Price Control: The War Against Inflation [Reprint 2022 ed.] 9781978811669

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PRICE CONTROL The War Against Inflation

PRICE CONTROL The War Against Inflation ERIK T. H. KJELLSTROM GUSTAVE HENRY GLUCK PER JAGOBSSON IVAN WRIGHT

New Brunswick

RUTGERS UNIVERSITY PRESS

1942

COPYRIGHT 1 9 4 2 BY THE TRUSTEES OF RUTGERS COLLEGE IN NEW JERSEY

Printed, in the United States of America by The Haddon Craftsmen, Inc., Camden, N. J.

To Two Friends

EUGENE E. AGGER SCHOLAR

WILLIAM A. SCHUTZ BUSINESSMAN

Contents Preface

ix

Introduction

3

Sweden—Erik T. H. Kjellstrom

9

Statistical Appendix Canada—Ivan Wright Statistical Appendix

67 72 103

Great Britain—Gustave H. Gluck

110

Switzerland—Per Jacobsson

146

Preface THIS BOOK was intended originally to describe the price control policies in Sweden only. Considerable material was collected for this purpose. I decided later to impose upon three personal friends and asked them to contribute essays on price control problems in countries with which they are thoroughly familiar. As a result the text consists now of four essays. It is to be hoped that this arrangement will serve a greater purpose than the original plan. I am deeply indebted to Professor Ivan Wright, Dr. Gustave Henry Gluck, and Dr. Per Jacobsson for their kindness. I trust that the reader will find their studies not merely illuminating but greatly instructive. Dr. Jacobsson's essay is based upon a lecture delivered by him on October 20th, 1941 before the Economic and Statistical Association of Basle. I am personally responsible for the changes made. For reasons of convenience several of his charts have been omitted. Professor Wright has asked me to thank Mr. Howard Crosby, a graduate student at Rutgers University, for his excellent cooperation in preparing the manuscript on Canada. It is a great pleasure for me to fulfill Dr. Wright's wish! I am heavily indebted to another Rutgers student, Mr. Jerome Jacobson. He aided me untiringly for several months in my general survey of foreign price control experiences. His intellectual energy was almost appalling at times! When it comes to Mr. Naboth Hedin and his assistant, Mr. Tell Dahlldf I am wavering between thankin

x

Preface

ing and spanking! Mr. Hedin responded to my request for newspaper clippings on price control in Sweden with all the goodness of his heart. With his true Harvard thoroughness he disorganized, literally, my living quarters! The material has now been returned to the American-Swedish News Exchange and it is to be hoped that some other American student of Swedish affairs will make better use of these clippings in the future than I have been able to do. I am not in a position to thank all those, who have aided my collaborators in finding the statistical data needed for their studies. Unknown to me, as they are, I thank them. When manuscripts of this nature are changed and revised time and again one can only hope that someone is right. To type, and to chase footnotes through many hundreds of sources is no easy task. I am afraid that some such details have been overlooked. If so, it is not intentional and most certainly not due to Miss Davis, Mrs. Anderson and Miss Kerr, who typed and re-typed the major portions of the manuscript. With price control events bursting almost over you while you write, errors of judgment are likely to creep in. And many a friendly helper may easily be forgotten. One true friend I cannot forget, however. Her name is "Limpan." E. T . H. K. Rutgers University, New Brunswick, New Jersey

PRICE CONTROL The War Against Inflation

Introduction

I

N an article in Fortune, August, 1941, entitled "Price Fixing Is Not Enough," the Chairman of the Board of Governors of the Federal Reserve System, Marriner S. Eccles, writes, in part: " T h e fact that we have abundance of some kinds of goods, yet already are meeting drastic shortages in others, greatly affects the kind of policy we should adopt in meeting one of the great economic problems of any war, namely the control of prices." T h e Chairman later goes on to say that "it is also essential to distinguish two different ways by which prices can be controlled. One way I should call the direct method where the government steps in and keeps specific prices from ger ; ~ig out of hand. T h e other way I should call the functional controls by which the government seeks to curb the purchasing power in the hands of the public by broad fiscal policy or other means." These concepts may well serve as an introduction to the economic problems discussed in this volume, as most nations today are making use of both direct and functional price control in order to avert inflation. T h e four democratic countries considered here have all experienced rising prices, yet none of them as yet has been confronted with a devastating inflation. T h e immensity as well as complexity of our American economic life makes it rather difficult to draw any direct parallels between our price experiences and those of some smaller democracies. Nevertheless, some of their policies and results may throw light upon our own price 3

4

Price

Control:

problems. Most of these countries have had longer experience with price control during this war than has the United States. T h e records of their achievements should be of interest, therefore, when we are now facing the impact of the greatest war time budgets in economic history. T h i s book is made up of four separate essays. Each one is written from the point of view of the individual author. It is to be hoped that this form of presentation will prove more stimulating to the reader than a more standardized approach. A t the outset, attention should be drawn to the fact that price control, be it direct or functional in nature, does not mean price stabilization in the sense that this term was used by many economists in the last post-war period. Stable or stationary prices are not the aim of modern price control policies. T h e i r ultimate aim is to prevent inflation. T h e other aims are to protect, as far as possible, the standard of living of the average person, with means which are not totalitarian in nature even if they encroach at times upon the ideals of accepted individual liberty. Some other purposes of price control are to protect the defense industries against shortage of material as well as the public purse against unwarrantedly high prices. Hence, a certain rise in prices should not be regarded as a failure on the part of those charged with the responsibility of protecting the price structure. A reasonable price rise is not essentially contrary to the best interests of any economic community. Price control is certainly not a modern economic invention. From the days of justurn pretium—yes, even centuries before the "just price" era of the Middle Ages

INTRODUCTION

5

— m a n k i n d has been concerned with price control i n one form or another. A t times price control has been a narrow concept concerned merely with a few types of prices. A t times it has been sweeping, embracing all, or nearly all, prices. T h e Medieval guilds and the great trading leagues offer innumerable examples of strict price control. T h e mercantilists were well versed, indeed, in this form of economic supervision. B u t it should be remembered that the rebellion against the early doctrines of the Commercial R e v o l u t i o n took the forms of arguments i n favor of free competition and the "market price." T h i s was in theory, at least, freely arrived at by rational persons. In those days of laissez faire any interference with the pricing processes of the free markets was frowned upon. It was thought unfair to the very concepts of h u m a n freedom to restrict the price mechanisms of the market. T h e traditional economic thoughts growing out of this idealistic liberalism are so strong that even today many persons voice objection to price control. Perhaps older economic text books are to be blamed for this attitude. Perhaps a n u m b e r of the objectors think merely in terms of bureaucratic interference i n business on the part of a strong central government. T h e likelihood is that political rather than economic considerations are allowed to take the upper hand. In the middle of the recent post war period many banking experts here and abroad followed w i t h intense interest the Federal Reserve policy and the price level. It was thought by some that the Federal Reserve Bank of N e w Y o r k finally had found a way to keep the general wholesale price level stable. T h e accuracy of this

6

Price

Control:

contention need not be challenged here. The important thing is that central banking price control was seriously discussed. Again, we may recall the price control policies of the early New Deal. In those days strong efforts were made to raise wholesale prices to a pre-determined level (commonly thought of as the 19a 6 level) and then keep them there for generations to come. That certainly was price control. We called it reflation. Yes, the American dollar was devalued as a means to control prices. And some years before innumerable debates in congressional and academic circles, not to mention hundreds of newspaper editorials, were concerned with the "compensated dollar" and similar ideas—all directed towards price control. The various "schemes" were generally challenged, and successfully so, usually by means of the old free market arguments. Nowadays it appears to be common knowledge, however, that prices are more often administered than free. We do not bargain freely in the corner drug store I And most people realize that labor unions attempt to control labor prices, i.e., wages; that cooperatives struggle against high prices on consumption goods; that a number of governmental agencies have constitutional authority to set "rates" in the interest of general welfare, and so on. No one can deny that this is price control. Mr. Marriner S. Eccles struck a happy note, indeed, when he distinguished between functional and direct price control. In the present general price emergency all nations have learned by sheer experience that socalled price fixing is not enough to avert a disastrous inflation. While this volume is directly concerned with efforts

INTRODUCTION

7

to prevent inflation in some other democratic countries, we in America cannot shut our eyes to the potentialities o£ long, if not permanent, price control under the direction of a central authority. Modern efficient democracies can no longer rely upon unhampered competition. Yet they abhor, and fight with all their power against the economic concepts of the totalitarian nations. A t the same time they know that monopolistic competition is far more realistic in everyday life than pure competition—the venerable idealism of the free market. During this century the world has witnessed the rapid development of economic group interests. We find them in almost every field from the university professor to the ordinary day laborer. All of these groups are concerned with standards, risks, prices and security. In the present struggle against inflation many nations have found such economic group interests extremely helpful — b u t again dangerously harmful. Nevertheless, these groups do exist. They are parts of our modern capitalistic order. Fiscal and financial policies, group interest policies, and so-called price fixing policies are all clearly interrelated in the general subject of price control. T h e position of governmental authority is very delicate, however. It is one of the gravest issues facing mankind today. T h e second World War is being fought over the abuse of power! Little wonder then that many democratic nations have found it necessary to proceed with caution lest bureaucratic emergency control become permanent State supervision. We must realize that the price emergency does not end with the peace treaty. Post-war in-

8

Price

Control

Rations have done more harm than "war prices" in the past. Yet no one can foretell just how long the coming democratic reconstruction period will be. We now turn to some price control problems as they have appeared since the war began in Sweden, Canada, Great Britain, and Switzerland. ERIK T .

H.

KJELLSTROM

Sweden Erik T. H. Kjellstrom I

P

R I C E C O N T R O L does not imply stable—stationary—prices. It means control over the movements of prices. In many respects, Sweden has been a leader in this field. Going back to the world economic depression, we find Sweden taking the first well formulated steps toward a managed currency in order to control prices. Let us look back on that program for a few moments. During the Spring and Summer of 1931, a great confidence crisis began in Vienna and swept over the European money and banking structure. Hurried calls for short term funds, held abroad, were sent out by almost all the leading banks. As a result, gold was drained in large quantities from many central banks, and even the Bank of England found it difficult to meet these payments. T h e gold standard began to crumble. T h i s standard had been founded upon the democratic principles of freedom of trade and international cooperation. Freedom of contract and freedom of movement in trade and finance had been essential elements of the long, productive era of liberalism which had arisen out of the restrictive policies of the mercantilistic period. 9

10

Price

Control:

Fortunately, the decline of the gold standard came at a time when economists and bankers were ready to deal with the problems of money without the aid of any automatic metallic standard. T h e concepts of "managed money" had begun to be widely understood, and the general public accepted the new money system with remarkable calm. Several nations formulated new and effective monetary standards. The most explicit, and also perhaps the most progressive policy was announced by the Swedish government on September 27, 1931. The first "market basket" or goods standard for money that the world has known was devised. T h e preservation of the domestic purchasing power of the currency in the hands of the consumers became the aim of the new Swedish monetary policies. Much has been written in America about the principles as well as the practical results of this program. Some writers have called it an object lesson for America. Many economists have praised it; few have denounced it. Then, in the middle of the 30's, another Swedish innovation in the field of money attracted wide attention. A double-budgeting system was adopted by the Swedish Parliament. T w o national budgets were officially prepared. One was called the current budget. T h e other was termed the capital budget. T h e former was concerned with the running expenditures and incomes of the government. T h e latter dealt with the long term investments—the public assets. By its very nature the capital budget must always be in balance; not so the current budget. T h e calendar year was discarded as the fiscal period of registration. The business cycle was sub-

SWEDEN

IX

stituted for the ordinary accounting period. In lean years the current budget should be under-balanced. In good years it should be over-balanced. Or, in other words, the good times should help the bad times. In the Spring of 1939 interest was again aroused concerning Swedish price policies. In May of that year the Swedish government passed a maximum price law in anticipation of dangers to the domestic price structure in the event of a European war, or other serious international disturbances. This first law, subsequent laws, and other price policies constitute the subject for our discussion. Before venturing into these matters, it may be of interest to consider Sweden's economic environment. Briefly, Sweden has a population of about six and a quarter million persons living in an area a little larger than the State of California. T h e main natural resources consist of forests, iron ore, and water power. Of these Sweden has excellent supplies, ample for domestic requirements and for export. T h e coal deposits, located primarily in southern Sweden, are insignificant. This great deficiency in coal is only partly off-set by the use of hydro-electric power. Sweden's iron ore deposits, among the largest and richest in Europe, are located in northern and south-central Sweden. Although two-thirds of the Swedish people live in rural areas, only about one-third is engaged in farming. T h e reason for this is that less than ten percent of the land is suitable for agriculture. Despite the low percentage of arable land in Sweden, the nation should under ordinary circumstances be fairly self-supporting as the table below indicates.

Price

12

SELF-SUFFICIENCY IN FOODSTUFFS OF E U R O P E A N

Control: COUNTRIES1

in percentage of full self-sufficiency

Great Britain . . . Norway Switzerland . . . . Belgium Holland Eire Austria Finland Greece Germany (old territory) France Sweden Portugal

25 43 47 51 67 75 75 78 80 83 83 91 94

Italy Spain Czecho-Slovakia Estonia Denmark Poland Yugoslavia Latvia Bulgaria Lithuania Roumania Hungary U.S.S.R

.

95 99 .100 102 103 105 106 106 109 no no 121 101

T h e percentage distribution by occupation in 1935 was as follows: Agriculture and forestry Industries and mining Transportation and commerce Fishing Other

34-2% 31.7 15.5 0.6 18.0

T r u e , the industrial revolution came rather late to Sweden; only the last six or seven decades have seen 1 T a k e n from a table published by the German Institute tor Business Research in February 1939. Consumption in calories for individual countries (generally for 1937) was estimated as well as the proportion of the total which imports provided or exports represented. T h e extent to which the figures are below 100 indicates the degree of dependence on imports while figures above 100 show a corresponding export surplus of foodstuffs. It should be noted that the estimates are in calories (energy) and thus no account is taken of the desirability of "protective" foods and of a varied diet. Bank for International Settlements 1941.

SWEDEN

I3

the country become, at least partially, an industrial nation. Developments have been swift, however, and accompanied almost from the very beginning by the growth of labor unions. Collective bargaining also long has been the accepted form of domestic economic negotiation. Cooperatives, especially consumer cooperatives, entered the scene at about the same time as the labor unions. T h e relative economic importance of these cooperatives may easily be exaggerated by the enthusiasts. Nevertheless, their role in bettering the living conditions of a large portion of the population cannot be underestimated, nor can their influence on general retail trade be disregarded. T h e public utilities, the major portion of the railroads, the schools, hospitals and other institutions, not to forget some of the natural resources, are largely owned and controlled by the national government and local municipalities. T h e industrial enterprises, on the other hand, are privately owned and operated. Private enterprise and government social control go hand in hand. Industry and trade are financed mainly by the banks. T h e commercial banks perform both the commercial and the investment banking functions. T h e y care for the needs of trade and for the short- as well as long-term credit requirements of industry. Their operations are centered largely around four or five big institutions with branch banks scattered throughout the country. T h e Riksbank (the Bank of Sweden) began as a commercial bank in 1656. It has the distinction of being the world's only "Bank of Parliament." In 1897 this bank became the sole note-issuing institution in the country.

14

Price

Control:

Checks are not commonly used, and the notes, issued by the Bank of Sweden, constitute the major portion of the media of exchange. Mutual savings banks serve a very important purpose in Sweden. A considerable portion of the savings of the community is deposited with these banks. They compete directly with the commercial banks for these funds, and also for long-term loans. This competition expresses itself in differentiations of interest rates. Installment sales are not especially significant from the point of view of the total national economy. T o understand the price control problems of Sweden, it is necessary to recognize the importance of world trade to the Swedish people. Sweden is not economically independent. She must rely upon imports and exports, and normally trades with about ten or fifteen of the leading commercial nations. The percentage distribution of Sweden's total foreign trade, in the years preceding the present war (1936-1938), by principal countries of origin, was as shown in the table on page 15. From these figures it will be noted that two-thirds of the imports and more than three-fourths of the exports were to countries in Europe, of which the United Kingdom and Germany together accounted for more than one-half. The United States supplied 14.3% of Sweden's imports and took 10.8% of her exports. T o complete this brief picture of Sweden's economic pattern mention can be made of the unique position of the academic economists. They enjoy probably more respect and influence with their people and their government than anywhere else in the world. They write regularly for newspapers and periodicals. Some of them are members of Parliament and leaders in various political

SWEDEN

15

Imports (by O r i g i n ) Europe British Isles Germany Northern Countries Denmark, Norway, Finland Western Countries Netherlands, Belgium, France Other Europe

I 3- I %

21.9

Total

United States Other Countries Total

(by

Exports Destination) 2 3-5%

16.8

7.7

15.6

10.5 13.4

10.5 10.6

66.6

77.0

14.3 19.1

10.8 12.2

100.0

100.0

parties. Public interest in the views of the economists has been encouraged by Sweden's program of adult education, especially in the social and economic fields. This adult education has contributed in no small measure to one important fact—the Swedish public itself has a good understanding of broad economic policies. II

During the last great war, or more specifically from 1916 to 1921, price control regulations were in force in Sweden. The results were mediocre. The cost of living rose sharply; war inflation was not avoided. Since that time many of the leading Swedish economists, such as Ohlin, Myrdal, Lindahl, Johan and Gustav Akerman,

i6

Price Control:

Hammarskjold, Lundberg, not to mention older economic pathfinders such as Davidson, Wicksell, Cassel, and Heckscher, devoted considerable thought to the general problems of prices and purchasing power. Most of their work is well known to American readers of economic literature, and it will suffice to say that they directed their attention to the broad, as well as to the specific issues of public economic policies. Many of their ideas have received practical application; for instance, the double budgeting system. Indeed, price control legislation cannot be said to have come as a surprise to the Swedish people. Much knowledge and experience had been gained during and after the first World War. It is fitting, therefore, to draw upon the knowledge of Professor Gustav Akerman and to present his interpretations of other economists' views. In the Skandinaviska Banken's Quarterly Review for January, 1940, he begins his analysis with some articles written by Professor Davidson in the economic journal, "Ekonomisk Tidskrift," in 1920. In Professor Akerman's words: "The view expressed by Professor Davidson in those articles was that at times when national productivity and the supply of consumption goods has for some reason been reduced, a general rise of prices corresponding to the shortage of goods, which could not properly be regarded as inflation, should be permitted. When a price advance is thus limited, the general volume of purchasing power and its distribution among the various groups of income-receivers, whether with fixed or fluctuating incomes, would, he contended, remain approximately unchanged, and the shortage of goods would therefore affect these various groups in equal degree. If, on the other hand, at a time of such

SWEDEN

17

a shortage of goods the price level were kept constant, the result would be that 'passive' capitalists with fixed returns on capital, and wage earners with fixed incomes, would not at all be affected financially by the shortage of goods, which would fall all the more heavily on the producers and active capitalists, and would soon be felt also by work-people and other wage-earners with fluctuating incomes. This policy would, therefore, not only be unfair, but also detrimental to national production. "Professor Davidson's views, as above indicated, have won adherence from most Swedish political economists. They have been supported, for example, by Professor Lindahl, in his publications entitled "Penningpolitikens mal" and "Penningpolitikens medel," on the aims and means of monetary policy. Professor Davidson, however, in framing his theoretical program, had proceeded from the assumption that the reduction of productivity would be of an all-round character and distributed fairly evenly over the various branches of production, as, for example, in the case of the introduction of the eight-hour day. "Against this view, however, Bertil Ohlin, now Professor of political economy, contended (in "Ekonomisk Tidskrift," 1921) that a reduction of productivity entailed by war would affect different branches of production in very different degrees, falling mainly on those branches which were dependent on foreign raw materials of various kinds. In such branches tendencies toward a storage of goods for speculative purposes would doubtless soon be manifested, and this might easily give rise to a price advance beyond the level warranted by the shortage of goods, and thus of a truly inflationary character. "An important, though not fully elaborated theory was advanced by Professor Wicksell in an article in

i8

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Control:

"Ekonomisk Tidskrift" in 1925. T h i s author contended that when a shortage of goods suddenly supervenes, with consequent rises in prices, most people nevertheless try to maintain substantially the previous scale of consumption. In many cases they can defray the additional expenditure thus entailed by drawing on their savings, or even by resorting to consumers' credits. But the additional spending power thus brought into play will tend to force up prices still further, so that a real inflation arises. T h a t in situations like this such phenomena may in many cases be observed is indeed true. Most people, however, would presumably endeavor to avoid encroaching upon their savings to any great extent, and therefore would doubtless gradually adapt themselves to the new situation by reducing their expenditure and thus really diminishing their consumption. " T h e commodity prices at first raised in such an inflationary manner will give the producers considerable profits and thus additional purchasing power. According to Wicksell, this spending power will be used by the producers for increased consumption, and will give rise to a further inflation of prices, which will entail further profits for the producers, and so forth. W h e n the producers in question are peasant-farmers, or other persons doing business in a small way, there is great truth in Wicksell's contention. In the case of larger enterprises in industry or other fields, however, such profits for the most part will be funded; and in the case of joint-stock companies, larger dividends which may stimulate increased consumption will not be paid until after the lapse of considerable time. In many cases, additional spending power, which tends to stimulate consumption, may be created by increasing the staff of workers, or by

SWEDEN

19

raising the wages of existing workers, though as a rule some time elapses before such rises come into effect. Furthermore, these larger profits, whether or not distributed in the form of dividend, may induce the companies to expand their production and reinvest the new earnings, which will increase the demand for 'investment goods' and for labor. Whether this actually happens, however, will depend on whether the profits are expected to recur, whether the raw materials required for the increased production of consumption goods are available, and whether there is a sufficiency of 'investment goods', among other factors." This analysis, made by Professor Gustav Akerman, throws light upon the underlying ideas of the present price control program. His remarks are limited, and should not be interpreted as constituting the sole theoretical foundation of the present policies. Yet they are important because they show certain trends of thought related to the price control difficulties during the previous great war. In later years many studies have been made by leading Swedish economists both inasfar as functional and direct price controls are concerned. Professor Emeritus Gustav Cassel has recently offered some interesting views on the general topic of price control. His name and his ideas are quite well known in America. For our purpose, attention is drawn here to a section of one of his articles. Writing in the Quarterly Review, of the Skandinaviska Banken for April, 1940, Professor Cassel says, in part: "State economic policy can neither gain efficiency nor inspire confidence if it lacks inner cohesion, and if it is not the result of a well-coordinated plan. "Private individuals must save both in order to be

20

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Control:

able to pay their taxes and to have money left for lending to the State. Saving must, in short, aim at transferring productive forces from the service of individuals to that of the State. Hence, the best way in which individual saving can be encouraged is to convince the general public that the productive forces released will be rapidly and effectively employed in a manner serviceable for the national defense. T o that end the capacity of the State for utilizing free productive forces must be raised to a far higher standard than that to which we have hitherto been accustomed. "Under normal conditions the entire national economy is, of course, regulated by the price structure. Its importance as a regulator both of production and consumption cannot be diminished by any wartime economy. A rise in the prices of particular goods should therefore not be prevented by artificial means. A rise of prices will, of course, retain its value as a means of enforcing the restriction of consumption and as an incentive towards increased production, or towards overcoming special difficulties in the way of the supply of goods. For example, if the price of fuel rises owing to higher initial costs, the factors which have caused this rise should indeed be counteracted in every possible way. "But the consumption itself should not be encouraged by State subsidies intended to keep the price down. T h e same applies to freight rates of all kinds. Nor is it rational to endeavor to prevent a rise in the prices of special goods by means of maximum prices, the chief effect of which is that existing stocks will be sold off at the previous initial costs, whereupon the maximum prices will have to be raised on a level with the new

21

SWEDEN

costs. In the meantime the incentive towards a restriction of consumption is being sapped. It is in fact a mistake to try and put a check on rises in the price of particular goods in order to prevent the rise of some average 'index number'. Such a procedure is indicative of an arithmetical statistical view of the problem of the general price level, which at bottom is of a purely monetary character. " T h e fundamental cause of inflation is an artificial creation of purchasing power. It is this that must be combated. "If we succeed in this, a rise in the prices of individual goods would deprive the public of spending power for the satisfaction of other needs, and the necessary reduction of the standard of living would then be effected. " T h e State should not release the public from the necessity of such a reduction by continuously infusing new spending power in the form of bank money created for the purpose. " A system under which wages and salaries rise according to the increase in the cost of living is very prejudicial to the entire national economy, as it must always weaken resistance to inflation and prevent the natural adjustment of the standard of living to the reduced national supplies." W e have now seen Professor Cassel calling attention to the need of inner cohesion in any government economic policy if it is to gain efficiency and inspire public confidence. T h a t this is well understood is clearly exemplified in a statement 2 given by a retiring leader in government finance who remarked that the fight against 2Svenska

Dagbladet, J u l y , 1 9 4 1 .

22

Price

Control:

a continued depression of the value of money must be waged on a wide front. Price control, rationing, production incentives, accompanied by propaganda against anticipations of inflation and hoarding, may contribute directly or indirectly to erase or subdue important price raising tendencies. These forces, however, must be associated with and supplemented by a fiscal policy, a monetary policy, a wage policy, and a trade policy, which are alert to the need of counteracting to the greatest possible extent any forces of a price raising nature. It is at times possible to rely upon the loyalty of the general public. But such loyalty can only be achieved in a democracy when the public has at least a reasonable understanding of the broad—as well as the specific— price control aims. It appears necessary for the price controlling authorities to avoid as far as possible economic dissatisfaction by one or several groups. It should be emphasized that price control to a very great extent must rely upon cooperation, mainly voluntary in nature by consumers, traders, industrialists, workers, and farmers. Such voluntary cooperation may be more easily attained in one country than in another. Homogeneity in population, traditional attitudes towards government interference, as well as the underlying political philosophy of a particular democracy are matters of major importance. Ill The eminent British economist, D. H. Robertson, advises the readers of his famous volume, Banking Policy and the Price Level, to read each chapter twice before proceeding to the next. The readers of this book should not be troubled by such difficulties. But it may serve all

SWEDEN

23

readers to think at times about Professor Robertson's reference to a quotation from Through the LookingGlass. "She's in that state of mind," said the White Queen, "that she wants to deny something—only she doesn't know what to deny!" "A nasty, vicious temper," the Red Queen remarked. T h e attitude of the Red Queen may very well suit all those who are irritated with the economists for their failure to agree upon any popular definition of inflation. True, it is an evasive term which has been given numerous interpretations. But prior to 1914 very few references to it appeared in economic literature. Through the inflations connected with the first World War, however, this concept became incorporated into the everyday language of the business world, though even today there does not exist any definite and generally accepted concept of this dreadful economic disease. In its worst stages, the so-called hyper-inflations, public confidence in money disappears. This occurred in Germany after the last war, and as a consequence the whole German monetary system had to be reconstructed. In the meantime, private savings, insurances, etc. had been ruined. Similar experiences are to be found after our Revolutionary war. Then the debtors literally chased the creditors—not the creditors the debtors—for the creditors did not want to have their good loans repaid in worthless moneyl Such "run-away-inflations" have occurred many times in economic history. Other and somewhat milder forms of inflation have made their appearances during and after wars in almost every country. Today we face the same problem. And the problem, stripped by all theo-

24

Price

Control:

retical controversies, is simply that more and more money is bidding for less and less goods with the result that prices will rise, cost of living increase, the value of savings decline, and so on. It then becomes more expensive for the government to purchase the necessary military materials. T h e government has to spend more money and unless restrictions are placed on wages, prices, and profits the vicious spiral of inflation is in full swing. This simple description of inflation is open, of course, to attack from a number of economic theories. Still, it will serve the purpose of drawing attention to some of the essential factors in the war against inflation. W e should be cautious, however, not to confuse rising prices as such with inflation. It is quite possible to find prices rising quite sharply without causing an inflation provided goods in increasing amounts are offered for sale in the markets. Rising prices are not always synonymous with inflation. Like all other problems in economics, the question of "degree" and "kind" will decide the issue. Hence, it is possible to say, for instance, that prices have risen in Sweden, yet the public is not suffering from the fever of inflation. T h e functional and direct price control policies so far have succeeded in keeping the fever under control. Before the functional price control questions are discussed, a few important facts must be made clear. T h e first is that prices have risen a great deal in Sweden since the war began. T h e second is that production has suffered from lack of necessary raw materials as well as from curtailed outlets for the all-important export industries in which a large portion of the population is normally employed. T h e third significant fact is that

SWEDEN

25

the Swedish price control authorities could not possibly have forecast the long term weather conditions. T h e harvests in 1940 and 1941 were far below expectations. Indeed, the weather has had m u c h to do with the rise of prices. T h e fourth point is concerned w i t h labor. Most A m e r i c a n students of economics have shown considerable interest in the Swedish labor movement. L a b o r in Sweden is not merely well organized—it is the nation's most powerful political force. T h e labor leaders are experienced in politics as well as in economics. M a n y of them hold Cabinet posts—one as Prime Minister, a man thoroughly respected by all political factions. T h e fifth fact relates to the distribution of wealth. Few, if any, nations can boast of a better wealth distribution than Sweden. W i t h these five points in mind, w e w i l l proceed to describe the functional policies, leaving the direct price control questions to the n e x t section. W e turn first to the question of wages and salaries. Wages and salaries as well as farm prices are not included in the Swedish price control laws. Nevertheless they are carefully regulated by nation-wide bargaining agreements in the case of labor and employees, and by government regulations in the case of farmers. T h e elimination of these two important price control factors from the legal list, as it were, should not be taken to mean that considerable thought has not been given to these vital issues. Y e t it is true that the powers of the Price C o n t r o l Board, corresponding roughly to the Price Administration in Washington, cannot be exerted directly over wages and farm prices. T h e reason for this is quite simple. T h e present Price Control Board is an emergency measure. T h e carefully

26

Price

Control:

organized labor unions and the strong employers' union are permanent institutions growing out of Sweden's effort to establish an equitable relationship between three factors: the nation, labor, and capital. A similar condition prevails in the farm field. A study of wages and farm prices in Sweden during, let us say, the last decade is extremely fascinating from the point of view of intricate business cycle analysis. But it would be an error of judgment to underestimate the political power of these two groups in Swedish affairs. T h e i r demands have been restrained, it is true, yet they have been strong enough to cause concern to other economic interest groups. Viewing their demands from an international view point, it appears to be only fair to say that these two groups have been quite reasonable. It should be kept in mind that it is far easier to utilize statistical data for purposes of economic policy in a small and highly organized democracy than on a continent. W h e n references are made to index numbers in the text, we must remember that those index numbers are not merely a "play toy" for the economists. T h e y are vital in the war against inflation. Since the second World War began, three separate wage agreements have been reached between the Association of Industrial Employers and the Federation of Swedish Labor Unions. These agreements have served as a general standard for other wage adjustments both as far as government and private employees are concerned. Broadly speaking, the wage increases amount to approximately fifty per cent of the rise in costs of living. These wage increases are calculated on the basis of two indexes of costs of living. T h e index, using 1914 as its

SWEDEN

27

base year, applies to industrial workers. Government and private employees have their wages and salaries adjusted according to an index using 1935 as its base year. T h e first general index agreement was reached on December 16, 1939. In this contract, covering the year 1940, wage increases were allowed up to 0.42% of each unit rise in the cost of living index. Compensations could only be made each quarter. Furthermore, no wage changes were permissible unless the cost of living index had risen by at least six units. T h e second index agreement was made on January 9, 1941, T h i s pact was more restrictive in character. It stated that additional compensation could be given as of February 1, 1941 provided that the cost of living index had reached at least 200 (1914 = 100) at the turn of the year. As the actual figure was 204, the total compensation amounted to 8.7%. It was also stipulated that a further wage increase of 4 % could be given within six months, provided that the index had then reached at least 212. T h i s prerequisite, unfortunately, was fulfilled by April when the index was reported as 219. T o t a l compensation now became 12.7%, or less than 5 0 % of the rise in the cost of living since the war began. T h e third general contract signed on January 15, 1942, is less restrictive than the previous one (1941). According to this agreement, additional wage compensation of 2.5% shall be paid provided that the cost of living index at any quarter of this year has reached at least 233, but not more than 237. Should this latter figure (237) come true, additional pay of 1.5% will be permitted. If, however, the cost of living increase should be more rapid and also greater than anticipated at the

Price

28

Control:

time that this agreement was drawn the wage compensation will be somewhat curtailed. T h e total permissible wage rise for the year 1942 is 8 % . If entirely unforeseen price changes should occur this current pact may be terminated on October 1, 1942.3 O n the basis of this overall pact the various labor unions may reach separate agreements with their employers. Similar procedures are followed in the case of government and private employees who are not directly affected by the above mentioned pacts. T h e wages for farm labor are an exception, however. Although statistical data is lacking, it is known that these wages have been permitted to rise proportionally much higher. It is estimated that approximately every fourth Swedish person obtains wage and salary adjustments based on cost of living indexes. It should be emphasized, however, that both the government authorities and the employers as well as the labor leaders are clearly aware of the necessity of protecting the price structure even at the cost of curtailed living standards. FARM

POLICIES

A thorough presentation of the Swedish farm price policies would require a complete volume of its own. Such studies are available in the publications issued by the U. S. Department of Agriculture. For our purpose emphasis should be placed upon two factors. During the last decade strong efforts have been made to protect the income of the Swedish farmers by means similar to those employed in the United States during the same period. A survey of the Swedish farm policies has a fa3

"Social-Demokraten," Stockholm, January 16, 1942.

SWEDEN

29

miliar ring, indeed, to American ears. Minimum prices, processing taxes, import duties, export subsidies, milling quotas, surplus purchases, etc. have all been employed in order to protect and to improve agricultural conditions. These programs worked well. The second problem is concerned with an unforeseeable scarcity. The government had purchased large quantities of food stuffs both at home and abroad long before the war broke out, and there appeared to be no need for worry. Through government aid and intelligent planning both the farmers and the general public were able to look happily into the future. But no one had forecast a German invasion of Norway and an almost complete blockade of the western trade. And no one had calculated with two very serious crop failures. T o repeat: Sweden had made every effort to strengthen her own food resources. She had improved substantially the incomes of the farmers. She had relied upon her trade with the western world. She had not planned the weather! As a result of these unusually bad weather conditions the grain crops in 1940 were about 3 1 % smaller than the average production obtained in 1937-39, and the 1941 crop is estimated to be 4 1 % smaller than the average. The hay crop was cut even more sharply—by 58% in 1941. For the root crops, especially potatoes, weather conditions were much more favorable and production was increased, according to Mr. Ewert Aberg's data published in the January, 1942 issue of Foreign Agriculture (U. S. Department of Agriculture). The table below shows the changes in production of grain, hay, and net imports of grain for 1941 in percentage of 1937-39. The same source lists the most important measures

Price Control:

3°

Product Bread grain: Production Net imports

'94* as percentage of 1937-39 52% 4

Total

56

Feed grain: Production Net imports

63 5

Total

68

Total grain: Production Net imports

59 5

Total

64

Hay production

42

that have been adopted to adjust Swedish agriculture to emergency conditions as follows: 1) Survey of supplies and building up of stocks before the war; 2) Rationing to reduce the quantities consumed; 3) Changes in crop production and methods; 4) Use of substitute feeds; 5) Use of substitute fuel and power; 6) Organization of farm labor. The last point, the organization of farm labor, is a result of two things. First, the average Swedish farm is

SWEDEN

31

not large enough to justify extensive use of machinery. Secondly, there has been a shortage of farm labor largely due to the required military service. "In order to minimize the labor deficiency," Mr. Aberg reports, "a-cooperative movement has been organized to form socalled labor units, of which there are now about 75,000 in the country. In these organizations the laborers from a certain number of farms work together as a unit under the leadership of one man. T h e results have been that the available supply of labor is used more efficiently, and that the available horses and machinery are more fully utilized. In certain cases the labor deficiency has been so great that it has not been possible to take care of the shortage by the above labor-unit method. In such cases young women have been organized to help with farm as well as other work during emergency periods." T h e lack of adequate fuel supplies for houses, industries, and schools has made it necessary also to shift workers to the forests. There can be little doubt that the Swedish agricultural situation is serious. Every family has felt the shortage but all have cooperated to make the necessary adjustments. And according to Mr. Aberg, the farmers are willing to bear a share of the increased expenses of production but demand that the burden of the increased costs be shared, through higher prices, by the entire population. T h e extent to which farm prices have risen is shown in the following table. T h e increases, expressed in per cent, refer to the prices per kilogram of selected products as of August, 1941 over August, 1939. T h e data for food costs and cost of living are calculated on an index basis. T h e other figures are based on actual prices.

Price

32 Item

Control:

Increase August, 1941, over August, 75159

Wheat Rye Barley Oats Potatoes Sugar Cattle Hogs Eggs Milk: For consumption For manufacturing Butter, domestic Margarine Food costs (July, 1914—100) Cost of living (September, 1931—100)

50% 58 60 55 157 25 37 44 66 20 40 18 76 31 34

MONETARY POLICIES

P r i c e m o v e m e n t s and price control efforts have l o n g b e e n closely associated w i t h monetary policies. S o m e economists h a v e v e n t u r e d so far as to m a i n t a i n that m o n e t a r y actions are the sole determinants of cyclical price m o v e m e n t s . T h i s theory is n o longer regarded as acceptable. Nevertheless, m o n e t a r y policies must always be an integral part of any b r o a d price control program. W e m a y d i v i d e the subject of m o n e t a r y policies i n t o two parts: one positive, the other negative. A positive m o n e t a r y policy is applicable to circumstances w h e r e it may h a v e a direct effect u p o n the p r i c i n g process, as, for instance, w h e n a change i n the external v a l u e of the

SWEDEN

33

currency directly influences import and export prices, or when a change in the official bank rate tends either to stimulate or to retard, as the case may be, business activity, investments and production. An easy money policy, that is to say, a lowering of interest rates and an easing of reserve requirements or similar actions, is usually intended to invite economic expansion, and is commonly associated with the depression phase of the business cycle. Almost all countries made use of such a policy during the world economic depression. A tight monetary policy is essentially the direct opposite, and in consequence it is associated with efforts to prevent an inflation and not uncommonly used to check an outflow of short term funds or precious metals. A negative monetary policy is concerned with efforts to prevent, as far as possible, the accumulation of superfluous purchasing power, which may give impetus to an acceleration of already existing price rise tendencies. Hence, both positive and negative monetary policies are important tools for price control. A change in the external value of a currency, i.e., a deliberate shift in the foreign exchange rates, can only be effective if the volume of imports and exports is large enough to play an important role on the domestic market. This was the case in Sweden during the early years following the suspension of gold payments in 1931. A different situation prevails today. The blockade in the west and the difficulties of extensive trade to the south and the east have curtailed imports and exports to such an extent that changes in the rates of foreign exchange can only exercise a very minor power of control. Chart No. 1 and Table No. 1 easily show the general

Price

34 CHART NO. I

Control:

4

Sveriges Riksbank Return in millions of S.Kr.

Swedish Market Rates - in percentages. -

-

Yields of Gov irnmerrt Bon J S / Y •—I • 1

-

-

—

•

.

_ 111111111 BJi.ua 1938 1939 1940 1941 4

nth

P- 143-

Annual

Report

of the Bank for International

Settlement,

1941,

SWEDEN

35

trend of Swedish monetary policies during this war against inflation. As a whole the Swedish money market has been characterized by increasing liquidity. The commercial and industrial demands for bank credit have declined. Government borrowing, on the other hand, has increased sharply, as reflected in the combined portfolios of the commercial banks. Nevertheless, it is worthy of note that the decrease in primary deposits caused by the withdrawal of cash to fulfill subscriptions for government bond issues has been more than offset, from the point of view of commercial banking, by credits released from inventories. T o this should be added, of course, the influences of the meager import trade, and above all the large government expenditures. INTEREST RATES

A very significant aspect of functional price control relates to the levels of interest rates. Some economists have asserted that high interest rates tend to induce saving on the part of the general public, but this theory is not substantiated by modern factual investigations. Another theory holds that low interest rates tend to stimulate production. This argument centers a great deal of attention on the important building industry, which, in the case of Sweden, has been virtually at a standstill since the beginning of the emergency. The opponents of low rates of interest claim that low rates may inspire inflation and thus undermine the war efforts against inflation. If the controversy is viewed from the standpoint of the Treasury solely, then, of course, low interest rates are most desirable. For several months during the Spring of 1941 the Swedish Parliament and the public press debated this

Price

36

Control:

TABLE NO. I

COMPARATIVE DATA: ALL BANKS

COMMERCIAL

(In millions of kronor) Total primary deposits

December 1940 December 1941 Increase or in %

Total lending operations

Cash reserves

Bond portfolio

December 1940 December 1941

4320.91 4879.03 558-I2 12.8 4464.95 4294.01

Decrease or in %

170.94 4.

December 1940 December 1941

518.00 649.00

Increase or in %

131.00

December 1940 December 1941 Increase or in %

25-3 385.00 1055.00 670.00 174.1

issue. Lengthy documents were written for the information of the public and the financial editors of the daily press had no reason to be concerned over lack of suitable material for their editorials. T h e essential facts were that interest rates had begun to rise a few months before the war and that the rise had continued until May, 1940. T h e effective rate of interest on government bonds (the 1934 loan) had gone up from 3 % to 4l/£%. T h e

SWEDEN

37

Bank of Sweden had raised the official bank rate from 3 % t o 3]/2%> a n d similar actions had been taken by the commercial banks relative to their lowest discount rates. T h e mutual savings banks and the postal savings banks followed the same trend. T h e Banking and Currency Committee of Parliament claimed that the rise of interest rates had been caused primarily by an outflow of foreign claims from the Bank of Sweden. Other contributing forces were thought to be increased credit demands by both the government and private enterprises. T o this were added the requirements of the national defense agencies and the costs involved in the financing of surplus goods in storage. While these explanations were given by the Committee, this body stressed the need for lower interest rates not merely as a means to induce greater production in the building industry, but also for the purpose of relieving the financial burdens of the farmers. It was thought furthermore that unemployment, small as it was, was closely related to the high price on loanable funds. T h e Committee was inclined, of course, to view lower interest rates with favor from the viewpoint of government borrowing. And it did not express any fear of initiating a price inflation through lower interest rates. Since these views were expressed interest rates have declined in Sweden, as seen on Chart 1, on page 34. T h e reasons for this decline have been discussed before. T h e present long term loan rate of 31/2% regarded as satisfactory by the authorities of the central bank. T h e important thing, from the point of view of functional price control, is that those in charge of this problem in Sweden devoted considerable thought to this

38

Price

Control:

aspect of the problem. Production versus inflation were the issues directly involved. T h e spread between the interest rates on primary deposits and the general loan rates was considered also. T h e thought was advanced that government controlled commercial banks could force the privately owned commercial banks to narrow this spread in the interest of needed production. MONEY IN CIRCULATION

One of the objects of functional price control is to control, and if necessary to withdraw from circulation the common media of exchange. In the case of Sweden, the most usually used exchange medium is the notes issued by the Bank of Sweden. If the average person has too much money in his pocket and if goods are not strictly rationed the chances are that prices will go up through competitive bidding. T h e so-called free sector, i.e., goods not rationed, as well as goods not under government price supervision in one form or another is quite limited. Nevertheless, the free sector cannot be disregarded. As a mere enumeration of statistical data could not readily clarify the "question of money in circulation" in Sweden, a brief description of a chart prepared by the Konjunkturinstitutet (The Business Cycle Institute, Vol. A.g, page 74) may serve this purpose. T h e factors included in this analysis are: (a) the volume of money in circulation; (b) the costs of living; (c) incomes; (d) volume of consumption. From 1936 until the outbreak of the war in 1939, money in circulation and incomes (an estimate) followed trends largely parallel to, but slightly below, the indexes of consumption volume and living costs. Since the war, this rela-

SWEDEN

39

tively parallel movement has been broken. T h e volume of consumption has declined by about twenty per cent, incomes have risen by approximately nine per cent, the cost of living has gone up more than thirty-eight per cent, while money in circulation has increased (with strong fluctuations) almost fifty per cent. A comparison made between the increased volume of money in circulation and retail as well as wholesale price changes shows that Sweden has followed a course somewhat similar to that of England, but it shows also that the volume of money in circulation in the United States, Germany and Finland (I) has risen far more than in Sweden in comparison with the other two factors since the outbreak of the war. This international comparison, interesting as it is per se, does not disprove the fact that the income and purchasing power developments in Sweden have increased, rather than diminished, the potential scope for price increases. Sweden has not made use of the famous Keynesian plan of forced savings (see Dr. Gluck's section on England). Many financial authorities have voiced anxiety over the developments, however. They have pointed out the dangers lurking behind the dry statistical facts. Some of them have advocated private, and if necessary government, control over dividends. Some have thought of other extraordinary measures to absorb this 'excess' purchasing power. But those in charge of the general price control problems have not been led to believe that the increases in profits and income have been of an inflationary character. They have traced the price advances to other sources. They do not regard the price increases as results of the demand factors, but rather as the outcome of cost changes. This extremely important con-

40

Price

Control:

elusion will be considered further in the latter part of this section. Let us first look over the Swedish budget and the public debt. CHANGES IN T H E BUDGET

T h e present national income is estimated to be approximately 12 billion Swedish kronor (6 billion dollars. One krona is worth officially 23.8 cents. T h e equivalent purchasing power is almost double, however. Foreign exchange rates do not as a rule portray comparative purchasing powers. But in order to simplify calculations one Swedish krona may be regarded as equal to 50 cents). This estimated national income is used here merely for the purpose of explaining the size of the Swedish public debt. On July 1, 1939 the public debt was 2.6 billion kronor. On January 1, 1941 it was 6.15 billion kronor. It is estimated that the debt will reach about 8 billion kronor during the current fiscal year, or two-thirds of the estimated national income. T h e deficit in the national budget for the fiscal year 1939-40 was 924 million kronor. T h e following year a deficit of 1,609 millions was recorded, and for the current year (1941-42) the deficit is estimated to be 1,800 millions. T h e war time defense expenditures for the same fiscal periods are, respectively, 1,057, i»6oi, and 1,450 million kronor. T h e changes in the Swedish double budget, interpreted from an analysis made by Sunt Fornuft, September, 1941, are presented on pages 41 and 42. These tables show in approximation the trends of the budget policies. T h e rise in "Defense taxes" and "Turnover and Sales taxes" indicate especially the functional price control policies of the Swedish Treasury.

SWEDEN

41 THE NATIONAL BUDGETS

Incomes on Current Budget 1038-30 1930-40 1940-41 Taxes, incl. of custom duties and excise taxes 1x04.8 13692 1597 1 Receipts on Gov. acc. (fees) SO.O 68.S 67 S From public pension fund SS.6 77.8 77-5 Miscl. revenue 25-8 35.6 85.7 Revenues from Gov. enterprises 187.1 249.1 276.4 Total incomes on current budget The largest tax income items are Income taxes Defense taxes Automobile taxes Custom duties Turnover and sales taxes Tobacco taxes Liquor and malt taxes Expenditures Current budget Royal Household Justice Department State Department Defense Department Interior Department Communications Department Finance Department Education Department Agriculture Department Commerce Department Supply Department Pensions Department Unforeseen expenses Cost of Parliament and Audit, etc. Total essential State expenditures Expenditures for air service Interest on Public Debt Write-offs Total expenditures for State capital fund Total expenditures on Current budget Capital budget Gov. business activities Air Service Fund Gov. Real Estate Funds Gov. Loans Fund Loan guarantee Funds Funds for Gov. owned stocks Gov. Reserve Funds Miscl. Capital Funds, etc. Excess ( + ) resp. deficit (—) on current budget to be added resp. subtracted Gov. budget equalization fund

1441.8 262.2

1849.3

335 -4 157 • 7

2036.6

437 0

IO4I-42 :

I7I3-9 46.6

45.0

28.5 246.0

2080.0 425.O 265.0

103.4 197.6

128.8 256.8

26S. 9 29. S 128.3 73-9 166.2 280.9

1.8 16.2 8.3 234 3 3142 138.5

2.0 16.8 13.7 1289.3 352.4 125.3 62.2 235-6 138.8 41-3 30.0 53.8 2-3 8.2

2 .0 I8 .2 10 .6 2010 . I 399 -7 77 • 5 94 •4 254 .6 179 •4 38 -7 59 -7 57 • 7 0•3 10 .0

1.8 18.3 9.0 2110.3 429.2 108.8 68.2 265.0 152.9 23-7 173-1 70.8 1.0 7.6

2371.7

3212. 9

3439-7

I.3 145 5 54 3

1.2 187.2 732

130.2 206.9

66.s

231.0 109.2 32.S '58-8 6.3 5.6 1223.2 1.3 91.1 33 0

1273 207.8

1-4 98.3 42.2

250

140.0 245.O 160.0 208.0

125.4

I4I-9

201. I

261.6

1348.6

25136

34*4-0

3701.3

82.6 1.6 II.8 32.3 5-4 0.1 95-5

122.2 I.I 19.7 36.4 11.1 9.0 166.4 0.2

I26. 5 3 2 71- 8 36.6 6. 6 19- 0 198.6 2. 0

134-1 2.1 90.3 63.7 80.8

229.3

366.1

464.3

446.3

+46.2

—924.4 —1608.8

1 Estimates made prior to the autumn session of Parliament. » Estimated deficit.

'7^8 35

—1621.0»

42

Price

Control:

TABLE NO. 2

SELECTED I T E M S * [In percentage of total current budget income per fiscal year)

1939-40 1940-4* mT~42 J 17.6 21.5 9-9 I 1 12.6 38-5 1.0 1.6 1.6 1.2 i-3 2.4 2-5 3-5

Income tax Defense tax War excess profits Special asset tax Stamp taxes Automobile taxes Custom duties Turnover and sales taxes Tobacco taxes and net income (Government monopoly) Liquor and wine taxes and net income (Government monopoly) Beer taxes Postal service Telegraph and telephone service (Government monopoly) State railways Gov. water and power plants, etc. State forests, etc. Bank of Sweden (share in profits) Government owned stocks

6.7

11.2

1.4

1942-43 19-3 15.0

1.1 2-3

.8

.6

6-3 3-6

12.6

5-5

5-2 12.5

8.2

8.2

7-9 II.O 1.4

.8

10.5 1.6 .8

5-°

2.0 4.8

2.0 4.6

2-3 4-3

1.1 •9

1.1 •7

i-3 •7

i-3 •7

.8 .8

.4

i-9

1.1 1.0

6.9

12.0 1.8

1.0

2.0

II

*5 !-9

i-3

1.0

* Data calculated from basic figures assembled by Affarsvarlden, 194:

SWEDEN

43

These taxes in combination with other tax increases indicate the efforts to absorb additional purchasing power. T h e turnover and sales taxes are also responsible to a small extent for the increase in the costs of living. As a whole, Sweden has followed the principle of "half and half" in her war time budget. T h i s means, essentially, that about fifty per cent should come from taxation and fifty per cent from borrowing. This general statement needs clarification, however. T h e nondefense expenditures on the current budget have been covered by taxes and other forms of government income. T h e defense expenditures are divided into two groups. One, regarded as "normal," the other as "extra-ordinary" because of the international emergency. T h e "normal" expenditures may be thought of as the costs for the permanent military organization in peace time. These costs are covered, generally speaking, by taxes. Only the emergency military outlays are not covered by taxes, but by government borrowing. It is a fallacy, therefore, to say that Sweden has not relied upon taxes to cover the cost of military preparedness. Such statements have been made by Swedish economists, however. In giving these views, they overlooked, seemingly, the ordinary, or "normal" defense costs. Table No. E in Appendix shows the general trend of government borrowing. IV Four months before the war between the great powers began, or in May, 1939, the Swedish Parliament passed a law in order to give the government power to establish maximum prices in case of national need. T h i s maximum price law was essentially a counterpart of a similar law which had been in force during the first

44

Price

Control:

World War and its immediate aftermath. It is noteworthy that the Swedish legislators were ready to pass a bill in anticipation of economic events rather than to wait until events themselves made it mandatory. It appears to have been evident to the government of Sweden for many years that laws must be passed in advance, preparing the ground for swift government action in the event of an economic emergency, since parliamentary debates may impede effective action. This has often been referred to by persons inclined to question the efficiency of a democracy as the essential drawback of this form of government. Another interesting feature of the above-mentioned price control law is that it was made applicable in times of "war" as well as in times of "abnormal circumstances" resulting from war. T h e Swedish government, hence, attempted to foresee some domestic economic difficulties as a result of a military conflagration between any great powers. It was realized that nervousness, in its economic implication, might very easily cause price dislocations on the purely domestic market, especially as the public at large had been accustomed for many decades to view their own price problems, including the cost of living, from an "international" point of view. A t first this may seem to be an overstatement. It must not be overlooked, however, that a considerable portion of the Swedish population is employed directly or indirectly in production of goods that either need a selling market abroad, or must rely upon a buying market for raw materials and semi-manufactured goods. Unless this situation is understood, one will find difficulty in realizing the important roles played by two index series viz., the prices of imported goods and the prices of exported goods.

SWEDEN

45

In the price law of May, 1939, the Swedish government was "enabled under certain conditions to fix a reasonable price, which in voluntary sales may not be exceeded." 5 It is significant that the law referred to any commodity which was deemed to be of importance for the requirements of the population or for production. 8 Both monetary and social welfare were the basis of this anticipatory legislation. T h e standard of living, production, and the purchasing power of the currency at home and abroad seem to have been the essential considerations. In the price control program of 1931, emphasis was placed on the purchasing power of the krona in the hands of the average consumer. In this new program retail prices were again of primary concern. A t the outset the problem of stimulating production was of secondary importance. T h e problems of the external value of the krona were somewhat less at this time, perhaps partly because of the foreign claim position of the Bank of Sweden and the leading commercial banks. T h e maximum price law was in reality "a cost of living law." 7 In this law the term, "a reasonable price," was used. Its meaning can vaguely be interpreted as an intention on the part of the legislature to mean such a price as would include only the essential elements of production costs and a fair profit. A fair profit is difficult to define. Presumably it meant the usual ordinary profit margin in any given business. Hence the law was vague. Yet it should be realized that the government entertained no thought of applying it unless it became clearly necessary Scandinaviska Banken Quarterly Review January 1940. «Ibid. * Ibid.

5

46

Price

Control:

to take action. In Parliament hopes were expressed that business as well as industry would voluntarily attempt to avoid unnecessary price increases. It was hoped also that government moral suasion might forestall the need of direct interference in the pricing processes. A n o t h e r item of significance was concerned w i t h the question of price ceilings f r o m the point of view of production. T h e potential dangers of scarcity were realized. Production, especially for the domestic market, should be stimulated. M a x i m u m prices, if and w h e n they were actually made effective, should be sufficiently high so as not to curtail individual initiative. A f t e r the outbreak of the war in September, 1939, this m a x i m u m price law was put into effect. A t the same time another emergency law was passed by Parliament. T h i s new law gave the G o v e r n m e n t power to requisition commodities from individuals against compensation. It was called the Requisition L a w . In calculating the compensation to individuals the law provided that consideration should be given to what was " d e e m e d reasonable with due regard to unavoidable costs in production or retail sale, normal trade profit, or other factors w h i c h normally affect the fixing of prices." 8 Requisition against compensation could now be made not merely for purposes of military defense, b u t also for reasons of importance for the population and production. T h e n in November, 1939, Parliament empowered the G o v e r n m e n t to render aid to the importers by assuming certain risks in connection with importation of goods in war time. W h a t has been said above is essentially an outline of the legal foundation of Sweden's direct price control. 8

Government

Bill N o . 284.

SWEDEN

47

The interesting point is that those in charge of the price control policy have made every effort to avoid enforcing the maximum price law. Instead they have relied almost exclusively upon voluntary agreements. It has proven possible to bring about satisfactory price agreements without the use of government compulsion.9 Private enterprises have shown understanding of the government's desire to avoid sharp price rises and they also have been loyal to their voluntary agreements. One should not overlook the fact, however, that the very existence of laws permitting the government to control prices directly has been of great service in inducing voluntary agreements. An understanding of the limited nature of the direct control of prices is necessary in order to appreciate the policies followed by those in charge of this work. Since the outbreak of the war prices have risen largely because of events beyond the sphere of direct control. An increase in the price of imported goods, a rise in the price of domestic farm products, coupled with an upward trend of wages, may be regarded as prime causal factors. It has been the responsibility of the Price Control Board to prevent these prices from inducing undue price changes within the fields of industry and commerce. Hence, the work of supervising prices was, in fact, from the very beginning an attempt to check inevitable price rises. Much of the work of this Board has consisted of the supervision of price changes in relation to increasing costs. As a whole, the Board has attempted to restrain price rises which might occur as a result of 9 This section is based on an article written by Dr. E. Lundberg in Fran Departement och Namnder, 1941, No. 4.

48

Price

Control:

mounting profits at home. This has been done by scrutiny of cost increases. T h e Board has thought it advisable not to fix any definite prices. Instead, it has tried to make rather universal use of voluntary price agreements even though it possesses the right to fix both maximum prices and socalled normal prices, and also has the power to regulate some aspects of trade. It is worthy of note that the voluntary price agreements which have been made between the companies concerned and the Price Control Board cannot be superseded without examination and approval by the Board. T h e Board has operated in close cooperation with the price bureaus set up by the Federation of Swedish Industries, the Swedish Wholesalers Association, and the Union of Swedish Merchants. T h e Board obtains pertinent data from these groups, and in certain cases the decisions of the Board have been handed down through these private price control bureaus. Almost all hicreases in costs since the war began have been concerned with variable elements, such as fuel, materials and wages. Each company is under obligation to report the volume used and the prices actually paid prior to the outbreak of the war in September, 1939. The cost calculations of the individual companies must be based upon the normal market prices which prevailed immediately before the war (August, 1939). No anticipation of higher prices was permitted to enter these cost estimates, and because of this practice the margin of error in the evaluations made by the Board have been fairly small. All calculations have been based upon the costs per unit of product. As a rule, any additions relative to fixed costs and profits have not been permitted. As a matter of principle only those cost in-

SWEDEN

49

creases which could be accounted for and clearly specified have been taken under consideration by the Board. In some cases it has happened that the prices prevailing immediately before the outbreak of the war were such as not to be considered as normal market prices. In these cases cost adjustments have been made. T h i s does not mean that the fundamental principle has been discarded. T h i s general principle does not permit a raising of prices for the purpose of covering increased fixed costs per unit of product if this increase relates to a decline in production or sales. Compensation for increased fixed costs is not in accordance with the aims of direct price control. Compensation for any decline in output, which for some reason is connected with the curtailment of production of profits, in one or several branches of operations, may not justify price increases. T h e same principle holds true for the price of goods in the various stages of production and commerce. One of the difficulties has been that cost calculations are more readily obtained from industries than from commerce. Nevertheless voluntary price agreements have been made in the field of commerce on the basis of available statistical data. O n July 1, 1941, the Swedish Parliament passed its latest price control act. This law is intended to replace the maximum price and price control legislation heretofore in force. " T h e new Act entails an extension of the powers vested in the Price Control Board involving, among other things, authority to impose the duty of notifying the Board of all prices charged and to stipulate that a certain time—generally a week and not more than a month—must elapse before any increase in prices may be effected. Anyone exceeding the fixed

50

Price

Control:

normal price without permission to do so will be subject to a penalty. T h e government's former powers to compel the forming of cartels and to prohibit the starting of new business enterprises have been made still stricter. Further, a general clause against profiteering has been inserted in the Act. In the preamble to the Act it is stated that the enhanced powers of control should, in keeping with the system of price supervision hitherto adopted, be exercised only insofar as the results aimed at cannot be attained by voluntary agreements. As to the general principles on which the current price control is to be extended, it is suggested that an increase in variable costs may as a rule justify a rise in prices, provided the price level from which the increase is effected can be deemed reasonable. O n the other hand, increased scarcity is not an adequate ground for raising prices, nor is any increase in unit costs that arises through the fixed costs being spread over a reduced volume of production." 10 T h e supervision over prices that existed prior to the new law of July 1, 1941 did not embrace all goods. Only those goods which were regarded as vital for production and consumption were considered by the Price Control Board. But the field has been steadily widened through reports of undue price rises from a number of private sources. T h e system of voluntary price agreements has been regarded as much smoother than any application of legal maximum prices. As scarcity increased, it was thought unavoidable to apply fully the legal powers possessed by the Board in specific cases without disIndex, 7.

10

p.

Svenska H a n d e l s b a n k e n , Stockholm, June, 1941, N o .

162,

SWEDEN

51

carding the desirable principle of relying upon voluntary agreements. In addition to the Price Control Board and the various privately organized price control agencies a special Price Bureau has been established. This Bureau has dealt largely with the national defense needs. It has formulated norms for the prices of defense materials. Hence it is charged with the responsibility of arranging prices for deliveries to the defense forces. These deliveries are, as a rule, determined both from the points of view of quantity and of quality. In peace time no price control has been found necessary or desirable as free competition has given the government opportunities to buy at low prices. If the defense program had actually begun a few years before the outbreak of the war, the defense materials could undoubtedly have been purchased at much lower prices than is now the case. Now a considerable portion of the industrial equipment has had to be utilized for military production. And it is noteworthy that industrial production had reached full capacity prior to the outbreak of the war. In this situation, the Swedish government entered suddenly as a buyer on a very large scale—sometimes demanding almost one-half of the capacity of certain industries. If the market had been left perfectly free, then the government would have been forced to bid higher than private buyers. By its own demand the government would have raised prices against its own interests. Hence, it became necessary for the government to institute price regulations in order to protect itself against the consequences of its own increased demand. Prior to the war, a number of purchase agreements had been made between the government and certain

52

Price

Control:

private industries. These industries were under obligation to start production of these goods whenever the government gave the instructions. But these industrial mobilization plans were not fully worked out. Insofar as prices were concerned these purchase agreements carried a clause saying that prices should be arranged between the government and the sellers within a specified period after delivery. If no satisfactory agreement could be reached the questions should be decided by three arbiters—one to be chosen by the buyer, one by the seller, and the chairman to be selected by the Royal Board of Trade. According to these agreements the government was given the right to examine the books of the companies involved, thus making it possible for the government to exercise a certain influence over prices. The Price Bureau, which deals with the problems of large scale government buying of military defense materials, was faced from the very outset with the problem of the principle which should serve as a basis for all prices of defense goods. The Price Bureau began its work by selecting a number of contracts in various fields in order to ascertain what questions were generally raised, and on the basis of this experience a memorandum was drawn up setting forth the principles of pricing for military deliveries. This memorandum has remained a main guide in the work. A most important principle is that the industries as quickly as possible shall know the exact price. A fixed price is in the long run of basic importance in order to force industry to perfect production and thereby lower the unit cost. Every thought that industry should be

SWEDEN

53

allowed to operate for the government on what in America is called cost plus profit was banned, as such a system eliminates the interest in cheaper production. Efforts have been made to institute uniform prices for the same commodities disregarding the circumstances under which any particular company operates. As far as raw materials are concerned, the cost of replacement has been a guide in the price calculations. With the blockade, the influx of raw materials has been sharply curtailed and under these circumstances the price of replacement has been difficult to determine. Such conditions have made it necessary to calculate the replacement price on the basis of prices prevailing prior to the blockade. Wear and tear on machinery and interest as well as profits are permitted to enter into the cost items only to the extent that they have a direct bearing upon the government contracts. As reasonable cost increases have to be carried by the government, any decline in costs that may occur during the period of the agreement shall be allowed to benefit the government. 11 T o these general principles a few comments should be added. T h e first one is that the principle of volitional agreements are still adhered to despite the new powers given to the Price Control Board in the previously discussed act of June 13, 1941. T h e second point is that greater attention has been given to "normal" prices then previously, without invoking the legal rights of establishing fixed prices. T h e third point is that the Price Control Board is by no means the sole price control agency in Sweden. In addition to the aforementioned subsidiary and collaborating institutions, we find 11

Drawn from an article by Ruben Rausing in Ekonomisk

1941.

Tidskrift,

54

Price Control:

a number of permanent government bodies which supervise and control price movements through subsidies and rate fixing. This refers especially to agriculture and the public utilities as well as the national government monopolies. Other bureaus, essentially temporary in nature but gradually becoming more influential and centralized during the present emergency, are the Food Commission, the Industrial Commission, the Traffic Commission, the Commerce Commission and the Labor Commission. These organizations are directly and indirectly serving as agencies for price control and rationing. As regards the membership, expert knowledge rather than political merits has been decisive, a condition not true during the first World War. Today every effort has been made to include leaders of the private economic organizations on the boards of these commissions. Each commission has five to seven members in addition to advisory boards which are summoned from time to time, or else represented by specialists. The boards are further augmented by staffs of civil service experts. It is an unwritten law that the industrial and agricultural organizations release their own experts for service on the commissions. The general work of the commissions is done in close contact with private enterprise, a practice which has led to mutual confidence. In order to bring about coordination in the general emergency administration the Government established in October, 1939 the Department of Public Supply. Matters which normally would have been referred to various other governmental departments are now handled by this body.

SWEDEN

55

It has been found necessary also to establish special bureaus in the provinces and the communities. T h e r e are now thirty-three such local boards aided by 1,500 local bodies. Their work has been largely to supervise food and wood production as representatives of the Food and Fuel Commissions. T h e y are also empowered to control trade and rationing within their fields. T h e Industrial, Commerce and Traffic Commissions, however, have only to a minor extent made use of similar local institutions. A n interesting observation may be made here. T h e Food Commission this time has found a satisfactory rationing procedure. It issues special ration cards which do not refer to any specific commodity. In order to avoid hoarding and other like difficulties the Commission can now and without prior notice announce rationing of a new commodity. T h e rations may be obtained by surrendering a certain coupon of this special card until the Commission has had time to print and distribute specific cards for this product. It has not proved possible to establish any uniform methods of handling commerce. Each intervention and each regulation has been considered in the light of prevailing conditions in each field. As a rule every effort has been made to utilize existing private channels, bringing them in under the general system of economic planning. In this way disturbances to private enterprise have been avoided and it is also hoped that by this method the return to "normalcy" will be facilitated after the end of the emergency. 12 1 2 Hastad, Elis, "Government Control of Supplies in Sweden," American Swedish Monthly, New York, January, 1942, Vol. 36, No. 1.

Price

56

Control:

TABLE NO. 3

T H E CONSUMPTION PRICE INDEX OF BANK OF SWEDEN

THE

[September 1931 = 100) Items

Food, etc. Milk, butter, cheese Meat Pork Eggs Fish Potatoes, flour and bread Garden products Groceries, etc. Spirits, tobacco, etc. Rent Fuel, light Clothing (general) Clothes Shoes Inventories Other expenditures

June

1939 118.1

mi

m

160.2

171.6

127.0

142.6

156.5

117.7

174.2

177.8

138.9

199-2

205.0

120.4

173.2

203.3

97-6

162.6

199-8

104.8

125.9

128.3

109.9 107.0

152.3

168.9

171.6

180.7

124.0

172.7

186.2

(96.5)

General index

December

August

1

101.2

(98.9)

(98.9)

161.9

165.8

103.8

157-9

165.1

107.0

166.8

174.4

97-2

133-5

138.8

102.6

136.6

142.2

98.3

116.5

121.0

107.3

141.6

148.3

V Have the Swedish policies been effective? Considering all circumstances, the answer must be yes. True, the cost of living has increased, retail prices have advanced, and wholesale prices have risen considerably. Yet the war against inflation has not been lost. T h e price rises ex-

SWEDEN

57 TABLE NO. 4

EFFECT

ON

COST

OF LIVING OF

CHANGES

IN

July i, 1939 to April Items Farm products Milk Butter Cheese Eggs Potatoes Yellow peas Flour and bread Meat Pork Sugar Other foodstuffs Margarine Fish Fruit Coffee Cabbage Malt beverages

Total

1,1941

Price Effect on Cost Relation to Weight Changes of Living Index Price Rise 28.06 29.8 909 31-4 6.38 20.0 1.38 4.8 2.48 0.1 0.04 !-3 1.16 60.5 0.77 2-7 1.86 68.2 1-53 5-3 1.0 21.4 0.28 1.22 0.19 0.16 107.2 0-5 20.6 1.24 4-3 5-79 36.4 1.31 3.21 4-5 4.03 1-99 6-9 43-3 1.74 22.0 1-3 0-39 6.63 1-43 1.32 1.82 1.14 0.19 0.73

Wood, gas, electricity 2.60 Coal and coke 0-59 Rent 14.82 Clothing 10.43 Shoes 3-49 Taxes 6.49 Household goods 3.84 Other expenses Tobacco Liquor

PRICE

%

23-05 1.14 1.63

+ + + + + + + + + + + + 5°-3 + 11.4 + ][14.4 + 48.7 + 59-8 + -5 + 30.2 + 42.7 + 69-7 + 2.6 + 34.6 + 36.4 + 30.0 + 33-6 + 20.7 + 39-2 + 68.9 11

100.0

SOURCE: Business Cycle Institute

+ + + + + + + + + + + + 3.21 + 0.18 + 1-35 + 0.82 + 0.62 + 0.02 + 0.22 + 1.09 + 0.42 + 0-35 + 5.68 + 1.30 + 1.98 + 131 + 4-57 + 0.40 + 1.17

+29.00

11.1 0.6 4.7 2.8 2.1 0.1 0.8 3.8 1.4 1.2 19.6 4-5 6.8 4-5 15-7 1.4 4.0 100.0

58

Price

Control:

plained in the tables below as well as in the appendix give a detailed picture of the price movements since the beginning of the emergency.

table no. 5 WHOLESALE

PRICES

(Averages 1913-1914 Items

Vegetable foodstuffs Animal foodstuffs Agricultural supplies Coal and coke Fuel oils Metals Building materials Textile goods Hides and leather General index

= 100)

1929 Averages

1938 Averages

1939 Averages

1940 Averages

1941 Averages

116 186 128 127 128 118 172 171 100 134

120 129 "3 156 103 I5 1 164 95 72 128

114 138 116 195 112 140 177 112 80 132

160 158 !35 333 183 I I 5 205 153 107 173

179 193 140 317 340 157 214 155 117 191

Source: Finanstidningen. From these data it appears quite clearly that the essential price raising forces are to be found outside of the Swedish economy. Increased farm prices at home have no doubt added to the upward trend of the cost of living. A close analysis of the Swedish price data does not justify the assertion that the Swedish farmers, heavily handicapped by extraordinary weather conditions, are responsible for the increased dearness of living. Nor can it be said that the labor unions, through their de-

SWEDEN

59

mands for reasonable wage adjustments, have been responsible for the rise in living costs. Such assertions are not justified by available facts. It is true, however, that wages have risen, that farm prices have increased, and that the additional purchasing power thus brought on the market has offered potentialities for continued price increases. But it is more accurate to say that foreign price movements, both as regards the vital import trade and the traditional export trade, have most strongly shifted the domestic costs of production upward. T h e Swedish war against inflation may very well be called a war against scarcity of raw materials, as well as a war against artificially created purchasing power. T h e cost increases which have occurred are traceable to the changed international economic situation. A n d it is against these inevitable cost changes that the price control authorities have worked. It is extremely interesting to observe the gradual decline in the rate of increase in prices after it became possible to adjust domestic production to available raw materials. T h u s price adjustment has been closely associated with changing techniques of production as well as necessary developments of substitutes. T h e statistical data presented in the text and in the appendix justify thoughts that the Swedish authorities must remain alert in their war against inflation on the front of increasing purchasing power. A l l available reports indicate that the financial and fiscal authorities have been and are aware of this danger. T h e y realize, and so does the Swedish public, that this war must be fought on the side of production—i.e., supply—just as much as on the side of demand—i.e.,

6o

Price

Control:

excess purchasing power. With this realization in mind, considerable attention must be given to imports and exports. Detailed data on these topics is not available to the student of general economics under present world conditions. T h e T a b l e No. 6 portrays, however, in general terms, the export and import situation during the last four years. As far as possible, Sweden has tried to handle her vitally important foreign trade along peacetime channels. She has made use of the internationally recognized principles of trade agreements. Also, she has not favored herself by any extraordinary trade arrangements. Sweden has suffered severely through the almost complete curtailment of her transatlantic trade. T h e shipping losses in the North Sea trade have been heavy, indeed. T h e raw materials used in domestic consumption and home production obtained from United States and other parts of the Western hemisphere have offset to a small but vital extent the virtual blockade caused by Germany's invasion of Norway. Under these circumstances, the Swedish government has found it necessary to direct through clearing agreements and trade treaties the import and export trade to countries within the available trading sphere. It has been possible to utilize the principle of free monetary exchange only with Switzerland and Hungary. T h e other trade agreements with Denmark, Norway, Finland, Germany, Holland, Belgium, Italy, and Soviet Russia are based on government control and financial clearing arrangements. T h e price statistics cannot give a complete picture of the influence of import and export prices on the

SWEDEN

61 TABLE NO. 6 SWEDEN'S {Preliminary

EXPORTS

values in million of kroner)

Foodstuffs Minerals and metals Chemical products, fertilizers, etc. Textiles, leather and rubber Forest products Machines, means of transportation Total SWEDEN'S

1938-1941

m 8 150

Total SOURCE: Svensk Utrikeshandel,

I

94°

W 68

133 577

73 491

51 60

48 60

44 33

673

718

486

34 13 49 1

311

333

211

197

1843

1879

1338

598

IMPORTS

Foodstuffs Minerals and metals Chemical products, fertilizers, etc. Textiles, leather and rubber Forest products Machines, means of transportation

1939

548

1351

1938-1941

395

388

304

674

883

679

234 537

167

231 469

176

162

53

371 29

365 30

413

466

440

344

2082

2489

1999

1672

384 49

February, 1942.

wholesale and retail price movements within Sweden. T h e problem of changing transportation costs cannot be overlooked. But it is not possible to draw any accurate

62

Price

Control:

conclusions regarding their influence on domestic Swedish price movements until complete data is made available. Production since the outbreak of the war has declined, but this decline has been very uneven. T h e most pronounced decrease is found in those industries which have been accustomed to rely upon imported raw materials and foreign markets. A detailed summary of production changes is in the appendix, Table B. It is seen there that the total volume of production increased slightly u p to the time of the western blockade. Since then the volume of production taken as a whole declined quite rapidly until the middle of 1941. From then on a rather amazing change has taken place. T h e decline has stopped. And the indexes remain virtually unchanged. This development justifies the assertion that it has proven possible to readjust domestic production to the new conditions. It should be borne in mind, however, that the statistics do not fully represent the actual situation because of the rapidly changing circumstances, especially as regards raw materials and plant utilization as well as decreasing inventories. This difficulty of analysis cannot be overcome until new production indexes are developed. Under present circumstances, a considerable degree of lopsidedness in production is unavoidable. Substitute production, handled to a large extent via government subsidies and direct government initiative rather than individual enterprise, has partially offset the sharp declines that have occurred in Sweden's "international industries"—e.g., pulp and paper. T h e reasons for government "interference" in the production of substitutes for normally imported goods should be traced to the experiences of the first world war.

SWEDEN

63

" T h e losses sustained by such producers after the end of the last war are still too vividly recalled! Increased taxation has also tended to deter private initiative in these fields. Hence the Government has found it necessary to undertake such production or to subsidize it. T h i s has been done in a number of different ways. One gives permission to the Government to form corporations and invest its own funds in the new company. Another way allows the Government to give direct subsidies to private individuals, who undertake the actual production. Again, the Government may reach an agreement with producers whereby they are guaranteed, for a specified period, a price sufficient not merely to cover ordinary profits but also high enough to care for writeoffs on the original investment during the contract period. By a fourth method the Government grants loans on favorable terms. At times such loans have been made in connection with Government price and market guarantees. Finally, new producers are offered lower taxes, if not complete exemption from war surtaxes." 13 S U M M A R Y AND NOTES

Which, then, are the most important causes of the price rise in Sweden? Three factors are of dominant influence. T h e first one refers to prices on imported goods, the second to the two unusually bad harvests, and the third to the wage increases. Import prices rose from 110 in August, 1934 to 304 in December, 1941. T h e corresponding figures for exports are 114 and 166. There can be little doubt that the extraordinary increase in the index for import prices 1 3 Hastad, Elis. "Government Control of Supplies in Sweden," American Swedish Monthly. New York, January, 194a, Vol. 36, No. 1.

64

Price

Control:

is a key to the rise in general wholesale prices. T h e disparity in the movements of import and export prices may very well be looked upon as the fundamental cause of the decline in real incomes, both as regards wages and profits. Farm wholesale prices have risen from 117 in August, 1939 to 178 in November, 1941. T h i s increase is somewhat less pronounced than the rise in the general wholesale price level, but if a comparison is drawn between farm wholesale prices and other domestic wholesale prices (excluding import and export prices) then the influence of the increase in farm prices becomes more apparent. These two factors have not been within the sphere of direct price control. T h e same holds true for wages which have been increased approximately thirteen per cent for industrial workers, and still more for farm laborers. T h i s has led to higher domestic prices. But the exact extent of the influence of higher wages on the general wholesale price level cannot be readily determined. Changes in Swedish imports and exports in terms of Swedish kronor are given in T a b l e No. C (appendix). These changes refer to the period January through December, 1940 and 1941. T h e total money value of exports and imports for 1940 was 3,337.2 millions of kronor. In 1941, the total foreign trade declined to 3,022.4 millions of kronor. T h e corresponding figure for 1939 was 4,387.8 millions of kronor. T h e value of imports declined by 16.4% in 1941 while exports increased by 1 % . T h e export increase may be attributed to price changes. T h e decline in imports, on the other hand, is very largely due to transportation and market difficulties. Since April, 1940 (the invasion

SWEDEN

65

of Norway) Sweden's foreign trade has been confined almost entirely to the European countries. In 1941 only 1 0 % of Sweden's total trade was transoceanic. One of the most important reasons for Sweden's prosperity in the two decades following the last world war was in large measure the favorable developments of Swedish export prices. These advantages have now vanished. Furthermore, the changed German price policies have to a considerable extent influenced the import prices. This subject is amplified later in the text (see Switzerland). After twenty-eight months of price control, from September, 1939 to January, 1942, Sweden has experienced many phases of this general problem. The prevention of a disasterous inflation, however, has always remained the cardinal issue. So far no signs of such an inflation have appeared, despite the fact that prices have risen quite sharply. It is not possible, however, to prognosticate the future developments with any degree of certainty because of the complexity of the economic forces involved. In the beginning of the price control program, especially after the German invasion of Norway, considerable stress was placed on the question of stimulating domestic production. At the end of the period considered here, the question of excess purchasing power commands attention. While some tax increases are still economically feasible, the consensus of opinion seems to be that taxation no longer can be made sufficiently far-reaching to absorb entirely the excess buying power. Rationing is very effective for this purpose. And rationing is increasing steadily in Sweden. Nevertheless, a great number of

66

Price Control:

commodities still belong to the so-called free sector of the market. Here, rigid direct price control appears necessary unless other means can be found to stem the tide. It has been suggested that sterilization of excess purchasing power may be achieved by stimulation of private saving, curtailment of non-essential government expenditures coupled with increased efficiency in the tax collection systems. In addition, it has been thought that recommendations against further increases in dividend payments should be made, and that if these recommendations are not effective, legislative actions should be considered. Criticism against the government farm policies have been voiced. The wage and salary agreements, on the other hand, have been less criticized. However, both the higher wages and the higher farm prices have added to the increased cost of living. Sweden's virtual economic isolation after the Spring of 1940 coupled with Germany's failure to deliver the contracted amounts of coal and coke and the two unexpectedly small harvests in 1940 and 1941 have made living conditions not fully as good as in the previous years. From a nutritional point of view the Swedish people do not appear to suffer any hardships. The menus have been changed, but the food values have been well maintained. But obviously, the standard of living has declined somewhat since September, 1939.

67

SWEDEN

Statistical Appendix TABLE A

WHOLESALE PRICES1 (Averages igij-igrj.

=

100)

O 1a " "8 ¡ 3§ •g 0a '"S C k, X Co ü 0