Preliminary paper to be presented at EconomiX March 22, 2007
Monetary Theory and Practice: Parallel currencies in Sweden, 1789 – 1833 Anders Ögren∗ EHF – Institute for Research in Economic History at the Stockholm School of Economics and EconomiX (UMR 7166) CNRS Université de Paris X – Nanterre
(Draft paper, please do not quote)
ABSTRACT In this paper I analyze the parallel note issuance conducted by the National Debt Office and the Riksbank from a perspective of the history of monetary thought. These monetary authorities both issued notes unrelated to each other between the years 1789 and 1803. The Riksbank based their notes on a silver standard whereas the National Debt Office initially made their notes interest bearing. Within short the National Debt Office Notes became the main mean of payment. As the Riksbank notes fell out of circulation their value also appreciated in relation to the National Debt Office Notes. This discrepancy in value made the National Debt Office notes the new unit of account. The case is of importance not only as an empirical case in studying the effects of two parallel but different monies in circulation. It also gave birth to new theories on money and the function of the monetary system. It shows that, unlike what Sargent and Velde (2002) assumes, theories on monetary arrangements based only of a paper standard (a fiat system) were early developed as a result of the how the monetary system worked in practice.
∗
E-mail:
[email protected]. This paper is an offspring from the research project entitled “Means of Payment in Circulation. Money and Credit in Sweden, 1668 – 1903” and in particular the paper “Complementarity or competition: Parallel paper monies in Sweden” and consequently I would like to thank my colleague and the co-author of that paper Torbjörn Engdahl. I am also indebted to Nathalie Le Bouteillec for making her knowledge on history of economic thought, literature and scholars in Britain, France and Sweden available to me. All errors are my own. I am grateful for financial support from the Jan Wallander and Tom Hedelius Foundation in Sweden.
Introduction I have three purposes with this paper, all of them interlinked and dependent on each other. These are, in the order as the argument goes, to: 1) Analyze and conceptualize the monetary theory of the late eighteenth century Sweden as a full bodied and consistent theoretical framework. 2) Analyze the emergence of this monetary theory (or theories) as a result either of previous domestic monetary theorists, international influences or current empirical events. Of course all of these three fields are part when new monetary theories were built, but in general current empirical observations were more important for new economic theories than what the usually (in theory) theory driven economists of today would acknowledge. 3) To show that the basic assumption explaining the emergence of fiat monetary systems in modern neo-classical monetary theory, that of Sargent and Velde (2002), is not valid. Thus modern neo-classical theory still wrestles with the problem of explaining the emergence of fiat monetary systems. One specific event in Swedish economic history that serves as a good case is the parallel but unconnected issuance of notes from two autonomous monetary authorities; the National Debt Office and the Bank of the Parliament, known as the Riksbank. Although the institutions governing these actors differed both the National Debt Office and the Riksbank were owned and run by the parliament. But these authorities were not cooperating. On the contrary, the Riksbank refused to accept notes issued by the national Debt Office, despite these notes being accepted for tax payments. Of course these events would give rise to new thoughts on monetary theories. One of the most prominent Swedish monetary theorists of this day was Anders Wappengren, who besides being a member of parliament also made contributions within economic thought (especially finance) and mathematics. In light of these events he wrote a thesis to revolutionize the entire Swedish monetary system. Although some of his postulates are not without flaws, his theory deserves attention. Wappengren’s theory is interesting since it basically argues for a complete change to a paper based monetary system; a fiat system. Before him many Swedish theorists not least in the eighteenth century had been working with issues on how a monetary system based on paper worked. Again their work was inspired by their current economic and monetary situation in practice, but usually the paper standard was still regarded as an anomaly. One important implication of both the experiences of fiat monetary systems as well as the attempts to theorize them is that the existence of a fiat based monetary system 2
was know since long in history. This was the case in most countries but probably more so in Sweden, especially during the eighteenth century. Of course this very basic fact seriously challenges the validity of the evolutionary theory used today in neo-classical economics to explain the emergence of the fiat monetary systems. The paper is structured as follows: The first section contains a short discussion on modern day monetary theory. In the second section I go through the empirical case of the two note issuing authorities and what became the result of this situation in monetary terms. Finally in the third section I describe and synthetisize the monetary theory of Wappengren, using the former parts as a background.
Monetary theory and empirics One of the most striking feature of every economy is its monetary system. Nevertheless theoretical assumptions inherent in classical and thus neo-classical monetary theory are difficult to build from micro theory, and do not correspond to empirics. So is the possibility to define the concept of money and the traditional ideas of money combing the three functions of unit of account, store of value and medium of exchange repeatedly fails to distinguish money from other forms of assets in an exclusive manner. Thus the definition of money always becomes functional. The failure of the monetary theory to explain monetary empirics is often circumvented by ad-hoc explanations. One way of circumventing the impact of historical empirics is to view the case in question as “unique” and unrepresentative and subsequently not working in accordance with monetary theory. Such an interpretation is more rule than exception in the case of Sweden in the eighteenth and nineteenth centuries. Contemporary scholars and agents repeatedly argued that unlike for instance England Sweden was not a “mature” economy and thus not working in accordance with the nature of the economy as postulated by the classical theory. Eli F. Heckscher, who in the 1949 wrote about the case in this paper is an example of this. The case forced him to acknowledge a functional definition of money stating that it did not matter what theory postulates as long as the public chose to regard the notes issued by the National Debt Office as money. Heckscher still explained the episode as unique and did not analyze its theoretical implications. Rather than allowing the functional view on money open for questions of the validity of classical theory, he stood firm in the idea that it was the case that was wrong; i.e. the political setting and the 3
agents. The episode just illustrated a monetary arrangement in disequilibrium (if the equilibrium case ever has existed in Swedish monetary history it is certainly during short and rare time periods). The original model of the barter economy leads to two axioms being the basis of classical and neo-classical monetary theory. The first of these axioms is that money as means of payments are unrelated to the real economy. Money serves as lubricant to facilitate exchanges in the real economy. The second of these axioms consequently is that there is a clear distinction between so called commodity and so called fiat money. The former being recognizable by intrinsic value and the latter of no value and no use other than to facilitate exchange. The two axioms in conjunction lead to the proposition that money is exogenously provided into the economy, just to serve as lubricant. Commodity money in terms of specie money is provided by nature, and fiat money by a monetary authority. Although the definition of money in modern neo-classical theory still is circular, i.e. money is what is being used as money, the axioms that modern economists routinely derives from Stanley Jevon’s proposition of ‘the double coincidence of wants’ are still what modern neo-classical monetary theory rests on axioms.1 Arguably these assumptions to a large degree decide the outcome of purely theoretical monetary models. Often empirical observations seem to put the basic assumptions in neo-clasical monetary theory into question. In fact also research built on these assumptions have a hard time not to conclude the facts that what serves as money and what provides the value of money to a large extent is decided by institutional and contextual parameters. In the important article from 1989 “Money as a Medium of Exchange”, Kiyotaki and Wright define commodity money and fiat money by negative mirroring. Thus, fiat money is defined as an intrinsically useless “good” with the specific property of being totally indifferent for the utility of the people in the economy. This “good” is introduced from nowhere. The overall utility increases if this particular “good” replaces commodities as medium of exchange. Since the commodities are assumed to be positively related to the utility only when consumed, this outcome is intuitive from the assumptions.
1 See Laidler, D. (1988), Kiyotaki, N. & Wright, R. (1989), (1992), Kocherlakota, N. R. (1998) and Shi, S. (1995).
4
But the main conclusion of the paper is that money in fact is dependent on the context. Only commodities will circulate as mediums of exchange if the first agents do not believe the fiat money is possible to transfer in the future, since the fiat money has no value. “…, a critical factor in determining if an object can serve as a medium of exchange is whether or not agents believe that it will.”2 Thus, the conclusions are mainly contextual: “We also demonstrate how genuine fiat currency may, or may not circulate in the economy, depending on extrinsic beliefs, or social customs, as well as preferences and technology.” 3 Another approach, but based on the traditional functions of money and the definition of fiat money as useless, i.e. not affecting utility of the agents, is arguing that money is memory. Memory is defined as: “knowledge on the part of an agent of the full histories with whom he has had direct or indirect contact in the past.”4 Arguably, this approach is the balance sheet approach, without acknowledging the idea that money is part of a debt. On the contrary, Kocherlakota argues that money does not allow society to transfer resources over time. The idea that money is accepted because it keeps a track record is interesting but not sufficient. Why would the agents in an economy bother to keep a track record of the past? Basically the question must be asked, what possibility there is for the holder to use the money in transactions in the future. One conclusion drawn by Kocherlakota, not further enhancing the importance of “memory”, is as a consequence that commitment of the issuer is essential.5 Thus, it is not clear whether the commitment or the “memory” endow money with value that ensures its acceptability for further transactions. The value of fiat money is derived from the possibility to decrease transaction costs (increasing the probability of a match), and there are no attempts to based on empirics define what assets that will serve as money. Thus, the value of fiat money and its origin is still a mystery in classic and neo-classical monetary theories.
2
Kiyotaki, N. & Wright, R. (1989) p. 928 Kiyotaki, N. & Wright, R. (1989) p. 928. The definition of a medium of exchange used by Kiyotaki and Wright is based on Wicksell, and may easily include all kinds of financial assets. Kiyotaki, N. & Wright, R. (1992) p. 18. These models assume impossibility to hoard money, as the agents have to chose between accepting a medium of exchange or a commodity. Both can not be held at the same time. In the article “Money and Prices: A Model of Search and Bargaining” (1995) the author, Shi, uses the same set of assumptions as Kiyotaki and Wright, to develop the model for, among other things, exchange market intervention. 4 Kocherlakota, N. R. (1998) p. 232 5 Kocherlakota, N. R. (1998) p. 244 3
5
In an influential work, the Big Problem of Small Change (2002) Sargent and Velde formalizes the origin of fiat money to the need for change, i.e. the use and supply of token coins throughout history. Such an explanation of the origin of fiat money is a combination of an evolutionary learning process and a transaction cost explanation. The need to minimize transaction costs highlighted the need for change, that is token coins, and this fostered people to “trust” also fiat money issued by the authorities. Although this explanation is a powerful support to the existence of fiat money in an (neo) classical framework the problem is that an evolutionary learning process is hard to incorporate since it at some point in time does not assume rationality on the micro level. Another more important problem with their evidence of the emergence of fiat monetary system is that their scientific method is problematic to say the least. They admit that their choices of empirical cases are biased in the sense that they are chosen to fit with their theoretical model. Working with empirics in such a way that all empirics that shows to be problematic is automatically filtered away of course makes it possible to prove anything, including say that the world is flat if one would like to do so. In line with this method of working Sargent and Velde assumes that no monetary system and no monetary theory based on paper have existed before the breakdown of the BrettonWood system in 1973. Instead of repeatedly try to legitimize the neo classical monetary theory using different ad hoc explanations it would be more fruitful to ask the question of how to formulate a monetary theory that better captures the role and function of money. This way of working is certainly more in line with what Popper would have suggested. The question is if it is given that the existence of fiat money has to be searched in the forms of means of payments that fits into the traditional “definition” of money. Empirically it is often found that other forms of financial assets may serve as money. In Sweden bonds and promissory notes issued by companies, private persons or the state has served as money. The existence of fiat money can be traced to the issuance of interest bearing assets that for one reason or another comes to be used as money. And this also led to the existence of monetary theories for fiat monetary system.
Competing monetary authorities – the National Debt Office and the Riksbank, 1789-1833 The Swedish National Bank, the Riksbank was formed in 1668. It was owned and administered solely by the Parliament to protect it from risky ventures imposed by the
6
King. The Riksbank was responsible for keeping up the value of the currency, preferable by maintaining the specie standard. During the eighteenth century, the silver standard had been abandoned for various reasons from time to time. By 1789, notes issued by the Riksbank again were redeemable into a fixed amount of specie. But, this had only been the case since 1777, when a readoption of the silver standard took place. The experience of this readoption was that the deflationary effects had been severely costly for the Swedish economy. The National Debt Office (NDO) was formed in 1789. It originated from the Parliament’s Office (Riksens Ständers Kontor) founded in 1719. This authority had the task of repaying the substantial debts from the wars run by the former king Karl XII. Also when the National Debt Office started in 1789, the debt of the Swedish State to foreign lenders was substantial.6 In 1788 the government needed funds to finance the war on Russia. But as king Gustav III requested such funding from the Riksbank the bank denied this. Instead the Riksbank argued that the newly established silver standard was to be protected. The preferences of the government, i.e. the king, for this war was clear. The refusal of the Riksbank was questioned and a loan was taken against the will of the parliament.7 This to further consolidate the government’s independence of the parliamentary control. As a compromise with the parliament the National Debt Office was given the task of raising further capital. Unlike the Riksbank, the board of this Office was influenced by the government, as the king’s representative was appointed chairman. The National Debt Office was given the right to issue interest bearing promissory notes. According to the parliamentary regulation, the Office could issue notes to an amount of maximum 600 000 Riksdaler Specie (the Riksbank circulated approximately 5.5 million Riksdaler Specie in 1789). Within one month this amount was exceeded.8 In 1791 the promissory notes issued by the National Debt Office were no longer interest bearing. And to pay off earlier loans the Office maintained its note issuance, which continued until an agreement was settled with the Riksbank in 1803. It was then decided that the Riksbank should take over the responsibility for the notes in circulation 6
Ahlström, G. (1989) pp. 93-94, Carlsson (1989) p. 35 According to Heckscher, king Gustav III stated the following regarding the refusal of the Riksbank to lend money: ”Since it only concerns money, I believe that nothing more is needed than the inconvenience of manufacturing them”, and ”I imagine myself, that the Swedish paper-mills have not burnt down”. Heckscher, E.F. (1949), pp. 235, 246. Author’s translation. 8 Heckscher, E.F. (1949) pp. 236, 245, Sveriges Riksbank (1931) p. 44 7
7
that had been issued by the National Debt Office. In 1803 National Debt Office notes at a nominal value of no less than 19 million Riksdaler Specie was in circulation.9 Monetary arrangements Throughout the period, the Riksbank maintained the specie standard. The first credit notes issued by the National Debt Office were interest bearing. Since the Office issued notes to such an amount and these were accepted as means of payments by the public, the interest rate bearing feature of these notes was dropped in 1791. Officially, until the settlement between the Riksbank and the National Debt Office in 1803, the notes issued by the two monetary authorities were valued at par. Riksbank notes were officially legal tender. National Debt Office notes were in practice legal tender being accepted for all payments, including taxes, except for payments and deposits in the Riksbank. The Riksbank consistently refused to accept any connection to the notes issued by the Office, referring to its responsibility for the fixed exchange rate. A responsibility not limiting the issuing capacities of the National Debt Office.10 The National Debt Office notes were issued in smaller denominations than Riksbank notes. Something that has been forwarded as an explanation for the popularity of the National Debt Office’s notes among the public.11 Monetary consequences For a period of more than thirty years, Sweden would experience two types of currencies, diverging in value and formally not exchangeable. The working of these two currencies, both issued by authorities, makes an interesting empirical perspective to the question of how money is created and endowed with value. As seen in figure 1 below, the massive issuance of notes conducted by the National Debt relative to the Riksbank, made the main part of the money supply consist of National Debt Office notes. It seems as Riksbank notes obeyed the monetary adverse selection mechanism labeled Gresham’s law, although this law originally concerns only metallic coins.
9
Hallendorf, G. (1931) pp. 209, 221-235, 290, Heckscher, E.F. (1949) p. 254 See Heckscher, E.F. (1949) 11 See Fregert, K. & Jonung, L. (1996) 10
8
Figure 1: Note-circulation 1789-1833. 1000’s Riksdaler Specie. 35 000
The Riksbank's notes
30 000
Total
25 000
The National Debt Office's notes
20 000 15 000 10 000 5 000 0 1831
1828
1825
1822
1819
1816
1813
1810
1807
1804
1801
1798
1795
1792
1789
Source: Ahlström (1974) p. 24, Sveriges Riksbank (1931) pp. 13-21
Whatever the reason was fore the practical diminishing of Riksbank notes in circulation, this development resulted in several important changes in the monetary situation in Sweden. Most obvious was the almost immediate divergence in value in the market between Riksbank and National Debt Office notes. Figure 2 below shows the ratio between Riksbank and National Debt Office Notes. Figure 2: Ratio between the Riksdaler Banco and the Riksdaler Riksgälds 1790-1798. In percent. 25 20 15 10 5 0 1798
1797
1796
1795
1794
1793
1792
1791
1790
Source: Ahlström (1974) p. 29
Even though the Riksbank and National Debt Office notes were exchangeable at par officially, this was not the case in the market. When the Riksbank took over responsibility for the National Debt Office notes in circulation in 1803, the exchange rate was fixed at 1:1.5 in favor of the Riksbank. 9
As the value diverged, two “new” currencies were invented. The former Riksdaler Specie was divided into Riksdaler Banco (issued by the Riksbank) and the Riksdaler Riksgälds (issued by the National Debt Office). There were in practice two State issued currencies circulating simultaneously. As the latter circulated to a higher extent, prices quickly became quoted in the currency of the National Debt Office.12 The division between these currencies was visible until the monetary reform of 1855, when the Riksdaler Riksmynt was introduced. This currency was the same as the popularly used unit of account: the Riksdaler Riksgälds. Notes issued by the Riksbank, as well as the private banks were denominated in both currencies, but the denomination was regularly “even” in Riksdaler Riksgälds.13 The situation with two independent national currencies was not accepted and as a consequence a restored monetary unity was on top of the political agenda at least from 1792. However, voices from groups whose income was not dependent on taxes or rents promoted the idea of maintaining the paper standard. In 1800 a detailed plan was agreed upon in the parliament. But external forces delayed the Riksbank’s possibility to take over the liabilities of the National Debt Office, and thus these grew from 15 million to 19 million Riksdaler Banco (the old currency).14
Monetary theories in the light of the parallel currencies The recent monetary experiences due to the parallel note issuance of the Riksbank and the National Debt Office gave rise to a lot of writings in political economy. This was especially so in relation to the parliamentary gathering in 1792. Many of these works expressed direct opinions on how to solve the issue of the two parallel kinds of money and their internally floating exchange rates. An example was the (originally anonymous) print by a captain J.J. von Bilang in 1791: “Högmåls-Fråga till de Vise och Ädelsinnade i Landet angående en Ny Mynt-Författning och et Nytt Riks-Mynt til Befrielse ifrån den Riksfördärfverlige Agiohandeln”15 In this paper it was argued that the Riksbank should take over the liabilities of the National Debt Office Notes and that the Riksbank notes should be banned or inhibited to circulate “for some time”. 12
See Heckscher, E.F. (1949), Fregert, K. & Jonung, L. (1996) p. 458. See Ögren, A. (2003) Chapter 1 14 Hallendorf, G. (1931), Heckscher, E.F. (1949) p. 254 13
10
Theoretically this work was of poor quality. The fact that National Debt Office notes had been issued to such a high extent had nothing to do with their decreasing value in relation to the Riksbank notes. Instead the blame had to be carried by the “greedy” exchange agents (agioteurer) who “speculated” in the ratio between the notes and thus lowered or heightened their internal exchange rate. Bilang’s pamphlet was regarded as the preferred policy by the government at the time and of course provoked reactions, not least from those within the Riksbank. The view within the Riksbank (mainly argued by Silfverstolpe as a member of the Board of the Riksbank) is clearly an expression of the dominating metallistic view. There is a definite distinction between notes and coins. And notes are under no circumstances to be regarded as real money; i.e. metallic coins.16 The fact that there was a large discrepancy between the value of the metal content and the face value for many of the coins in circulation did not pose a problem for this reasoning. As was the case with the reaction of the Riksbank the main monetary view also throughout the monetary turbulent eighteenth century was metallistic. The view of previous Swedish theorists in the eighteenth century, such as Polhem, Berch, Nordencrantz, Chydenius, Christiernin, on monetary systems were based on the idea of money being endowed with value due to their metal content. There were degrees of differences to what extent it was acceptable or not to issue token coins or notes representing coins. Polhem (1730) and Chydenius (1766) both argue that there should be no deviation between the face value of the coins and the value of the metallic content.17 Christiernin (1761) is known for his quantity theoretical analysis of the inflation during the paper standard in Sweden between the 1743 and 1776. The most thorough theoretical work in relation to the situation with parallel currencies was made by Anders Wappengren in his work “Grunderne till ett Naturligt Finance-systeme, i jämförelse med vårt närvarande” which would translate into: “The
15
“An Important Question to the Wise and Noble Minded in the Country regarding a New Monetary Convention and a New National Coin to Liberation from the Nation Devastating Trade in Exchange Rates” (author’s translation). 16 Hallendorf, G. (1931:2) 17 In Chydenius’ important work “Rikets Hjelp genom en naturlig finance-system” (1766) (§4) he quotes Polhem’s statement to the Public Bureau of Affairs (Commerse Collegium) on the debasement of coins in any way “Such ideas in the Monetary System are either childish craziness or just acts of scoundrels” (author’s translation) [In original: “Slika påfund i Mynt-wäsendet äro, antingen barnsliga galenskaper eller blotta filourstreck:”] Originally this work of Chydenius was a speech in the parliament regarding the debate on adopting a pure silver standard. The silver standard also became implemented in 1776. 11
Foundations of a Natural Financial System, in comparison to our present System” published in 1792. In this work he argued that the monetary system based on silver, or any kind of specie, should be replaced with one based solely on paper. Heckscher regarded his work as the first to point out the “fundamental superiority of the paper monetary standard” but apart from that was Heckscher very skeptical of Wappengren’s work which he did not take seriously at all.18 In addition to the fact that no one has recreated the work of Wappengren into one fully consistent monetary theory, many of the statements regarding his theory are flawed (such as the claim that he argued for the usage of National Debt Office notes or assumed foreign transactions to be carried out with specie). Wappengren’s theory of a fiat monetary system (1792) Wappengren was well aware that his ideas would be regarded as controversial at the time. He initiated the introduction in his work with how he contradicted the general idea (what he labeled the “voice of the general”). This general voice stated that the principle of all finance was that the coin is silver, and that he wants to “tear down the temple by replacing the silver with paper”. As most economic thinkers at the time Wappengren’s thoughts were deeply rooted in the ideal of natural rights. There was a natural order in the economy and it had to be obeyed not only for the sake of economic stability but also for the importance of justice and fairness in the economy. In a way the theory was Walrasian since it started out with an equilibrium and was focusing on the fluctuations around this equilibrium. The economy was built around two things: Goods and Money. Two important concepts in this theory were Value and Price. In equilibrium, Value and Price of a Good (or aggregated to all goods) would be the same. Wappengren also built his theory on the idea of supply and demand, stating that: “Nothing else, than the Supply of a Good to the Need, determines its Value, and consequently also, that Nothing else should determine its Price.”19
18
Ahlström, G. (1993), Heckscher, E.F. (1949) p. 254 (Perhaps Heckscher’s skepticism was based on his own fundamental belief in the specie based monetary system.) 19 Wappengren, A. (1792) p. 3 ”Ingen ting annat, än en Vahras Tillgång emot Behofvet, bestämmer des Värde, och följaktligen äfven, att Ingen ting annat bör bestämma des Pris.” Italics in original.
12
A country’s Money stock was directly related to and symbolizes the stock of Goods of the country. The amount of Money to the amount of Goods during a year in equilibrium production of Goods, Price and Value would be the same. During years of scarcity of Goods, Price would deviate from the equilibrium Value by increasing, and during years of excess production Price would decrease in relation to Value. This was just, since when one received less in production one was compensated by a higher Price and thus more Money. Wappengren made a quantity theoretical reasoning as he concluded that the Money stock would change with the business trend, and while doing so affect Prices. The Money stock had to be kept constant otherwise Prices in relation to Value of the Goods would deteriorate. Such an imbalance in the relationship between Value and Price would mean that the Price in Money no longer expressed the true Value of the Good. Subsequently the Price in Money then misses to illustrate the equilibrium between Supply and Need. Thus, the Price would no longer be the Vale of the Good and thus not fair or just.20 The silver standard, which had been the ideal and had been the official monetary standard in Sweden since 1776, posed a problem. The fact that the Coin (Wappengren uses the terms Money and Coin interchangeably) consisted of silver made its role dual; it was Money due to the fact that it was minted, but it was also a Good. As it was a Good it may be taken out of domestic circulation by being accepted abroad. Thus it does not correspond to the idea of a steady Money stock to circulate domestically. It is here that the theory of Wappengren poses most problems. First because he obviously assumes no growth in production over time, and second because he seems to promote a kind of “Soviet model” of the economy closing the borders for international trade with the domestic Money. The assumption of no growth is true, but if steady growth over time would occur this would not falsify the working or the objectives of his model. Inherent in his reasoning is not only the idea of Money neutrally working as a lubricant to facilitate exchange. Wappengren too assumed trade originally in history to have been carried out by barter. The reason this was not sustainable anymore was because of the volume of trade had
20 Wappengren (1792) Part III §5 ”Man eger ingen säkerhet hvarken för sina Penningar eller Vahror. [“There is no security, neither for Money nor Goods”]
13
become too high.21 At heart of his theory is the idea of a just, or fair, financial system. Higher general production in relation to a steady money supply would thus lead to a generally lower Value (and Price) of the produced Goods expressed in Money. It would thus be fair that everybody could buy more of this general increase in production.22 The problem he is out to solve is when the equilibrium between Value and Price is distorted due to discretionary and temporary changes in the money supply. So Wappengren’s theory of the steady fiat monetary system does not fall with this argument. Just because Wappengren argued for a domestic money supply to be kept within the country’s border does not mean that he refuses foreign trade. On the contrary, he has a rather sophisticated reasoning in regard to this. First of all silver was not necessary for foreign trade. We had been trading internationally since long before the adoption of the silver standard. Second, how had the silver that was “needed” for foreign trade end up in Sweden in the first place? Since we did not produce it the silver used to mint coins must have been imported and paid for some other way than with silver coins or bullion. Third, to use silver in international trade was just to circumvent the fact that trade was made for goods by both countries. In time these transaction costs would diminish since other countries also would adjust their Money stock to their stock of Goods. Thus, he views the possibility of international trade between countries that all are on a fiat. His argument is that this would not be more difficult than with a specie standard. With a specie standard the silver is bound to leave the country as a result of a booming money supply or during years of failed harvests. During these circumstances neither a falling exchange rate nor ban on export of specie helps, this is just vain acts of attempts to curb Nature. Specie will flow out of the country until the right Money stock in relation to the domestic stock of Goods again is returning to its prior level. The big flaw in his reasoning is that he does not acknowledge that the effect of Sweden’s structural imbalance in trade could pose a problem also after the implementation of a fiat monetary system. Instead he views it as good, since it draws the silver in circulation out of the country. Even though he admits that it is painful and
21
Wappengren (1792) Part III §1 ”I äldsta tiderna, handlade aldeles utan Penningar: man utbytte blott sina Vahror.” [In the oldest times, trade was completely without Money: man just exchanged their Goods”.] 22 This argument for a steady money supply has been repeated much later in history. Not seldom by metalists who for the same reasons of justice argues against the depreciation in value. Swedish economist David Davidsson at the beginning of the twentieth century for instance argued strongly for the use of a steady money supply.
14
costly, he wishes this process to continue until Sweden is devoid of silver coins, and the more rapid the process is the better.23 Wappengren’s analysis of the functioning of the parallel monetary system at the time is well worth to be noticed. First of all he concludes that the fact that the Riksbank holds silver in its vaults is of no importance for the value of its notes. The notes are, as all Money, secured by the Value of the production of Goods in the country. The fact that there is silver in the reserves is at best unnecessary and at worse a costly waste; unnecessary during excessive or equilibrium years, but costly as the capital could be used during leaner years. The silver in the vaults of the Riksbank did not make its notes of higher value than the National Debt Office notes. The fact that a holder of a National Debt Office notes would receive between eighty and ninety percent of the value of the Riksbank note had nothing to do with this fact. If so, the National Debt Office note would only be worth the paper it was printed on. The fact that the Riksbank refused to accept the notes of the National Debt Office was just an illusion. In fact, he pointed out, the Riksbank was the institution that were redeeming the notes of the National Debt Office at a regular basis. What would a merchant holding National Debt Office notes in need of specie do? He would exchange his National Debt Office notes for Riksbank notes and of course redeem these notes at the Riksbank. Thus, the state would be liable for its notes whether authority that issued the notes. And in the end all the National Debt Office notes in circulation would have to be redeemed by the Riksbank until they were out of circulation. In the fiat monetary system proposed by Wappengren, the Riksbank would be the issuer of the fiat money. The fiat money would be guaranteed by the production of Goods and not by any reserves held by the bank. The Riksbank would just serve to maintain the Money stock stable by replacing destroyed notes. In addition it should accept interest bearing deposits and in this way the debt of the country would be turned into domestic debt instead of foreign.24
23
Wappengren (1792) Part II:3 ”Att under detta Speciemyntets exporterande följer en annan Exporthandels underlåtande och, genom bristande afsättning, Näringarnas utarmande, hvilket alt Riket blir för hvarje gång vanmägtigare att uthärda: det är således en olycklig nödvändighet, att Speciemyntet måste utföras, men då är det också en välgerning, att det sker fort eller obehindradt, emedan det dock nödvändigt skall ske, innan Näringana kunna börja att vederfaras.” 24 Wappengren (1792) Part IV §5 15
How the bank would fund the possibility to pay out the interest rate is not mentioned by Wappengren. Nor how this increased wealth would affect the money supply in the long run. The idea of turning the debt into a domestic debt seems to come as an ad hoc idea when discussing the design of the system. Despite the theoretical inconsistencies in Wappengren’s model it has many thoughts that are worth highlighting and that bear resemblance to the economic discourse today. It also frankly attacks many of the weaknesses in pre-classical, classical and later neoclassical monetary theory, such as the ideas of the working of commodity standards and how paper money in specie exchange regimes are endowed with value. In other ways he follows these discourses as he embraces the ideas of monetary neutrality as well as the quantity theoretical reasoning. The idea of fiat money and the problem of combining a sufficient money supply not to impede economic growth with the need for a stable value was according to a Swedish nineteenth century economic scholar addressed already by Plato in his work about the state. Plato’s solution was not too different from Wappengren’s. In brief the former argued for a dual monetary system, one part for domestic economy consisting of paper and one part for external trade and warfare consisting of precious metals.25 Wappengren certainly showed that the ideas of fiat monetary system and the importance of the current empirical situation was of utmost importance for designing new monetary theories. Although he quotes the previous Swedish scholars this is mainly a part of his argumentation against their focus on silver as the hallmark of an organized monetary system. He also quotes some international scholars (Rousseau and Smith in particular) and views his work as part of the enlightment. But in all respects their scientific contributions are put into the practical case and not the other way around.26
Concluding discussion Wappengren’s theory was an attempt to conceptualize a framework of how a pure fiat standard would work and be implemented. Money is neutral and just symbolizing the Goods produced within the country. The role of Money, thus is to facilitate exchange by taking away the need for barter. The Value of the Good in terms of Money is the same
25
Nordström, J.J. (1853) And so was in fact the case with most of the monetary theorists in Sweden during the eighteenth century, see Ögren, A. (2006:2). 26
16
as the Price in equilibrium. During years of low or high production, the Price would be altered to compensate for this. This would only be in line with nature and a fair way of compensating for more or less in production through the monetary system. The Money supply thus must be kept constant, otherwise, in accordance with a quantity theoretical reasoning, Prices would no longer reflect the true Value of the Good. His theory was a direct result of his empirical observations regarding the parallel note issuance of the National Debt Office and the Riksbank. Here he showed a kill for analytical reasoning as he concluded why the Riksbank could not escape the liabilities of another authority and why the value of Riksbank notes was not based on its reserve holdings in silver but on the general production in the country. The fact that the Swedish monetary history of the eighteenth century more concerned fiat monetary systems was of course of importance for the theoretical idea of a fiat monetary system. The note issuance of the National Debt Office demonstrates the close ties between financial instruments and means of payments. Unlike the idea of deriving acceptability as fiat money based on the idea of token coins, the National Debt Office notes started as interest bearing bonds financing a certain venture and continued as means of payments not carrying any interest. It should also be noted that in the nineteenth century Swedish bonds issued by the state and their interest rate coupons were possible to use for tax payments.27 Thus Swedish monetary history and history of monetary thought certainly does not fit with the evolutionary pattern from token coins to the fiat monetary system.
References Agardh, J.M. (1865) Om Bank-väsendet och penninge-theorien. Norstedts. Stockholm, Sweden. Ahlström, G. (1974) Studier i Svensk ekonomisk politik och prisutveckling 1776-1802. Studentlitteratur. Lund. Ahlström, G. (1989) “Riksgäldskontoret och Sveriges statsskuld före 1850-talet” in Dahmén (Ed.) Upplåning och utveckling. Riksgäldskontoret 1789-1989. Norstedts Stockholm. Ahlström, G. (1993) “Swedish Economic Thought in the Eighteenth Century” in Jonung, L. (Ed.) Swedish Economic Thought. Explorations and Advances Routledge UK.
27
Ögren, A. (2007:1) (2007:2) 17
Bell, S. (2001) “The role of the state and the hierarchy of money.” Cambridge Journal of Economics 25, pp.149-163. Brisman, S. (1931). “Tiden 1803-1834” in Sveriges Riksbank 1668-1924-1931. Bankens tillkomst och verksamhet. Part IV. Sveriges Riksbank. Stockholm. Carlsson (1989). “Riksgäldsfullmäktige 1789-1989” in Dahmén (Ed.) Upplåning och utveckling. Riksgäldskontoret 1789-1989. Norstedts Stockholm. Chick, V. (1992) On Money, Method and Keynes. Selected Essays. The MacMillan Press LTD. London, UK. Chydenius, A. (1766) Rikets Hjelp genom en Naturlig Finance-System Kungliga Tryckeriet, Stockholm, Sweden Fregert, K. & Jonung, L. (1996) “Inflation and switches between specie and paper standard in Sweden 1668-1931: A public finance interpretation.” Scottish Journal of political economy 43, Goodhart, C.A.E. (2003) “The two concepts of money: Implications for optimal currency areas” in Bell, S.A. & Nell, J.N. (Eds.) The State, the Market and the Euro. Chartalism versus Metallism in the Theory of Money. Edward Elgar, UK. Hallendorf, G. (1931) “Bankens öden från mössväldet till den andra 1766-1803” in Sveriges Riksbank 1668-1924-1931. Bankens tillkomst och verksamhet. Part III. Sveriges Riksbank. Stockholm. Hallendorf, G. (1931:2) ”Exkurs V. Några broschyrer om banken närmast före riksdagen i Gävle 1792” in Sveriges Riksbank 1668-1924-1931. Bankens tillkomst och verksamhet. Part III. Sveriges Riksbank. Stockholm. Heckscher, E.F. (1949) “Riksgälds en unik fas i det Svenska penningväsendets historia.” Ekonomisk tidskrift 1949. Kiyotaki, N. & Wright, R. (1989) “On Money as a Medium of Exchange” The Journal of Political Economy 97, pp. 927-954 Kiyotaki, N. & Wright, R. (1992) “Acceptability, Means of Payment, and Media of Exchange” Federal Reserve Bank of Minneapolis Quarterly Review 16, pp. 1821 Kocherlakota, N.R. (1998) “Money Is Memory” Journal of Economic Theory 81, pp. 232-251 Meyer, L.H. (2001) “Does Money Matter?” Federal Reserve Bank of St. Louis Review 83, pp. 1-15 Laidler, D. (1988) “British Monetary Orthodoxy in the 1870s” Oxford Economic Papers 40, pp. 74-109 Lindgren, T (1968) Riksbankens sedelhistoria 1668-1968. Rabén och Sjögren. Stockholm. Nordström, J.J. (1853) Afhandlingar hörande till läran om crediten. I. Credit- och bankväsendet. Norstedt. Stockholm, Sweden. Nygren, I. (1985) Från Stockholm Banco till Citibank. Svensk kreditmarknad under 325 år. Liber förlag. Stockholm. 18
Ögren, A. (2003) Empirical Studies in Money, Credit and Banking: The Swedish Credit Market in Transition under the Silver and the Gold Standards, 1834 – 1913. Doctoral thesis. Stockholm School of Economics. Ögren, A. (2006:1) “Free or central banking? Liquidity and financial deepening in Sweden, 1834–1913.” Explorations in Economic History 43, pp. 64-93 Ögren, A. (2006:2) “Monetary Theory and Practice in Sweden, 1657 – 1776” presented at the workshop: Les Penseés monétaires dans l’histoire: 1517 – 1776 (Monetary Thoughts in History, 1517 – 1776), at the Université Lumière Lyon 2, September 7 – 8 Ögren, A. (2007:1) “Financial Revolution and Economic Modernization in Sweden” SSE/EFI Working Paper Series in Economics and Finance No 650 Ögren, A. (2007:2) “Lender of Last Resort in a Peripheral Economy with a Fixed Exchange Rate: Financial Crises and Monetary Policy in Sweden under the Silver and Gold Standards, 1834 – 1913” in Cottrell, P. et l (Eds.) Centers and Peripheries in Banking Ashgate (Forthcoming in September). Sargent, T.J., & Velde, F.R. (2002) The Big Problem of Small Change Princeton University Press. Shi, S. (1995) “Money and Prices: A Model of Search and Bargaining” Journal of Economic Theory 67, pp. 467-496 Sveriges Riksbank (1931) “Statistiska tabeller 1668-1924” in Sveriges Riksbank 16681924-1931. Bankens tillkomst och verksamhet. Part V. Sveriges Riksbank. Stockholm. Wappengren, A. (1792) Grunderne till ett Naturligt Finance-systeme, i jämförelse med vårt närvarande Joh. Edmans Enkas Förlag, Uppsala, Sweden. Wennberg, J.O. (1829) Om myntbestämning och realisation. Hörberg. Stockholm, Sweden. Wray, L.R. (1990) Money and Credit in Capitalist Economies. The Endogenous Money Approach. Edward Elgar. UK.
19
