Economic Policy In Sweden During The Great Depression Economics Essay

Economic Policy In Sweden During The huge opinion political economy EssayWhen the massive Depression swept crossways Europe in the early mid-thirties the impact of the sparing d proclaimturn vary across countries. sm solely-arm for example Germ either, Austria and well-nigh of Central Europe experienced a languish and deep frugalal crisis, the economies of the Nordic countries Sweden, Denmark and Norway were non only touch on by and by and more mildly by the Depression, but excessively corned earlier. The crisis in Sweden for example only lasted a little more than both(prenominal) long time (in Germ both and Poland it lasted for more than 4 years, see graph 1) and peak even out in industrial production was at 10.3% while for example Germany or Poland had declines in industrial production of more than 40% (see graph 2). eve when expression at comparable GDP figures, Sweden was with a decline of 6.5% salutary below countries such as Germany (25%) or Austria (2 3.4%, see graph 3). stock-still and of greater side by side(p) for this paper is the item that Sweden did not only make out advance during the large Depression but to a fault pursued a different frugal indemnity. Most prominently cited amongst economic historians are dickens distinctly Swedish form _or_ scheme of government measuresFirst, mattering at Swedens m itary polity, scholars ca countersink out, that the uncouth go away the money standard very(prenominal) early and unequ each(prenominal)ed at that time simultaneously coif the preservation of the inseparable buying authority of the krona on top of the political agenda.Second, it is often mentioned, that the fond-Democratic government, which came into top executive in 1932, invested heavily in semipublic work programmes pursuance a Keynesian-type fiscal polity.The present paper seeks to analyse whether these two featureors are a) adequate and b) withstand a closer empirical evaluation when i t comes to justify the better development of Sweden during the gigantic Depression. In order to do so, the paper will, as a prototypal stride, outline the economic situation in Sweden and the agree economic insurance policy introductory to the crisis. This is necessary, as it provides an overview of the nature of Swedens economy, its degree of integration into the international grocery store and accordingly its general contagion risk at the time of the crisis. Secondly, the above mentioned policy measures during the abundant Depression will be outlined. Thirdly and most central in this paper is an analyses of the essenceiveness and resultant roles of these policy measures. The last chapter will thusly draw the attention to early(a) factors outback(a) the control of government policy that might avow helped Sweden to ease the effects of the Great Depression.LiteratureImmune to crisis? Swedens economic development prior to the Great DepressionEven though Swedens macro- economic policy is often seen as the study contributor to the countries positive development during the Great Depression, one must not fail to see, that some of the reasons for this development are rather to be ensnare in specific characteristics of Swedens economy prior to 1929/31 than in any explicit policy measure thereafter. Two pre-existing conditions derriere be outlined, that faceed to have stabilized the economy during the crisis. Firstly, a constantly undervalued krona make Swedish exports cheap on the international market. Secondly, the banking orbit in Sweden was centralise and crisis-prone. Thus, a banking panic never occurred. The following paragraphs explain these specifically Swedish conditions in greater detail.Traditionally, Swedens economy was based on the countrys rich endowments of crusade and timber. Its main trading lift offner was Britain and by and by on Germany and the United States. During the graduation of the 20th century Sweden to a fault be came a major exporter of technologically civilise neats such as telephones (e.g. Ericsson) or appliances (e.g. Electrolux). As Sweden was at least on paper a neutral spot during World War I (WWI) many investors sought to acquire Swedish assets at that time, as the country seemed to be a safe haven for upper-case allowter. Additionally, by mainly merchandise raw materials, Sweden could take advantage of the growing in foreign supplicate for those goods safarid by WWI. By the end of the war Sweden had transformed from a major international borrower to a creditor to the rest of the world. While the export effort could simoleons from these developments, ostentation emergenced mainly over cod to increasing costs for imports. amongst 1915 and 1918 the cost of living rose by as much as 90%. This inflation was eventually condemned between 1920 and 1924 when prices declined by 55% due to a restrictive fiscal policy. After 1924 a s set about, but fixed deflation continued until 1931. With such low domesticated prices, Sweden was highly competitory on the international market. That is why during most of the 1920s Sweden experienced a bullocky export-led economic growth. This is why after WWI Sweden reinstated the grand standard as one of the showtime industrialized countries in 1924. Many economic historians believe that this overhaul to the meretricious standard occurred at a rate that left the krona undervalued well into the 1930s. As a consequence Swedish exports remained highly competitive even in times of economic crisis.The domestic market withal stabilized during the 1920s. Due to export bans and high import taxes during and after WWI, Swedish consumers, whose buying power constantly increased during the 1920s, substituted imports with domestic products. Additionally, demographics bumped a role. During the 1920s and 1930s there was a rapid rise in the number of young people of working age (e sparely those aged 20-29). Respectively, ai m for housing, food, clothes and other consumer products increased which contributed to a strong growth of domestic production as well.When the stock market crash of October 29, 1929, triggered the Great Depression, some other factor for Swedens low proneness to crises became obvious. Swedens banking structure was very c one timentrated. This was much in contrast to for example the United States, where the banking structure was highly fragmented and decentralized. fit in to Ben Bernanke, such a structure is much more desirely to earn banking panics. Sweden even so was characterized by a branch banking dodging, where risks were dispersed. It is argued that specially in the shield of Sweden, earlier experiences with failing banks in the 1920s had led to reforms that had give the banking system on a sound footing. That is why at the beginning of the 1930s the banking sector in Sweden did not experience widespread panics.Putting all these facts to perk upher, it can be argued, that Sweden was from the very beginning less apt(predicate) to be effected by the Great Depression than those countries whose banking sector collapsed. This especially holds uncoiled when considering the fact that trust in the economy never vanished in Sweden due to a generally lasting banking structure. Additionally, even though exports declined from 1931 until 1932, Swedens export industry always remained highly competitive. This was not least due to an undervalued krona, whose parity remained abiding well into the 1930s. Nevertheless, analyzing the characteristics of Swedens economy prior to the Great Depression only get alongs part of the question to why Sweden performed considerably better during the crisis than other nations. Especially when Sweden left the grand standard in 1931, specific policy measures as exposit in chapter two played an equally significant role.What was so special? Swedens response to the Great DepressionPrior to the Great Depression, the political mainstream of the occidental industrialized world followed a laissez-faire ideology that propagated the free play of the market. It was believed that capitalism had a self-equilibrating tendency, leading to an optimal level of resource utilization. Hence, economic policy at that time simply meant that governments should balance their budget, maintain the gold standard and let businesses reequilibrate themselves. However, while many countries had to reconsider their economic policies during the Great Depression, Sweden had already do this step beforehand. During the late 1920s, Swedens economic policy was already based on the advice of trained economic experts who did not solely propagate the present-day(a) neo-classical view on economics but rather pursued their own theories on how the state should react during an economic crisis. This so called capital of Sweden cultivate was a loose collection of economists whose most substantial figures were Knut Wick transmit, Eli Hecksche r, Gustav Bagge, Bertil Ohlin and David Davidson. Especially Knut Wicksells begetings at the beginning of the 20th century inspired most of the works of his followers.Wicksell is lift out k nowadaysn for Interest and Prices, his contribution to the fledgling field now called macroeconomics. In this book and in his 1906 Lectures in Political Economy, volume 2, Wicksell sketched out his variant of the quantity supposition of money (monetarism). The standard view of the quantity conjecture before Wicksell was that increases in the money supply have a transfer effect on prices-more money chasing the same amount of goods. Wicksell foc utilise on the indirect effect. In elaborating this effect, Wicksell distinguished between the genuinely rate of bring around on new capital (Wicksell called this the natural rate of involution) and the actual market rate of invade. He argued that if the banks reduced the rate of interest below the real rate of return on capital, the amount of loa n capital withdrawed would increase and the amount of saving supplied would resolve. Investment, which equaled saving before the interest rate fell, would egest saving at the lower rate. The increase in enthronement would increase overall expense, thus driving up prices. This cumulative process of inflation would stop only when the banks reserves had travel to their legal or desired limit, whichever was higher.In laying out this theory, Wicksell began the conversion of the old quantity theory into a full-blown theory of prices. The Stockholm school, of which Wicksell was the father figure, ran with this insight and create its own version of macroeconomics. In some ways this version resembled later Keynesian economics.Wicksell also argued passionately for making price stability the lordly culture of monetary policy. A stable price level, he maintained, make training easier for participants in both financial and labour markets. In an 1898 analysis, Wicksells refer recommend ation for central banks was to increase interest evaluate whenever prices were boost and to lower them when prices were falling-a monetary policy that he considered to be straight precedent. He argued that low interest rates would tend to increase prices. A low rate of interest would lead a borrower to buy some commodity which otherwise he would not have bought at all and would lead someone who wishes temporarily to keep some or all of his goods off the market . . . to choose . . . the Bank for money with which to meet his immediate or pending liabilities without having to sell his goods. Thus, consider would rise and supply would fall, thereby ensuring an increase in prices.18 This meant that the stabilisation of prices required only that interest rates be increased when prices were rising and reduced when prices were falling.Wicksell stressed that movements in the price level exerted a specially large effect on borrowers because an increase in all prices made it easier to re pay debts while a reduction made it harder. He also noted that real reinforcement could be affected if nominal wages (in kronor) did not keep up with changes in prices.Even though Wicksell died in 1926 his followers such as Eli Heckscher, Bertil Ohlin, Gustav Cassel and Gunnar Myrdal, could build upon his suppositional work and sound out concrete policy advice in 1931, when the Great Depression eventually reached Sweden. The following paragraphs reveal how their influence and advice on the Swedish central bank (Riksbank) and on the political elite helped Sweden through the crisis.Monetary policyDuring the early months of 1931, Sweden was the recipient of capital inflows. However, the German standstill led many international investors to go to sleep their cash in hand from Sweden both because they lacked access to their German funds and because they feared that the crisis would spread. These withdrawals contributed to a drastic reduction in Swedish reserves. By family of 1931, reserves had fallen to less than one-tenth of their January level. Similar pressure was placed on the British financial system, and on September 21, Britain abandoned the gold standard. On September 27 Sweden, too, abandoned the gold standard. The Riksbank and the rector of finance immediately inform that the new monetary goal for the country would be to preserve the domestic purchasing power of the krona using all available means. The neighboring day, September 28, the Riksdag gave its official assent by relieving the Riksbank of its responsibility to convert notes into gold at a fixed rate. People who wished to metamorphose kronor for foreign exchange could still do so at commercial banks, whose representatives met daily (along with a Riksbank official) to set exchange rates.In making price stability the simple objective of its monetary policy, Sweden pursued an internationally unique agenda. Based on Knut Wicksells argument that stable price levels made planning easier for participants in both financial and labor market, the Riksbank new role was to maintain price levels inwardly a certain eye socket.In order to do so, the first step the Riksbank undertook was to develop a new, weekly index of consumer prices. This was necessary as the goal was to give the public certain definite stand points for estimating prox developments in prices. Consequently, the new index was designed to include a wide range of goods and services that reflected purchases made by average families in Sweden. This ensured that the purchasing power of the krona could be measured for most individuals correctly. The weekly inflation was then com retched by weighing the percent change in each good and service consumed by the fraction of total consumer expenditure that households allocated to this item. Instruments used by the Riksbank in order to fulfill the price stability target were changes in the tax write-off rate and operations in the foreign exchange market. Accordingly, the Riksbank changed the discount rate from 8% to 6% in 1931 as there were no longer signs for a continuing inflation. After that, the discount rate was lower to 2.5% in 0.5% steps until 1937.In retro perspective the monetary policy of the Riksbank proved to be very effective. Statistics show a considerably stable level of consumer prices between 1931 and 1938 (see graph 7). Most importantly however is the fact, that the monetary program of 1931 maintained public trust and confidence in the banking sector. genius can therefore conclude, that not only did the centralized branch system of the banking structure prevented Sweden from the experience of a fully scaled banking panic, but also a sound monetary policy based on the theoretical determinations of the Stockholm School.Nevertheless, the price stabilizing policy of the Riksbank did not remain unchallenged. For example, Bertil Ohlin, who wrote an bind entitled The inadequacy of price stabilisation. There he acknowledged that th e economic situation would most undoubtedly have been still worse if prices had been allowed to fall as they did in countries that kept to the old gold parity, and that the knowledge that the Riksbank would sweat by every means in its power to prevent any appreciable fall in prices has exercised a reassuring influence on trade. However, Ohlin went on to argue that stabilization of prices could not prevent reductions in investment and hence in GDP. The next chapter explains how this argument was also put forward by the fond Democrats in 1932.Public deficit disbursementIn the 1932 elections, the Social Democrats obtained the highest number of votes and formed a government. The new minister of finance, Ernst Wigforss, held that a monetary policy focused on price stability was light to obtain an acceptable outcome for Sweden. The new finance minister had long championed the idea of intentional deficit spending in recessions. Wigforss had been a professor of linguistics at Lund befo re he became one of the leading intellectuals of the Social Democratic Party, and he worked closely with a number of Swedish economists, including Gunnar Myrdal, Erik Lindahl, and Bertil Ohlin. The group developed theories justifying the use of fiscal policy as a stabilization tool that were quite similar to those developed by John Maynard Keynes. In a 1928 article, for example, Wigforss wrote If I want work for 100 people I do not need to put all 100 to work. . . . If I can get an discharged tailor work, he will get the opportunity to buy himself new shoes and in this way an unemployed shoemaker will get work. . . . This crisis is characterized above all by a relationship which is called a vicious circle. . . . One can say the crisis drives itself once it begins, and it will be the same once recovery begins. Wigforsss advocacy of deficit spending in response to the Depression was a radical departure from the policies of foregoing governments. Prior to 1933, government borrowing was primarily limited to loans for productive purposes, that is, for investments that would spawn future government revenue, such as the postal service, telephones, electrical power generation, and railroads. Income derived from these activities would then cover the interest payments on the public debt while also generating additional income for the state.36 In contrast, nonproductive government expenditure was supposed to be compensable for with current government revenues. Since it was impossible to predict current revenues or nonproductive expenditures accurately, Sweden had reserve funds that accumulated any unanticipated surpluses. These funds were then available to cover unanticipated deficits. In the fiscal years 1931-1932 and 1932-1933, for example, the budget was balanced by reducing the reserves of the Alcoholic tope Account. Thus, while budget deficits in the modern sense occurred, they were not acknowledged, and they were not the result of any policy aimed specificall y at creating or allowing a deficit.One of the more controversial issues amongst economic historians is the questions whether public deficit spending and public work programs really helped Sweden out of the economic slump or whether they were merely a side note during the Great Depression. The reason for that is that the advance to power of the Social Democrats in 1932 are widely perceived as a turning point in Swedens economic policy and sometimes even as the global birth of modern macro-economic policy. However, empirical raise proving that a special Social Democratic economic policy caused Swedens riotous recovery is scarce. As a matter of fact, the debate about the future fiscal policy of Sweden under Social Democratic rule already circled around issues much similar to those that John Maynard Keynes dealt with four years later in his magnum opus the General Theory of Employment, Interest and Money. Swedens financial minister Ernst Wigforss argued that price stabilization woul d not be enough to fight the depression. He rather proposed a public work program designed to put unemployed back to work even if this meant budget deficits. Much like the policy advocating stable prices, this one was again based on advice put forward by contemporary economists. This was a radical departure from the policies of preliminary governments. A balanced budget had always been the highest maxim. Usually, government loans were only used for investments that were expected to generate future profits such as postal services, railroads or electric power supply. All other nonproductive expenditures were paid for by reserves the government had built up. Unsurprisingly, this radical change in policy went not without fierce debate and controversy in parliament. The first unbalanced budget proposed by Wigforss for the years 1933 and 1934 was criticized for causing inflation and depriving businesses of capital necessary for their development. To counter these arguments, the Social De mocrats moved away from financing public work programs through deficits and proposed an inheritance tax used to finance their plans. Additionally, the agrarian Party did not agree to the budget as they feared a carelessness of the population working in the agrarian sector. As a consequence, the Social Democrats had to include high subsidy payments for the agricultural sector in the budget. When it finally passed the parliament in 1933 much of the planned deficit spending policy had disappeared. Moreover, most of the funds still allocated to public work programs could not be put to use as a nationwide lockout of employees in the formula sector blockaded the building industry. This lockout took place because the employer association SAF wanted to impose lower wages for the industry. This conflict was solved in 1934 and only then could the government finally make use of the allocated funds for public works.Did they find the Holy Grail? The effects of Swedens economic policyRenowned e conomist and chairman of the Fed, Ben Bernanke, wrote in his essay collection on the Great Depression that Understanding the Great Depression is the holy grail of macro-economics. He thereby referred to the very difficult but ultimately rewarding task of finding a definite answer to the question of the real causes of the Great Depression. This, he argues, could help to identify future crisis better and address them more effectively.When looking at the fact that Sweden had overcome the Depression rather well by applying certain types of policies, the question arises whether the Holy Grail might have already been found long before Bernanke published his book. This chapter will therefore look more closely at the real effect that the Swedish economic policy had from 1929 to 1937.The range and depth of the several above mentioned policy measures varied significantly. It is therefore convenient to divide the chapter into the several policy fields that were address between 1929 and 1937. T he evaluation is mainly done by using statistics of blusher figures that are in direct relation to the executed policy. By skeleton on secondary literature it is then elaborated whether the figures in the statistics did or did not change due to a specific policy or due to other factors.When looking at the debate on the cause of Swedens recovery the author argues that according to one view the increasing demand and thus increasing exports led to a recovery. Hence, monetary policy was the most powerful contributory factor. The public works policy could not have had any significant effect, since the works were not started on any straight scale until recovery was well under way. On the other hand, the elaborateness of the export market at first did not have an elongated impact on the labor market as at first large pile of build up stock were used for exports. No increase in production or employment took place. The author concludes that it was a mixture of growing demand abroad, mon etary policy, deficit spending and deem of the agriculture that led to Swedens recovery. Even if it is clear that the public works did not lead to recovery it is unclear whether exports alone did the trick.Just lucky? foreign factors fostering Swedens recovery go away the gold standardAfter Great Britain left the gold standard on September 21st 1931, Sweden followed vi days later as one of the first countries. The effects on both the domestic markets and the foreign sector were at first positive. Leaving gold meant that the Swedish Riksbank could lower the interest rate, therefore practicing an inflationary monetary policy rather than a deflationary policy as before. This let the money supply increase and accordingly aggregated product demand. As Sweden experienced a deflation prior to 1931 the increase in money now turned the economic situation into a mild inflation. This proved to be a rather favorable constellation, as with lower interest rates at the central bank and accordin gly low real interest rates for businesses, investments increased. Hence, optimism amongst entrepreneurs never fell to a point where all investments were put on hold. Rather, trust in the economy always remained at a substantially high level, while prices remained at level that did not seem to hurt the economy too much.Another important factor was the effect of an inflationary monetary policy on the export sector. Leaving gold was followed by a depreciation of the Krona. This meant that Swedish products became cheaper and did not decrease significantly, which is unprecedented when looking at global trade statistics during the Great Depression. Graph 6 shows that Swedish exports did quite well during the 1930s, while a lot of other western economies had to face significant declines in exports. Additionally, a depreciation of the Krona also meant that imports became more expensive for Swedish consumers. As a consequence import substitution occurred, strengthening domestic enterprises . All put together, it becomes ostensible (see Berry Eichengreen), that leaving the gold standard early played an important role for the depth of and the recovery from the Great Depression.ConclusionThis paper examined the economic policy of Sweden during the Great Depression. The primary question was to find out which factors contributed to the relatively mild course of the crisis. Accordingly, the first chapter outlined the basic condition the Swedish economy was in prior to the crisis. This was a necessary entrance into the battleground as it revealed that Swedens exposure to contagion was at least with respect to the banking sector limited. On the other hand, the chapter revealed as well that the decrease of foreign demand due to the crisis had a definite negative impact on Swedens export industry. Nevertheless, it can be argued that under these circumstances, Sweden was from the very beginning less likely to be effected by the Great Depression than those countries whose ba nking sector collapsed. This especially holds true up when considering the fact that trust in the economy never vanished in Sweden due to generally stable, basic economic parameters. Hence, the specific characteristics of Swedens economy prior and during the Great Depression already answer part of the question to why Sweden performed so well.As Sweden was nevertheless hit by the crisis through the export market and the collapse of the international trading system, the second part of the answer can be found within the internationally unique policy measures Sweden pursued between 1931 and 1937. In chapter two it is argued that Swedish politicians deliberately followed an economic policy outside the neoclassical mainstream. This is mainly due to the so called Stockholm school, whose followers very early acknowledged that the state had to play a vital role during an economic crisis. As this group of economist and their advice was very well accepted within the political elite, policy me asures could be put into practice without having to make too many concessions to third parties. Thus, policy chemical reaction to the crisis was quick and effective.In chapter three, several major policy measures that helped Sweden to recover from the Great Depression quicker than others are analysed in detail the early abandoning of the gold standard, the stabilization of the purchasing power of the krona and public work programmes.While the suspension of the gold standard was merely a reaction to the fact that one of Swedens major trading partners, the UK, abandoned gold, the other two measures can clearly be traced back to the Stockholm School. It is argued in the paper, that stabilizing the purchasing power of the krona definitely helped to maintain trust in the economic system and provided planning reliability for businesses. The role of the public work programmes however remains somewhat blurry. Even though Sweden seems to be an early if not the first country to follow Keynesi an-like policies, the effects of the deficit spending policy is somewhat disputed by scholars. There is however consensus on the fact that the policies of the Social Democrats in the early 1930s paved the way for true deficit spending and broad government intervention in the following decades, leading to the today renown Swedish welfare state.Lastly, Swedens quick recovery is looked upon in chapter four. As available statistics do not reveal a significant success of the government work program, outside factors might explain more accurately why Sweden recovered so right away. Looking at exports statistics one can clearly see that a general upswing in the global business cycle was very well received by Swedens export industry. Especially the booming housing market in Great Britain pampered the export sector.Putting all pieces together, this paper showed that a mixture of internal and external factors helped Sweden to overcome the Great Depression better than others. While a relativel y low exposure of the banking sector to the international market helped to maintain trust in the economy, the stabilizing monetary policy of the Riksbank strengthened the planning reliability for customers and businesses alike. The quick recovery at the end of the Depression however can mainly be traced back to external factors. Nevertheless, the fact that businesses could quickly react to the growth in foreign demand at all is in great parts due to the stabilizing policy of the government.