Encyclopedia of Money: Sweden’s Paper Standard of World War I

During World War I Sweden sought to weaken the link between gold and domestic currency in an effort to tame inflationary forces. Sweden’s policy was unprecedented, considering that the gold standard usually receives strongest support from those quarters where inflation is most feared. The nineteenth century had seen several countries abandon a silver standard to avoid currency depreciation, reacting to the depreciation of silver relative to gold, which was a stronger metal monetarily and clearly the preferred bulwark against inflation.

Sweden had adopted the gold standard in 1873. A gold standard country must stand ready to buy and sell gold at an official price in its own currency. A country’s commitment to sell gold at an official price in its own currency puts a strict limit on the volume of paper money issued, acting as a guard against the issuance of inflationary levels of paper money. When a country suspends gold payments, as often happens during times of fiscal stress, such as wars, the country expects to see its currency depreciate, and domestic prices go up.

The other side of the gold standard is the commitment to buy gold at an official price, a commitment that Sweden suspended in February 1916. During World War I Sweden supplied war materials and supplies to the belligerents and often received gold in payment. Foreign currencies sold at a discount relative to the Swedish krone, and gold would have sunk in value relative to the krone if the Swedish central bank had not been committed to buy gold at the official price. The influx of gold and foreign currencies would not have created difficulties if Sweden’s opportunities for importing foreign goods had increased proportionately with its accelerating opportunities for export. Wartime conditions, however, favored exports over imports.

Sweden found itself faced with a swelling domestic money supply, fueled by gold inflows, and a shrinking supply of goods for domestic consumption as exports rose relative to imports. The Swedish central bank saw itself having to buy large quantities of gold that paid no interest. Also gold was sinking in price worldwide, which acted to drag down the values of gold-standard currencies, such as the Swedish krone. These difficulties converged to push Sweden into unhinging itself from the gold standard.

Freed from an obligation to buy gold at an official price and to mint all gold brought to the mint, Sweden continued to import gold, but at reduced prices, and to augment the domestic money supply. Between the first quarter of 1916 and the last quarter of 1917 the circulation of paper money increased 62 percent and prices climbed 65 percent.

Although nullifying the gold standard did not spare Sweden from a bout of inflation, it restrained the levels that inflation reached. In the Stockholm foreign exchange market, the Swedish krone rose in value relative to the U.S. dollar, the Swiss franc, and the British pound. The krone rose about 10 to 25 percent above the value it commanded when it was on a strict gold standard, and Swedish coins were worth 10 to 25 percent more than the value of their gold content.

The Swedish experience of World War I was a reminder that precious metals do not offer fail-safe protection against inflation, as Europe discovered after the influx of gold and silver from the New World.