Between 1745 and 1776 Europe had its first experience with an inconvertible paper standard. Sweden had been the first European country to introduce bank notes early in the seventeenth century, but by the mid-eighteenth century England and France had both made use of bank notes, and France had furnished Europe with its first example of a paper money debacle. Neither England nor France had officially adopted a paper standard when the Swedish government put Sweden on an inconvertible paper standard.
In the eighteenth century Sweden had a parliamentary government, in which two parties vied for power. One party, the “Hats,” identified with the exporting industries, the military, the nobility, and the monarchy, and generally favored policies of foreign expansion and increased influence abroad. By 1720 Sweden had lost its Baltic empire, much to the chagrin of the Hats, who wanted to maintain Sweden as a player in European politics. The other party, the “Caps,” represented agricultural interests, and what might be called the commoners. The Caps’ preference for policies of pacifism earned them the nickname Nightcaps, shortened to Caps, because they supposedly wanted to sleep while the great powers of Europe passed Sweden by.
Before the adoption of a paper standard, Sweden, home to vast copper reserves, had functioned on a copper standard. Copper, worth less than gold and silver per unit of weight, was bulky and awkward to transport in large monetary values, and Sweden turned to bank notes as a convenience. In the mid-seventeenth century Sweden saw its first suspension of bank note convertibility and bank panic. Bank notes fell into disfavor at first, but the Swedish public found bank notes much more convenient than copper coinage, and bank notes returned to circulation by popular demand rather than government policy.
The Hats held the upper hand in Parliament from 1739 until 1765 and pursued a policy of inflationary war finance, a policy opposed by the Caps. Between 1741 and 1743 the financial strain of war with Russia prompted the Swedish government to look for salvation in the printing press. Because copper was bulky, the sheer cost of transporting copper enabled the government to vastly increase bank notes without triggering an export of copper coins. With copper reserves held intact, the convertibility of bank notes into copper was not immediately threatened.
The issuance of bank notes continued, partly for subsidies to manufacturers, and by 1745 the Swedish authorities imposed an inconvertible paper standard. Unlike the suspensions of payments in the seventeenth century, the public did not panic, but inflation rose to the forefront of economic problems. The Swedish currency depreciated on foreign exchange markets, making foreign goods much more expensive in Sweden and Swedish exports cheaper in foreign markets.
The inflationary policy irritated the Caps, who wasted no time kicking the monetary rudder in the opposite direction when they returned to power in 1765. The Caps imposed a deflationary policy. As Swedish currency appreciated in foreign exchange markets, foreign imports became cheaper in Sweden, but Sweden’s export industries had to slash prices to remain competitive in foreign markets. Prices in export industries fell faster than wages and raw material prices, plunging the export industries into a depression.
Political opposition to the Caps’ monetary policy mounted as economic distress defused throughout Sweden and the Caps fell from power in 1769. The Caps’ experience with disinflation policies inspired a political drama that history would see replayed again whenever democratic governments imposed deflationary policies. Unemployment, bankruptcies, and virtually every other form of economic discomfort invariably accompanies disinflation and deflationary policies, and often democratic governments find it difficult to pursue these policies for extended time periods.
The Hats regained power and reverted to inflationary policies before the Caps returned briefly to power in 1771 through 1772. The political sphere began to mirror the turbulence in the economic sphere, and in March 1772 a bloodless coup d’etat engineered by the Hats displaced Sweden’s parliamentary government with a constitutional monarchy. Sweden’s parliament survived, shorn of much of its power, and the parties of the Hats and Caps disappeared. In 1776 Sweden established a silver standard, completely breaking with the copper standard and putting an end to inconvertible bank notes.
Sweden’s eighteenth-century episode of monetary disorder demonstrates how a society, exhausted with war, may find inflationary policies attractive, and how these policies are associated historically with political instability.
Chown, John F. 1994. A History of Money.
Heckscher, Eli F. 1954. An Economic History of Sweden.
Samuelsson, Kurt. 1968. From Great Power to Welfare State.