article to review the policies of the Riksbank in the mid-eighteenth century and to examine the economic theories of the two contending political parties.

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Articles
Information
The Journal of Economic History , Volume 29 , Issue 4 , December 1969 , pp. 739 - 757
Copyright
Copyright © The Economic History Association 1969

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References

I wish to thank William R. Allen and Frank W. Fetter, and an anonymous reader for this Journal for their helpful comments on an earlier draft of this article.

1 Sjöstrand, Erik, Mynt och Bankpolitik under Hattväldet, 1738–1764 (Uppsala, 1908), p. 182Google Scholar.

2 Heckscher, Eli, Sveriges Ekonomiska Historia, vol. II, part 2 (Stockholm: Albert Bonniers förlag, 1949) pp. 774–75Google Scholar, states that the deflation caused “… a reduction in production that, constituted a great net loss for the country as a whole.”

3 Montgomery, Arthur, Riksbanken och de Valutapolitiska Problem 1719–1779 (Sveriges Riksbank, 1688–1918, vol. III, No. 1)Google Scholar, Stockholm, 1920, p. 51, points out that expectation of the appreciation of bank notes prompted speculators to borrow abroad, first in Hamburg and later in Amsterdam. Hearings on the issue of the falling exchange rates were undertaken in the summer of 1767. Merchants testified that the reasons for the rapid decline were reduced imports and a scarcity of money which forced merchants to repatriate their assets held abroad (Ibid., p. 55).

4 The functions and responsibilities of the Foreign Exchange Office were assumed by private firms under contract from the Riksdag. The Kierman group performed these duties from 1747 to 1756 and was replaced by the König group in November 1745. The latter group abandoned the undertaking in November 1757. Malmström, Carl G., Sveriges Politiska Historia från Konung Karl XII:s Död till Statshvälfningen 1772, Stockholm, vol. IV, 1899, pp. 286–87, 409–10Google Scholar.

5 Montgomery, Arthur, “En studie i svensk valutapolitik vid midten af 1700-talet,” Statsvetenskaplig Tidskrift, 1916, pp. 312, 319Google Scholar.

6 Ibid., p. 320.

7 The price of foreign exchange began to rise in May 1757. It would appear that the Foreign Exchange Office's abandonment of the stabilization program should be dated from this month, and not from November when the König group's contract with the government was terminated.

8 Malmström, Carl G., Sveriges Politiska Historia från Konung Karl XII:s Död till Statshvälfningen 1772, Stockholm, 1899, vol. IV, p. 247Google Scholar.

9 Ibid., pp. 248–52, 415–16.

10 Ibid., pp. 251, 421.

11 Ibid., pp. 69–70, 248.

12 Ibid., p. 70.

13 One Hat economist worth singling out is Edvard Runeberg. Runeberg's effort to construct a “pure theory” explanation for the monetary phenomena of the day is interesting for what it attempted rather than for what it achieved. He expounded his monetary theories in two works: Tal om Varors Värden, 1760; and Tankar om Penningars Värden, eller Afhandling om Växel-Coursen Grundad uppå Theorien of Penningars Värden i Inländska Handels Rörelsen, 1762. Runeberg's monetary model divides the total money supply between three competing uses: (1) transactions balances (rörelsecapital); (2) speculative balances (hvilande capital) held in the money market (penningerörelsen); and (3) hoarded balances (dödt capital) (Tankar, pp. 17–18; and Tal, pp. 20–21). The transactions balances are used for payment of the factors of production and for the transactions occasioned by currently marketed commodities. It is this portion of the money supply which determines the value content of the monetary unit (Tankar, p. 8). Runeberg uses the simple quantity theory to point out that, given the supply of goods in the market, the value content of the monetary unit moves inversely with the quantity of money circulating as transactions balances (Tankar, p. 8). But transactions balances did not absorb the entire money supply. Part of the money supply is held in money market balances. Increases (decreases) in the quantity of these money market balances cause decreases (increases) in the money rate of interest. Changes in the interest rate, in turn, affect the supply of circulating capital, causing changes in the level of employment and output (Tankar, p. 24). If the demand for speculative balances exceeds the supply (at a given interest rate), the interest rate will rise. The higher interest rate will force some entrepreneurs out of business as capitalists transfer their funds to those who pay higher interest (Tankar, pp. 23–25, 60). The reduction in the working capital of entrepreneurs is synonymous with a reduction in the supply of money for transactions purposes. Output decreases as long as the given total money supply is being redistributed from transactions balances to speculative balances (Tal, pp. 56–59). But when this transfer stops—which occurs when the loan interest rate equals the profit rate on invested capital—output stops declining (Tankar, p. 25).

Unfortunately, Runeberg becomes hopelessly bogged down in his analysis at this juncture. Repetition, weasel words, and pretentious phrases too often substitute for the pure theory which he promised his readers. His orientation to monetary problems was theoretical. But he fell short of making an analytical or expository contribution to the Swedish bullionist controversy.

14 Heckscher, Eli F., Sveriges Ekonomiska Historia (Stockholm, 1949), vol. II, no. 2, p. 752Google Scholar.

15 . Ibid.

16 By 1765–1766 the belief that bank notes were issued in “excessive” amounts had gained wide acceptance. The Hats, too, came to accept this view, possibly because it was politically expedient to do so.

17 Hallendorff, Carl, Riksens Ständers Bank, 1719–1766 (Sveriges Riksbank, 1688–1918, vol. III, no. 2), 1920, p. 226Google Scholar.

18 Arthur Montgomery, Riksbanken och de Valutapolitiska Problem, 1719–1778 (Sveriges Riksbank, 1668–1918, vol. III, no. 1), Stockholm, 1920, p. 31.

19 Carl G. Malmström, Historia, Vol. V, pp. 144–50. Also, Carl Hallendorff, Bank, p. 226.

20 Per-Erik Brolin (Hattar och Mössor i Borgarståndet, 1760–1766, Uppsala, 1953, pp. 137–41, 409–14), makes the case that the inflation had reduced the real incomes of the small merchants and provided a rallying cause that promoted the enlistment of these groups into the Cap party with the consequence that the party became radical in the late 1750's and early 1760's as these groups assumed party leadership. Also, Montgomery (Riksbanken, p. 31) states that the inflation alienated the members of the civil service who then joined the ranks of the Cap party.

21 The best spokesman of the Caps' free-trade sentiments was Anders Chydenius. For a review of Chydenius' work, see Uhr's, Carl G. “Anders Chydenius, 1729–1803, A Finnish Predecessor to Adam Smith,” Western Economic Journal, Spring, 1964, pp. 85–116Google Scholar.

22 Per-Erik Brolin, Hattar, pp. 409–14.

23 A detailed comparison of the Swedish bullionist controversy, 1755–1765, and the English bullionist controversy, 1797–1810, is presented in my essay, “The Swedish and English Bullionist Controversies: A Comparative Study of the Impact of Events on Ideas,” contained in Eagly, Robert V., ed., Events, ideology and Economic Theory (Detroit: Wayne State University Press, 1968), pp. 13–43Google Scholar.

24 Anders Nordencrantz was the leading Cap polemicist on monetary matters during the 1760's. In the political arena he played a very important role. But he did not make any analytical contribution to the Swedish bullionist controversy. Nordencrantz' writings, although quite voluminous, did not present any systematic theory of monetary phenomena. To a modern economist Nordencrantz’ books and essays seem especially confused. Eli Heckscher, for instance, has described them as “extremely chaotic” and “lacking in central theme and in economic analysis.” (Svenska män och kvinnor, vol. V, p. 481.) Nevertheless, one overriding theme does come to the fore in Nordencrantz, who argued, time after time, that the high price of foreign exchange was caused by evil, greedy men (e.g., members of the Hat party) who had administered prices upward. In his view, therefore, nonmarket forces were the key variables causing the high price of foreign exchange. He took the position that speculators had raised the exchange rate and that the increase in the price of foreign exchange had caused domestic inflation. (Påminneher vid juris och oeconomiae adjunction P.N. Christiernins utdrag af dess föreläsningar, Stockholm, 1761.) Nordencrantz frequently mentioned the “excess” issue of bank notes but failed to develop this quantity theory notion in any detail. His failure to make effective use of quantity theory reasoning was perhaps the result of his propensity for political vindictiveness against Hat politicians which led him to emphasize personal causation at the cost of failing to discriminate the impersonal economic forces at work.

25 Andreen, Per G., “Det Svenska 1700-talets Syn På Banksedlar och Pappermynt,” Historisk Tidskrift, 1956, pp. 17–18Google Scholar.

26 For an analysis of Christiernin's monetary theory, see Eagly, Robert V., “Money, Employment and Prices: A Swedish View, 1761,” Quarterly Journal of Economics, LXXVII (Nov. 1963), 626–36CrossRefGoogle Scholar.

27 Uppsala was the fourth university in Europe to establish a professorial chair in economics (1741).