Managed Money. the Experience of Sweden 9780231886055

Citation preview

MANAGED

MONEY

The Experience of Sweden

A COUNTRY'S DEMAND IS NOT FOR A CERTAIN AMOUNT OF M E T A L L I C [OR O T H E R ] C U R R E N C Y ; B U T FOR A N AMOUNT OF CURRENCY WHICH HAS A CERTAIN PURCHASING POWER. ALFRED MARSHALL, " M O N E Y , CREDIT AND C O M M E R C E . "

MANAGED

MONEY

The Experience of Sweden

BY

E R I K T. H. K J E L L S T R O M W I T H

A

F O R E W O R D

H. P A R K E R

BY

WILLIS

PROFBSSOK OF B A N K I N G I N COLUMBIA

NEW YORK

UNIVERSITY

•

M O R N I N G S I D E

COLUMBIA

MCMXXXIV HEIGHTS

UNIVERSITY

PRESS

COPYRIGHT

I 9 3 4

COLUMBIA UNIVERSITY PUBLISHED

PRESS

1 9 3 4

P R I N T E D IN THE U N I T E D STATES OF AMERICA THE CAYUGA PRESS

•

ITHACA, N B W YORK

TO

My

Father

Foreword

Economists have never given to Sweden, or to Scandinavia generally, the attention that those countries deserve by reason of their long experience, their conservative standards, and their regard for their obligations. There has been a notable increase of recent years among British observers with respect to their interest in and attention to the Scandinavian states, and this growth has been particularly noticeable as concerns Sweden. American inquirers, on the other hand, had still maintained the attitude of neglect which had been so long characteristic, until, within the past two years or so, monetary and banking developments have become so urgent as to necessitate the search for information and new points of view in every country, no matter where situated, that offered real results of experimentation or theoretical inquiry. Their attention once drawn to Swedish conditions, there has, as often happens, been some tendency on the part of those who had thus "discovered" Sweden to find unexpected demonstrations of their own preconceived ideas, and remarkable exemplifications of monetary doctrines which for unexplained reasons had failed to " w o r k " elsewhere. Thus there has, of recent months, sprung up a superstition regarding Swedish "management" of

viii

Foreword

money and banking, which has been widely advertised and exploited by academic and other adherents of the view that it was possible to move price levels about practically at will, by mere shifting of the quantity of credit "released" by a central bank, or by direction of the price level after other methods. The consequence has been the practice of dogmatically asserting, whenever exception was taken to some impossible or absurd application of monetary "management," that: " I t works in Sweden, why not here?"—and as to this, inquirers into the truth have found a dearth of adequate material available for their study. Swedish economists, although often writing in languages other than their own, naturally devote themselves chiefly to facts as they observe them locally and write primarily for their own readers. Thus a considerable degree of explanation and interpretation is necessary if their data and conclusions are to be made really applicable to conditions prevailing elsewhere. There was evidently a plain need for some careful study of the monetary policy and methods of the Bank of Sweden—the institution whose name has of recent months been so often taken in vain, and to which have been ascribed, by hasty exponents of "managed currency" ideas, such miraculous accomplishments in the way of foreign trade development, price control, and "stabilization" generally. Such a study is now afforded by Mr. Erik T. H. Kjellstrom. His study is written from the point of view of Sweden and with sympathy for and knowledge of conditions existing in that country. It is,

Foreword

IX

moreover, written with full knowledge of the current bibliographical data available in the Swedish language, which is Mr. Kjellstrom's own. But it is also written on the basis of M r . Kjellstrom's years of work in the United States, and his close examination of the American monetary and banking scene. Observation of the American conditions has enabled him to select those elements of Swedish experience most likely to be informative to students of money and banking on this side of the Atlantic, and to draw from them the conclusions and lessons that are most applicable to the situation that presents itself here. His book is thus a valuable sedative for the excited minds which are now evolving new and strange monetary theories which they (on hearsay) ascribe to Sweden as the originating source of experimentation. Among the many elements in Swedish experience which Mr. Kjellstrom has chosen for analysis, those which will stand out as of conspicuous interest from the standpoint of the American reader relate to the movement of prices and production, to the credit policy of the Bank of Sweden, and to the foreign exchange and foreign trade phenomena with which the institution has had to deal. His conclusions nowhere pretend to develop new and striking discoveries; and will be the more confidently and positively received, in consequence, by American students. The author finds that in Sweden —as indeed in the United States—it is out of the question to trace any close dependence of actual events upon the policies of the central bank. He

Foreword

X

refuses completely to accept the prevailing superstition of a central bank as earthly providence. Further, says Mr. Kjellstrom, Sweden's abandonment of the gold standard and the depreciation of the krona abroad has not brought much advance in domestic wholesale prices, while it has proven impossible to "pump out" credit into the " m a r k e t " —the effort so often and so vainly made by Federal Reserve banks in the endeavor to carry out what some of their directors have referred to as the "discoveries" they have made in the field of banking policy. Finally, as this monograph shows, the movements of import and export prices have been controlled much more largely by foreign market developments than by conditions within Sweden. " T h e monetary program has not been an adequate means to lift the country out of the grip of the depression." Mr. Kjellstrom's volume is not only interesting in itself but is published at a time when it should have a wholesome and informative influence in American monetary discussion. COLUMBIA UNIVERSITY I N T H E CITY O F N E W YORK FEBRUARY X I , 1 9 3 4

H. PARKER W I L L I S

Preface This book is offered to the public in the hope that it will help to explain to the layman the monetary program of the Bank of Sweden, which for some time has attracted a great deal of interest in this country. I have attempted to set forth the principal factors as they are disclosed in banking reports and in other publications. Any attempt to analyze the policies of a central bank meets with extreme difficulties, however, as much of the desired information is never made available to the public. This fact has made it hazardous to draw definite conclusions; whatever conclusions I have formulated are based, to the best of my knowledge, on reliable data. In preparing the manuscript I have received valuable aid from Professors Benjamin H. Beckhart and John M. Chapman of the School of Business of Columbia University. I wish to take this opportunity to thank them for the assistance they have rendered me. I also want to thank Mr. Vladimir Kazakevich and Mr. Fritz Schumacher for their painstaking criticism. COLUMBIA UNIVERSITY IN THE CITY OF N E W YORK JANUARY, 1 9 3 4

E. T. H .

K.

Contents FOREWORD,

by H. Parker Willis

vii

PREFACE

xi

I. Introduction

3

II. The Swedish Background

6

III. Sweden Forced off Gold

19

IV. A Few Elementary Concepts

32.

V. The Initial Objective and Its Principal Guide . VI. Progress of Events During the Latter Part of 1931 VII. Monetary Program Revised VIII. The Second Revision of the Program I X . Summary and Conclusions APPENDIX

42. 53 60

. . . .

80 91 98

BIBLIOGRAPHY

105

INDEX

107

Tables and

Charts

TABLES I. N u m b e r of offices and sum total of the deposits in commercial and s a v i n g s b a n k s

10

II. S w e d e n ' s f o r e i g n trade, 1917-1932.

18 2.1.

III. Balance of i n t e r n a t i o n a l p a y m e n t s , 192.8-1931 I V . W e e k l y changes in the B a n k of S w e d e n Index, O c t o b e r 11 t o December 1 7 , 1931

58

V . E x p o r t s and i m p o r t s of securities in 1931

.

66

V I . N e t s u p p l y of f o r e i g n e x c h a n g e , December, 1931 t o December, 1932.

67

V I I . Interrelations o f t h e pound s t e r l i n g , k r o n a , and d o l l a r in 1931

69

V I I I . W e e k l y changes in t h e B a n k of S w e d e n Index in I93i I X . M o n t h l y c h a n g e s in the B a n k of S w e d e n Index,

in 1933

73 87

CHARTS i . C h a n g e s in the rediscount rate

65

2.. T h e trend of the k r o n a in terms of f o r e i g n currencies

68

3. F o r e i g n and domestic p o s i t i o n of the B a n k of S w e d e n

70

4. T r e n d of w h o l e s a l e prices

71

5. Indexes of p r o d u c t i o n 6. D e p o s i t s and loans of c o m m e r c i a l banks 7. I n d e x of u n e m p l o y m e n t

74 .

.

.

.

78 81

8. C h a n g e s in the balance of trade

85

9. V o l u m e of r e d i s c o u n t i n g

88

10. C h a n g e s in w h o l e s a l e price levels

ioz

Managed.

Money

CHAPTER

I

INTRODUCTION Managed money is by no means a new invention. Over a century ago—more specifically, in 1 8 1 1 — Sweden employed managed money to avert distortions of her price structure. Yet today the words "managed money" and "managed currency" seem to carry a connotation of novelty, and at times one of an almost magic formula, by means of which the purchasing power of money can be kept constant or changed at the discretion of the manager. Indeed, some of the believers in " a new money era" go so far as to say that money and credit are the sole determinants of prices, while still others are firmly convinced that even the most heterogeneous price structure can be raised or lowered to a uniform and consistent level merely by setting an arbitrary price for gold. Even if these enthusiasts disagree among themselves regarding some of the more subtle principles, they still seem to have one belief in common; that price stabilization is a sufficient means to initiate and later to preserve economic prosperity. We are, no doubt, at present passing through one of the most bewildering periods in the history of business and finance. Conditions are chaotic. The old measure of values—money—no longer seems to serve its traditional purpose; and it is perhaps only

4

Introduction

natural that we arc all looking for a stable yardstick with which to measure our gains and losses. Innumerable instruments have been suggested for this purpose, some of them sound, others unsound; but few of them have received serious attention, and still fewer have found their way into the monetary programs of governments. Since the widespread departure from the gold standard, many countries have taken steps t o ' ' mana g e " their currencies. The objectives and methods vary widely. In the United States the Administration has declared its intention to obtain a dollar with unchanged purchasing power, not merely over a short period of time, but for the next generation as well. The devaluation of the dollar in terms of gold is regarded as a first step toward a '' managed money." For centuries man has dealt with money in one form or another, yet the problem of money and prices remains nearly as puzzling as ever. Indeed, the very concept of money as such is still clouded by a haze of contradictory beliefs and convictions. It is not the object here, however, to add to the denseness of this haze; rather, it is my purpose to present in simple terms the progress of Sweden's monetary program, in reference to which the Monthly Review of the Midland Bank of England for OctoberNovember 1 9 3 1 , says: It w o u l d be difficult to find an instance of a policy in monetary affairs more closely adapted to local conditions or more caref u l l y and e x p l i c i t l y defined than that of Sweden, w h i c h left the gold standard only a f e w days after Great Britain.

Introduction

5

Both in the United States and abroad t h e Swedish " m a n a g e d currency" p r o g r a m has been heralded by many as a success, as an example for other governments to f o l l o w , and as a t r i b u t e to national homogeneity. Whatever w e w r i t e or say about Sweden's monetary policy, no w o r t h w h i l e appraisal of the program can be achieved w i t h o u t some knowledge of local conditions, t h e f o u n d a t i o n upon w h i c h it rests, for it remains true t h a t monetary policies must always be based upon t h e inherent traits of people, their b a n k i n g h a b i t s , and the nature of their trade. A policy successful in one country cannot indiscriminately be imposed upon another nation, but some of the fundamental principles may well be applied elsewhere, always provided t h a t the transplantation is intelligent.

CHAPTER

The Swedish

II

Background

There is somewhat of an air of solidity about the average Swedish person, and those who had the opportunity of following at close range the unfortunate and devastating disclosures of the unforgettable Kreuger crisis could not but admire the sobriety of this Scandinavian people. Then, in the midst of crashing fortunes and financial bewilderment, the Swedish public remained calm, collected, but intelligently interested. No runs on the banks occurred, not even on the institution most intricately enmeshed in Kreuger's financial spider web. The government acted swiftly and w i t h a definiteness that caused widespread commendation at home and abroad. In the hastily summoned Parliament, socialists, liberals, and conservatives alike voiced their approval of the action of the Crown. Political affiliations and party dogmas were openly disavowed. The nation was in danger. It was a struggle to be waged by the entire nation, not one to be placed upon the shoulders of one or the other political party. It is this high-minded spirit of social and civic cooperation which some observers believe to be responsible, in no small measure, for whatever success the government's present monetary program has had. Such a contention is no doubt open

Ihe Swedish Background

7

to criticism, particularly in view of the fact that for more than a year during the term of the monetary experiment Sweden has suffered from widespread strikes in t w o of her major industries. Still, the recognized homogeneity of the Swedish population has served as a good foundation for the monetary policies of the Bank of Sweden. ECONOMISTS ARE I N F L U E N T I A L I N

SWEDEN

The science and art of economics has long intrigued the Swedish mind, and few nations can point with more pride to an internationally recognized group of economic thinkers. The economists take an active part in the solution of the nation's economic problems. They do not hide their knowledge under the cloak of purely academic interests. The reputed stability and sound economic progress of the country is not a mere coincidence, and although much credit must be given to the sobriety of the public in general, the work and efforts of the nation's economists should not be minimized. At present the Social Democratic Party controls the national government, and socialism enjoys a large following in Sweden. Some of the most important industries are state-owned or state-controlled. Nevertheless, highly " c a p i t a l i s t i c " enterprises seem to find little difficulty in adjusting themselves to the Swedish brand of socialism. 1 ' S e c M. W. Childs, "Sweden: Where Capitalism Is Controlled," M a f a z m , No. 1001 (November, 1933), pp. 749-58.

Harper's

8

The Swedish Background S W E D E N ' S STABLE B A N K I N G SYSTEM

Sweden has, in many respects, been a pioneer in world social and economic developments. In the field of banking the nation introduced at an early date a system of currency and credit which only years later became widely accepted in other lands. Nevertheless, it is characteristic of Sweden that her banking history has not followed an unbroken path. Instead, it has evolved spasmodically. Carefully planned policies, after working for some time with fair success, have often been subjected to interference from the Crown, only to be tried again in the course of evolution, and finally adopted, this time with state approval. On November 30, 1656, the town of Marienburg, in Prussia, witnessed the signing of the royal octroi for the first Swedish bank. The charter was granted to a certain John Palmstruch and his associates. The banks of Amsterdam, and also to some extent the banks of Hamburg, served as models for the " Palmstruchska B a n k " which was the forerunner of the present " R i k s b a n k , " the Bank of Sweden. It is worthy of note that by the terms of the octroi the bank was given permission to open offices, not merely in Stockholm but in several other towns as well. It may be said, therefore, that branch banking was born with the Swedish banking system. The system of branch banking is, today, highly developed and it is possible—to use the British term —to talk of the ' ' Big Four'' of Sweden. Four banks are responsible for the major part of the nation's

The Swedish Background

9

commercial banking activities 2 and it is most important to recognize that the Swedish banks are usually called upon not only to supply the working capital of industrial enterprises, but also to finance their long-term capital needs as well. 3 The savings banks, it should be noted, play a more important role as competitors with the commercial banks than is the case in some other countries. Generally speaking, they are conservatively managed institutions; but the competition for deposits existing between them and the commercial institutions is at times a cause of difficulties, particularly in the event that the savings banks do not immediately adjust their interest rates to the changes in the official bank rate, as is the custom of the commercial banks. Regarding the deposit business of the Swedish banks, Dr. Karin Kock in her A Study of Interest Kates remarks, two facts must be kept in mind. First, small investors are, as a rule, not accustomed to invest their capital directly in undertakings in the form of shares or bonds, but prefer to place their money as time deposits w i t h the commercial banks or the savings banks. The banks have, therefore, founded their business on a great proportion of time deposits to demand deposits: at the end of 1 9 1 7 time deposits including savings accounts, amounted to about 80 per cent of total deposits. Demand deposits consist of the ordinary current account (checkrakning) against which checks may be drawn, and * In January 1934, a committee of experts was called to investigate the need for a state-owned commercial bank, as a means of facilitating long-term commercial credit for average sized enterprises. 1 The Banking regulations prohibit banks from granting credits for more than one year. Loans are, however, renewed and may thus run for many years. Cf. Kock, A Study of Interest Kates, 135.

o « tj\ i

H H ? I

ON O

OO H GO

o

«

w » a < H Z fe « O c/3 5 O -) z S H > O F
r¡ U .g - r e o O * OT .M ti J Î V 8 .t¡ g u.a e n s ^ E o H 2« S U yh a Ä I—I »—I •S W*

O H

rÀ +

+

+

+

i

i

T

+

+

OO OO o « ON c — i-i ^, 0 ^ > X -' c« « o H

12 •J I o zz O
96 Gold currencies, 57, 80, 84, 90, 93 Gold payments, 31-33 Gold points, 37 Gold purchases, 84, 91, 96 Gold reserve, 56, 87, 89, 90, 96 Gold standard, 4, 19, n , 34, 36, 41, 41, 53, 59, 96 Gold stock, 56 Government securities, 15, 77 Great Britain, 1 1 , 44 Imports, see Import trade Import surplus, 11-2.5 Import trade, 17-10, 14, 1 8 , 38, 46, 64, 76, 84

Index Inconvertible paper currency, 31, 34 Industry, 7, 17, 10, 45, 83, 87 Inflation, 53-55, 60, 61, 91, 95 Interest, 66 Interest rates, 9, 16, 64, 95 Invisible items, 10, 38 K o c k , Karin, 9, 1 1 , 1 1 , 19 Kreuger, Ivar, 6, 16, 18, 64, 7577. 93 L a b o r conflicts, 47 Labor market, 47-48 Lindahl, Erik, 48 Loans, 15, 44, 79 Long-term capital, 9, 10, 14 Managed currency, see Managed money Managed money, 3, 4, 31, 34, 41 Marienburg, 8 Marshall, Alfred, 40 Midland Bank, 4 Monetary means, see Monetary tools Monetary program, 4, 6, 16, 19, 37. 4 1 . 43. 5°. 53- 60. 6 3. 8 ° . 8 i , 83, 91, 93 Monetary standard, 19 Monetary tools, 36, 37, 45, 46, 90, 91 Money, 3, 4, 3 1 , 38, 41, 45, 87 Money market, 35, 87 Mortgage banks, 1 1 Myrdal, Gunnar, 19 National homogeneity, 5-6 Note circulation, 1 1 , 56, 91 Note issue, 14 Note reserve, 11

Index O b j e c t i v e of monetary program, 3 1 - 3 7 , 40, 4 1 , 53, 6 i , 63, 69, 9 1 , 96 Official bank rate, 1 « Rediscount rate Ohlin, Bertil, 56, 67, 77 " O p e n market operations," 1 1 , 15, 36. 83 Palmstruchska Bank, 8, 14 Parliament, 6, 1 3 , 30, 60 P e g g i n g . 4 4 . 6 1 , 93

"Post Bills," 11 Price 57, Price Price

level, 1 0 , 3 1 , 40, 45, 50, 52-, 61-63, 79 stabilization, 3, 41 structure, 3, 1 5 , 39-45, 69,

9096 Price system, 49 Private accounts, 1 6 - 1 7 Production, 40, 46-49, 74-76, 84, 9 1 ' 93 Prosperity, 3, 40 Public Debt Office, 1 9 Public Works, 77, 83 Purchasing power, 3, 1 0 , 3 1 , 40, 46, 48, 5 0 . 5 3 . 5 7 . 5 9 . 6 l . 75. 9 1 Rediscount rate, 15, 1 8 , 54, 63, 64, 91 Rediscounts, 79 Reichsbank, 1 7

Retail prices, 48, 50, 57, 9 1 , 94 R i k s b a n k , ite Bank of Sweden R o y a l Social Board, 49-51 S a v i n g s banks, 9, n , 64, 99 Scandinavian Monetary Union, 30 Securities, 1 6 , 1 9 , 64, 89, 9 1 Short-term capital, 2.0, 2 . 1 , 1 4 , 1 7 , l8

. 43. 54 Social cooperation, 6 Social Democratic Party, 7 Socialism, 7 Standard of living, 1 0 , 45, 46 Standstill Agreement, 1 7 Staple commodities, 17 Stock Exchange, 1 3 , 1 9 Stocks, 1 1 , 57, 89 T a r i f f restrictions, 1 5 Tariffs, 1 7 , 1 5 , 61 Time deposits, 9 Transfers of capital, 1 1 Treasury bills, 83 Underwriters, 1 1 Unemployment, 80, 8 1 , 84, 94 V a l u e of money, 3 1 - 4 1 , 44, 46, 54-60, 64 Visible items, 38 W a g e s , 1 5 , 1 8 , 47, 6 1 , 9 1 , 94 Wholesale priccs, 1 5 , 40, 60, 67, 69, 73. 75. 76. 8 1 , 86, 90-95