When the Great Major depression swept across European countries in the early 1930s the impact of the economic downturn mixed across countries. While for example Germany, Austria and the majority of Central European countries experienced an extended and deep financial turmoil, the economies of the Nordic countries - Sweden, Denmark and Norway - were not only afflicted later and much more mildly by the Major depression, but also recovered earlier. The turmoil in Sweden for example only lasted a little more than two years (in Germany and Poland it lasted for more than 4 years, see graph 1) and peak drop in industrial production was at 10. 3% while for example Germany or Poland got declines in professional production of more than 40% (see graph 2). Even though looking at equivalent GDP statistics, Sweden was with a decline of 6. 5% well below countries such as Germany (25%) or Austria (23. 4%, see graph 3). Moreover - and of greater interest for this paper - is the fact that Sweden didn't only perform better through the Great Despair but also pursued a new economic policy. Most prominently cited between economic historians are two distinctly Swedish insurance policy measures:
First, taking a look at Sweden's monetary coverage, scholars point out, that the united states left the precious metal standard very early on and - unique at that time - simultaneously place the preservation of the local purchasing electricity of the krona on top of the political agenda.
Second, it is pointed out, that the Social-Democratic government, which came into vitality in 1932, invested heavily in public areas work programmes following a Keynesian-type fiscal plan.
The present paper looks for to analyse whether both of these factors are a) sufficient and b) withstand a nearer empirical evaluation as it pertains to describe the better development of Sweden during the Great Depression. In order to do so, the newspaper will, as an initial step, outline the economic situation in Sweden and the related economic policy prior to the crisis. That is necessary, as it offers an overview of the type of Sweden's overall economy, its amount of integration in to the international market and appropriately its basic contagion risk at the time of the crisis. Second, all these policy measures through the Great Melancholy will be specified. Thirdly and most central in this paper is an analyses of the success and consequences of these policy measures. The last chapter will draw the focus on other factors outside the control of federal government policy that might have helped Sweden to help ease the effects of the Great Depression.
Immune to turmoil? Sweden's financial development prior to the Great Depression
Even though Sweden's macro-economic insurance plan is often seen as the major contributor to the countries positive development through the Great Unhappiness, one must not neglect to see, that a few of the reasons for this development are somewhat to be found in specific characteristics of Sweden's overall economy prior to 1929/31 than in any explicit policy solution thereafter. Two "pre-existing conditions" can be outlined, that seemed to have stabilized the economy during the problems. First of all, a constantly undervalued krona made Swedish exports cheap on the international market. Second of all, the bank sector in Sweden was centralized and crisis-prone. Thus, a bank panic never occurred. The following paragraphs explain these specifically Swedish conditions in greater detail.
Traditionally, Sweden's market was based on the country's abundant endowments of flat iron and timber. Its main trading partner was Britain and down the road Germany and america. During the beginning of the 20th hundred years Sweden also became a major exporter of technologically advanced goods such as telephones (e. g. Ericsson) or equipment (e. g. Electrolux). As Sweden was - at least in writing - a natural electricity during World Conflict I (WWI) many traders sought to acquire Swedish assets in those days, as the country appeared to be a safe haven for capital. Also, by mainly exporting raw materials, Sweden could take good thing about the upsurge in foreign demand for those goods induced by WWI. By the finish of the warfare Sweden had altered from a major international debtor to a creditor to the rest of the world. While the export industry could benefit from these innovations, inflation increased due mainly to increasing costs for imports. Between 1915 and 1918 the expense of living rose by as much as 90%. This inflation was eventually condemned between 1920 and 1924 when prices declined by 55% scheduled to a restrictive monetary plan. After 1924 a slower, but continual deflation persisted until 1931. With such low domestic prices, Sweden was highly competitive on the international market. That's the reason during almost all of the 1920s Sweden experienced a solid export-led economic development. This is why after WWI Sweden reinstated the gold standard among the first industrialized countries in 1924. Many economical historians think that this go back to the rare metal standard occurred at a level that kept the krona undervalued well in to the 1930s. As a consequence Swedish exports remained highly competitive even in times of monetary crisis.
The home market also stabilized through the 1920s. Because of export bans and high import taxes after and during WWI, Swedish consumers, whose purchasing electricity constantly increased through the 1920s, substituted imports with home products. Additionally, demographics played a job. During the 1920s and 1930s there was a rapid go up in the number of young people of working get older (especially those older 20-29). Respectively, demand for housing, food, clothes and other consumer products increased which added to a strong growth of domestic production as well.
When the currency markets crash of Oct 29, 1929, prompted the Great Major depression, another factor for Sweden's low proneness to crises became clear. Sweden's banking structure was very concentrated. This was much in contrast to for example the United States, where in fact the banking structure was highly fragmented and decentralized. Regarding to Ben Bernanke, such a structure is much much more likely to cause bank panics. Sweden however was characterized by a branch banking system, where risks were dispersed. It really is argued that especially in the case of Sweden, earlier activities with failing banking companies in the 1920s acquired led to reforms that possessed put the bank operating system on a sound footing. That's the reason at the beginning of the 1930s the bank sector in Sweden did not experience wide-spread panics.
Putting all these facts together, it could be argued, that Sweden was from the very beginning less inclined to be effected by the Great Depression than those countries whose banking sector collapsed. This especially is true when considering the actual fact that trust in the economy never vanished in Sweden scheduled to a generally stable banking structure. On top of that, even though exports declined from 1931 until 1932, Sweden's export industry always continued to be highly competitive. This is not least credited to an undervalued krona, whose parity remained stable well into the 1930s. Nevertheless, studying the characteristics of Sweden's current economic climate prior to the Great Major depression only answers part of the question to why Sweden performed substantially better during the crisis than other nations. Particularly when Sweden left the rare metal standard in 1931, specific coverage measures as identified in chapter two performed an evenly significant role.
What was so special? Sweden's respond to the fantastic Depression
Prior to the Great Depression, the political mainstream of the Western industrialized world adopted a laissez-faire ideology that propagated the free play of the market. It was assumed that capitalism acquired a self-equilibrating inclination, resulting in an optimal level of resource utilization. Hence, economic policy in those days simply meant that government authorities should balance their budget, keep up with the gold standard and let businesses reequilibrate themselves. However, even though many countries were required to reconsider their financial policies during the Great Major depression, Sweden experienced already made this step beforehand. During the late 1920s, Sweden's monetary policy was already based on the advice of trained economists who didn't entirely propagate the modern day neo-classical take on economics but instead pursued their own ideas on how the state of hawaii should behave during an monetary problems. This so called Stockholm Institution was a loose band of economists whose most significant results were Knut Wicksell, Eli Heckscher, Gustav Bagge, Bertil Ohlin and David Davidson. Especially Knut Wicksell's studies at the beginning of the 20th hundred years inspired most of the works of his fans.
Wicksell is best known for Interest and Prices, his contribution to the fledgling field now called macroeconomics. In this particular book and in his 1906 Lectures in Political Current economic climate, volume 2, Wicksell sketched out his version of the number theory of money (monetarism). The standard view of the number theory before Wicksell was that increases in the money supply have a direct impact on prices-more money going after the same amount of goods. Wicksell focused on the indirect effect. In elaborating this impact, Wicksell distinguished between your real rate of go back on new capital (Wicksell called this the "natural interest") and the actual market interest. He argued that if the banks reduced the interest below the real rate of come back on capital, the quantity of loan capital demanded would increase and the quantity of saving provided would fall season. Investment, which equaled conserving before the interest fell, would exceed saving at the lower rate. The upsurge in investment would increase overall spending, thus driving a vehicle up prices. This "cumulative process" of inflation would stop only when the banking institutions' reserves got fallen with their legal or desired limit, whichever was higher.
In installation of this theory, Wicksell began the transformation of the old number theory into a full-blown theory of prices. The Stockholm college, which Wicksell was the father number, ran with this insight and developed its version of macroeconomics. In a few ways this version resembled later Keynesian economics.
Wicksell also argued passionately for making price stableness the supreme goal of financial policy. A stable price level, he preserved, made planning easier for individuals in both financial and labour market segments. Within an 1898 evaluation, Wicksell's key advice for central banks was to increase interest rates whenever prices were rising also to lower them when prices were falling-a economic insurance policy that he regarded as straightforward. He argued that low interest rates would tend to increase prices. A low rate of interest would lead a customer to "buy some product which otherwise he'd not have bought at all" and would lead a person who "wishes briefly to keep some or most of his goods off the market. . . [to ask ]. . . the Bank for money with which to meet his immediate or pending liabilities and never have to sell his goods. " Thus, demand would surge and supply would fall, therefore ensuring a rise in prices. 18 This meant that the stabilization of prices required only that interest rates be increased when prices were growing and reduced when prices were falling.
Wicksell stressed that moves in the purchase price level exerted a particularly large influence on borrowers because a rise in every prices made it easier to pay off bad debts while a lowering managed to get harder. He also mentioned that real pay could be afflicted if nominal salary (in kronor) didn't keep up with changes in prices.
Even though Wicksell perished in 1926 his fans such as Eli Heckscher, Bertil Ohlin, Gustav Cassel and Gunnar Myrdal, could build after his theoretical work and formulate cement plan advice in 1931, when the fantastic Depression finally reached Sweden. The next paragraphs show you how their impact and advice on the Swedish central bank (Riksbank) and on the political elite helped Sweden through the crisis.
During the first weeks of 1931, Sweden was the receiver of capital inflows. However, the German standstill led many international traders to withdraw their cash from Sweden both because they lacked usage of their German money and because they feared that the turmoil would disperse. These withdrawals contributed to a radical decrease in Swedish reserves. By Sept of 1931, reserves experienced fallen to significantly less than one-tenth of their January level. Similar pressure was placed on the United kingdom financial system, and on September 21, Britain forgotten the gold standard. On Sept 27 Sweden, too, abandoned the gold standard. The Riksbank and the minister of finance immediately announced that the new economic goal for the country would be to preserve the home purchasing power of the krona "using all available means. " The next day, September 28, the Riksdag offered its established assent by minimizing the Riksbank of its responsibility to convert notes into yellow metal at a fixed rate. People who wished to exchange kronor for foreign exchange could still do so at commercial bankers, whose representatives fulfilled daily (plus a Riksbank official) to create exchange rates.
In making price steadiness the primary target of its economic coverage, Sweden pursued an internationally unique plan. Based on Knut Wicksell's argument that stable price levels made planning easier for members in both financial and labor market, the Riksbank new role was to keep price levels within a certain range.
In order to take action, the first step the Riksbank undertook was to build up a new, weekly index of consumer prices. This is necessary as the target was to "supply the public certain definite stand items for estimating future improvements in prices. " As a result, the new index was made to include an array of goods and services that mirrored purchases made by average households in Sweden. This ensured that the purchasing ability of the Krona could be measured for most individuals properly. The regular inflation was then computed by weighing the percent change in each good and service used by the portion of total consumer expenditure that households assigned to this item. Instruments utilized by the Riksbank in order to fulfill the price stability goal were changes in the discount rate and functions in the foreign exchange market. Accordingly, the Riksbank modified the discount rate from 8% to 6% in 1931 as there have been no longer symptoms for an ongoing inflation. From then on, the discount rate was reduced to 2. 5% in 0. 5% steps until 1937.
In retro perspective the monetary plan of the Riksbank became very effective. Figures show a considerably stable level of consumer prices between 1931 and 1938 (see graph 7). Most importantly however is the actual fact, that "the financial program of 1931 maintained public trust and self confidence in the bank sector. You can therefore conclude, that not only performed the centralized branch system of the banking structure avoided Sweden from the knowledge of a completely scaled banking stress, but also a sound monetary policy based on the theoretical findings of the Stockholm School.
Nevertheless, the purchase price stabilizing plan of the Riksbank did not remain unchallenged. For example, Bertil Ohlin, who had written articles entitled "The inadequacy of price stabilization. " There he acknowledged that "the economic situation would most undoubtedly have been still worse if prices had been allowed to fall as they performed in countries that kept to the old platinum parity, " and that "the data that the Riksbank would undertaking by every means in its capacity to prevent any appreciable semester in prices has exercised a reassuring affect on trade. " However, Ohlin continued to claim that stabilization of prices cannot prevent reductions in investment and hence in GDP. Another chapter explains how this argument was also submit by the Sociable Democrats in 1932.
Public deficit spending
In the 1932 elections, the Sociable Democrats obtained the best variety of votes and created a government. The brand new minister of finance, Ernst Wigforss, presented that a economic policy focused on price steadiness was insufficient to obtain an acceptable outcome for Sweden. The brand new finance minister experienced long championed the thought of intentional deficit spending in recessions. Wigforss have been a professor of linguistics at Lund before he became one of the leading intellectuals of the Community Democratic Party, and he worked closely with a number of Swedish economists, including Gunnar Myrdal, Erik Lindahl, and Bertil Ohlin. The group developed theories justifying the use of fiscal plan as a stabilization tool that were quite very much like those produced by John Maynard Keynes. In a very 1928 article, for example, Wigforss composed: "EASILY want work with 100 people I do not need to put all 100 to work. . . . [I]f I could get an unemployed tailor work, he'll get the opportunity to buy himself new shoes and in this way an unemployed shoemaker are certain to get work. . . . This turmoil is characterized most importantly by a romance to create a vicious circle. . . . One can say the turmoil drives itself once it begins, and it [will] be the same once recovery begins. " Wigforss's advocacy of deficit spending in response to the Depression was a radical departure from the guidelines of previous governments. Prior to 1933, government borrowing was generally limited to lending options for "productive" purposes, that is, for investments that would generate future government income, including the postal service, telephones, electrical energy generation, and railroads. Income produced from these activities would then cover the eye payments on the general public debt while also generating additional income for their state. 36 On the other hand, "nonproductive" government expenses was said to be payed for with current federal government revenues. Since it was impossible to predict current profits or nonproductive expenses accurately, Sweden acquired reserve cash that accumulated any unanticipated surpluses. These funds were then open to cover unanticipated deficits. Within the fiscal years 1931-1932 and 1932-1933, for example, the budget was well balanced by lowering the reserves of the Alcoholic Drink Profile. Thus, while budget deficits in the present day sense occurred, these were not acknowledged, and they were not the consequence of any policy directed specifically at creating or allowing a deficit.
One of the greater controversial issues between monetary historians is the questions whether general public deficit spending and open public work programs really helped Sweden from the financial slump or whether they were merely a side note through the Great Depression. The explanation for that is usually that the coming to electricity of the Public Democrats in 1932 are broadly regarded as a turning point in Sweden's monetary policy and sometimes even as the global "birth of modern macro-economic policy". However, empirical facts proving a special Social Democratic economic plan brought on Sweden's quick recovery is scarce. As a matter of known fact, the debate about the future fiscal plan of Sweden under Social Democratic guideline already circled around issues much similar to the ones that John Maynard Keynes dealt with four years later in his magnum opus "the overall Theory of Career, Interest and Money". Sweden's financial minister Ernst Wigforss argued that price stabilization wouldn't normally be enough to struggle the major depression. He rather suggested a general public work program made to put unemployed back to work even if this supposed budget deficits. Similar to the policy advocating stable prices, this one was again based on advice submit by modern-day economists. This is a radical departure from the procedures of previous governments. A well-balanced budget had always been the highest maxim. Usually, government lending options were only used for assets that were likely to generate future earnings such as postal services, railroads or energy supply. All the "nonproductive" expenses were paid for by reserves the federal government had built up. Unsurprisingly, this radical change in policy gone not without fierce controversy and controversy in parliament. The first unbalanced budget proposed by Wigforss for the years 1933 and 1934 was criticized for creating inflation and "depriving businesses of capital essential for their development". To counter these quarrels, the Friendly Democrats moved away from financing general population work programs through deficits and proposed an inheritance taxes used to funding their plans. On top of that, the Agrarian Get together did not agree to the budget as they feared a carelessness of the population employed in the agrarian sector. As a consequence, the Social Democrats had to include high subsidy repayments for the agricultural sector in the budget. When it finally transferred the parliament in 1933 a lot of the organized deficit spending policy had disappeared. In addition, most of the money still assigned to general population work programs cannot be placed to use as a countrywide lockout of employees in the engineering sector blockaded the building industry. This lockout took place because the company association SAF wished to enforce lower wages for the industry. This turmoil was resolved in 1934 in support of then could the federal government finally use the allocated funds for open public works.
Did they find the ULTIMATE GOAL? The consequences of Sweden's financial policy
Renowned economist and chairman of the Fed, Ben Bernanke, published in his article collection on the Great Major depression that "Understanding the fantastic Depression is the holy grail of macro-economics". He in that way referred to the difficult but ultimately rewarding job of finding an absolute answer to the question of the true causes of the Great Major depression. This, he argues, may help to recognize future turmoil better and addresses them better.
When looking at the fact that Sweden had overcome the Depression rather well through the use of certain types of policies, the question develops whether the Holy Grail may have already been found long before Bernanke published his book. This section will therefore look more carefully at the true effect that the Swedish economic policy acquired from 1929 to 1937.
The range and depth of the number of above mentioned policy measures mixed significantly. It is therefore convenient to split the chapter into the several policy fields that were dealt with between 1929 and 1937. The evaluation is mainly done by using information of key results that are in immediate relation to the executed insurance plan. By drawing on secondary books it is then elaborated whether the characters in the information did or didn't change due to a specific policy or anticipated to other factors.
When taking a look at the debate on the cause of Sweden's recovery the author argues that relating to one view the increasing demand and thus increasing exports led to a recovery. Hence, monetary policy was the most powerful contributory factor. The public works policy could not experienced any significant result, because the works weren't started out on any considerable scale until recovery was well under way. On the other hand, the enlargement of the export market initially did not own an extensive effect on the labor market as initially large pile of build-up stock were used for exports. No increase in production or job took place. The author concludes that it was an assortment of growing demand overseas, monetary insurance plan, deficit spending and support of the agriculture that resulted in Sweden's recovery. Even if it's clear that the public works did not lead to restoration it is unclear whether exports by themselves did the trick.
Just lucky? External factors fostering Sweden's recovery
Leaving the yellow metal standard
After Great Britain left the gold standard on Sept 21st 1931, Sweden followed six days later among the first countries. The effects on both the domestic market segments and the overseas sector were initially positive. Leaving gold recommended that the Swedish Riksbank could lower the interest, therefore practicing an inflationary monetary policy rather than a deflationary insurance plan as before. This allow money resource increase and consequently aggregated product demand. As Sweden experienced a deflation prior to 1931 the increase in money now switched the monetary situation into a moderate inflation. This proved to be a rather favorable constellation, as with lower interest rates at the central lender and consequently low real interest levels for businesses, investment funds increased. Hence, optimism among entrepreneurs never dropped to a point where all opportunities were put on hold. Rather, trust in the market always remained at a substantially higher level, while prices remained at level that didn't seem to injure the current economic climate too much.
Another essential aspect was the effect associated with an inflationary monetary insurance plan on the export sector. Going out of gold was followed by a depreciation of the Krona. This meant that Swedish products became cheaper and did not lower significantly, which is amazing when looking at global trade statistics during the Great Melancholy. Graph 6 shows that Swedish exports did quite well through the 1930s, while a great deal of other american economies had to handle significant declines in exports. On top of that, a depreciation of the Krona also meant that imports became more costly for Swedish consumers. As a consequence import substitution took place, strengthening domestic companies. All come up with, it becomes visible (see Berry Eichengreen), that departing the gold standard early performed an important role for the depth of and the restoration from the Great Depression.
This paper evaluated the economic policy of Sweden through the Great Depression. The primary question was to find out which factors contributed to the relatively slight span of the crisis. Consequently, the first chapter outlined the essential condition the Swedish current economic climate was in prior to the crisis. This is a necessary entry into the subject matter as it unveiled that Sweden's contact with contagion was - at least with regards to the bank sector - limited. On the other hand, the chapter exposed as well that the loss of foreign demand because of the crisis had a certain negative effect on Sweden's export industry. Nevertheless, it could be argued that under these situations, Sweden was from the beginning less likely to be effected by the Great Depression than those countries whose banking sector collapsed. This especially holds true when considering the fact that trust in the current economic climate never vanished in Sweden credited to generally stable, basic economic parameters. Hence, the specific characteristics of Sweden's economy prior and during the Great Despair already answer part of the question to why Sweden performed so well.
As Sweden was nevertheless struck by the problems through the export market and the collapse of the international trading system, the next area of the answer are available within the internationally unique insurance policy procedures Sweden pursued between 1931 and 1937. In section two it is argued that Swedish politicians deliberately followed an economic policy outside the neoclassical mainstream. That is mainly due to the so called Stockholm university, whose followers very early acknowledged that their state were required to play a vital role during an economical crisis. As this band of economist and their advice was very well accepted within the politics elite, policy steps could be put into practice and never have to make way too many concessions to third parties. Thus, policy reaction to the crisis was quick and effective.
In chapter three, several major plan procedures that helped Sweden to recover from the fantastic Depression faster than others are analysed in detail: the early abandoning of the rare metal standard, the stabilization of the purchasing ability of the krona and general public work programs.
While the suspension of the rare metal standard was merely a reaction to the actual fact any particular one of Sweden's major trading lovers, the UK, forgotten silver, the other two steps can plainly be traced back to the Stockholm University. It is argued in the paper, that stabilizing the purchasing power of the krona definitely helped to keep trust in the economic system and provided planning reliability for businesses. The role of the general public work programmes however remains slightly blurry. Even though Sweden appears to be an early if not the first country to follow Keynesian-like policies, the effects of the deficit spending coverage is relatively disputed by scholars. There exists however consensus on the fact that the policies of the Sociable Democrats in the first 1930s paved the way for true deficit spending and wide government involvement in the following decades, resulting in the today renown Swedish welfare condition.
Lastly, Sweden's quick recovery is looked upon in chapter four. As available information do not expose a substantial success of the government work program, external factors might make clear more effectively why Sweden recovered so quickly. Taking a look at exports statistics you can clearly see that a standard upswing in the global business routine was very well received by Sweden's export industry. Especially the booming housing market in the uk pampered the export sector.
Putting all items together, this paper showed a mixture of inside and external factors helped Sweden to beat the Great Melancholy much better than others. While a relatively low vulnerability of the banking sector to the international market helped to keep up rely upon the economy, the stabilizing financial policy of the Riksbank strengthened the look consistency for customers and businesses equally. The quick restoration at the end of the Despair however can mainly be followed back to exterior factors. Nevertheless, the actual fact that businesses could quickly react to the development in international demand whatsoever is great parts because of the stabilizing insurance plan of the federal government.