REV: APRIL 25, 2005
LISA H. LEWIS
The Birth of Modern Macroeconomic Policy:
Sweden and the Great Depression
In early 1937, a debate over monetary policy raged in Sweden. Six years earlier, in the wake of European banking crises and deepening depression, Sweden had abandoned the gold standard and embraced a revolutionary goal for monetary policy. Influenced by a group of notable economists, Swedish officials declared that monetary policy should use “all means available” to preserve “the domestic purchasing power of the krona.” This was the first time that a country abandoning gold set the stability of a price index as the objective of monetary policy.1 This remained the official policy over the following years, and consumer prices in Sweden remained stable. At the same time, Sweden’s central bank, the Sveriges Riksbank, had also apparently sought a stable exchange rate between the krona and the British pound, and the exchange rate had remained constant since July 1933.
Many observers felt that the monetary experiment Sweden initiated in 1931 had been a success. In 1934, American economist Professor Irving Fisher praised Sweden’s accomplishment: “Whatever the future holds in store, this achievement of Sweden will always be the most important landmark up to its time in the history of stabilization.” 2 By 1937, however, there were increasingly divergent views among Swedish politicians and economists over monetary policies and objectives. Over the past few months, Swedish wholesale prices had increased sharply and consumer prices were rising as well, developments that corresponded closely to increases in foreign prices. Some economists argued that price increases in Britain would cause price increases in Sweden and compromise the objective of price stability unless the krona was appreciated relative to the pound. Others, including the finance minister, Ernst Wigforss, preferred to maintain a stable exchange rate vis-à-vis the pound. Wigforss and other supporters of a stable exchange rate argued that price increases in Sweden were not significant enough to warrant action and an appreciation of the krona would hurt Swedish exports and could lead to a recession.
Up to now, Sweden had weathered a worldwide depression relatively successfully. With economic recovery underway in many countries, Sweden’s government and its central bank had to decide if domestic price stability should take precedence over other monetary objectives and, if so, what policies would best support price stability in the changing world of the late 1930s.
________________________________________________________________________________________________________________ Professor Julio Rotemberg and Research Associate Lisa H. Lewis prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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The Birth of Modern Macroeconomic Policy: Sweden and the Great Depression
Sweden's Government and Economy
Sweden, which had a population of 6.1 million in 1931, was...
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