29 March 2014

Banking and EconomiGc rowthi n Sweden beforeW orldW ar I

Banking and EconomiGc rowthi n Sweden
beforeW orldW ar I
The article sketches the history of Swedish commercial banking from 1656 until
World War I, with special attention to the post-1850 period. Emphasis is placed
on the relationships between economic growth and banking. International comparisons
based on the quantitative measures developed by Rondo Cameron and
Raymond Goldsmith are made. It is concluded that at all stages of its early
industrialization Sweden had a remarkably large and efficient banking system.
This, in turn, was largely the result of the general population's long experience
with banking and paper money and their generally high levels of literacy and
A series of studies analyzingt he relationshipb etween bankinga nd
the "earlys tages of industrializationf"o r various countries has
appeared in recent years. This work, all of it inspired and much of it
done by Rondo Cameron, covers the United States, England, Scotland,
Belgium, France, Russia, Japan (twice), Austria, Serbia, Italy,
and Spain.' The value of these studies has been considerably enhanced
by the substantial degree of coordination, especially with
regard to certain quantitative measures, which has been achieved.
It has been possible to draw some tentative conclusions about the
general featurest hat have historicallyc haracterizeds uccessfulb anking
systems2 and the features that have been associated with stagnation
and failure. In addition, our understanding of the process of
industrialization, and particularly of the role of banks and other
financial institutions, in individual countries has been enhanced by
The Journal of Economic History, Vol. XXXVIII, No. 3 (Sept. 1978). ? The Economic
History Association. All rights reserved.
The author is Professor of Economics at the Ohio State University. He wishes to thank
Professor Karl-Gustav Hildebrand and the members of the Institute of Economic History at the
University of Uppsala for their graciousness during his stay there.
1 Rondo Cameron et al., Banking in the Early Stages of Industrialization (New York, 1967);
Rondo Cameron, ed., Banking and Economic Development (New York, 1972); Richard H. Tilly,
Financial Institutions and Industrialization in the Rhineland, 1815-1870 (Madison, 1966);
Richard Rudolph, Banking and Industrialization in Austria-Hungary (Cambridge, 1976); Gabriel
Tortella-Casares, Los origenes del capitalismo en Espaiia (Madrid, 1973).
2 In- this paper, "banking" and "commercial banking" are used interchangeably.
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Economic Growth in Sweden 651
systematic comparisons with the experience of other countries, successes
and failures both.
Although the list of countries covered is impressive, it is unfortunate
that it does not include Sweden.3 Sweden was a seventeenthcentury
pioneer in banking and the use of non-commodity money.
Furthermore, during the period 1870-1914 Sweden had the highest
growth rate of per capita GNP of any country in Europe, and during
the century following 1870 was transformed from one of Europe's
very poorest countries into the richest. The purpose of this paper is to
fill the void in Swedish banking studies. It will summarize the development
and role of commercial banking during the early stages of
Swedish industrialization in general accord with Cameron's framework.
In particular, it will analyze certain quantitative measures of
the Swedish banking system relative to similar data for other countries
gathered by Cameron and his collaborators. It will also utilize
some of the data on financial structure in various countries developed
by Raymond Goldsmith.
Before 1850
When rapid modern economic growth commenced in Sweden
sometime between 1850 and 1870 it followed a century and a half of
absolute political and, at least relative, economic decline. The disasters
of the Great Northern War had by 1720 permanently ended
Sweden's status as a great power, and after 1814 Sweden was reduced
to its current borders.4
About the best thing that can be said for the country's economic
performance between 1720 and 1850 is that Sweden proper was
supporting more than twice as large a population in 1850 as in 1720.5
The evidence on economic development, per capita income, and
living standards is not impressive. Between 1720 and 1830 there was
little or no change in the percentage of the population dependent on
3 Furthermore, the extensive Swedish literature on the subject is virtually devoid of international
comparisons. Recent Swedish work consists almost entirely of individual bank histories.
See Olle Gasslander, History of Stockholmn Enskilda Bank to 1914 (Stockholm, 1962); Ernst
Soderlund, Skandinaviska Banken, 1864-1914 (Stockholm, 1964); and Karl-Gustav Hildebrand,
I omvandlingens tjanst (Stockholm, 1971).
4 The Union with Norway (1814-1905) was a personal one and the two countries remained
essentially separate.
5 Sten Carlsson. Svensk historic II/(Stockholm, 1961), pp. 33-35
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652 Sandberg
each of the principal sectors of the economy. Agriculture and associated
activities continued to dominate with between 75 and 80
percent of the population.6 Within agriculture, moreover, there were
some disturbing trends, particularly during periods of rapid population
growth. Not only was the average holding of the landowning
peasantry declining but, more seriously, the percentage of the population
belonging to the agricultural proletariat cotterss, cottagers,
servants, and paupers) was increasing rapidly. Between 1750 and
1850 it grew from about 20 percent to 40 percent of the entire
population. Its share of the agricultural population increased especially
fast between 1810 and 1850 and probably reached a high point
around 1870.7 Up to at least 1830 the change in the percentage
distribution of the population among social groups meant that a
decline in the average standard of living for the population as a whole
was compatible with all groups maintaining their average standard of
Thus the period around 1830 may well have been a low point for
Swedish per capita income. Despite the considerable data problems
of GNP estimates for this period, Table 1 gives a reasonable picture of
Sweden's extremely low relative per capita income level in 1830. Of
the countries listed only Russia and Finland had a lower estimated
per capita GNP. The evidence indicates that after 1830 there was a
slow but accelerating growth in per capita Swedish GNP. It was not,
however, as rapid as the average rate of increase in Europe as a
whole. Not until the 1870s did Swedish growth start to outpace the
European average.
To some extent the absolute improvement after 1830 may be credited
to an accelerating rate of improvement in agricultural techniques,
including the continuing rapid spread of the potato and the
increasing production of oats to fuel London's horse-powered transport
system. The continuing growth of the agricultural proletariat,
however, makes it seem unlikely that per capita income in agriculture
increased appreciably. The overall improvement in per capita GNP
must largely be credited to the increasing relative size of the nonagricultural
The period after 1845 also witnessed large-scale emigration, predominantly
of the agricultural proletariat and largely destined for the
6 Ibid., p. 40.
7 Ibid., pp. 78-79 and Kurt Samuelsson, From Great Power to Welfare State (London, 1968),
p. 146.
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EconomicG rowth in Sweden 653
(Europe = 100)a
1830 1840 1850 1860 1870 1880 1890 1900 1910 1913
Sweden 80.8 76.2 74.6 72.6 68.5 82.8 91.8 99.8 118.8 127.3
Austria-Hungary 104.2 102.3 100.0 92.9 85.0 86.1 93.0 91.0 94.2 93.3
Belgium 122.9 132.7 145.2 158.1 164.1 160.9 162.4 158.5 171.1 167.4
Denmark 86.7 86.5 90.5 94.8 94.7 108.2 129.4 139.1 148.1 161.4
Finland 78.3 78.8 80.2 77.7 87.2 89.3 94.8 93.4 90.4 97.4
France 110.0 116.2 117.7 117.7 121.7 126.8 132.7 132.7 136.3 129.0
Germany 102.1 102.7 108.8 114.2 118.7 121.0 138.4 140.4 141.3 139.1
Greece - 76.9 76.0 74.2 69.6 71.0 74.7 65.9 65.1 60.3
Italy 110.4 103.8 97.9 97.1 86.9 85.0 80.2 73.6 73.3 82.6
Netherlands 144.6 146.9 150.9 145.8 140.9 148.1 151.0 134.9 146.1 141.2
Norway 116.7 117.3 123.7 129.4 117.3 126.8 134.8 126.8 134.0 140.3
Russia 70.8 65.4 61.8 57.4 69.6 61.2 46.9 54.5 57.5 61.0
Spain 109.6 110.8 110.6 111.6 91.6 88.3 82.7 77.1 74.1 68.7
Switzerland 115.0 121.2 138.2 154.8 152.9 184.7 181.7 172.5 179.4 180.5
UK 114.2 151.5 161.8 180.0 174.9 185.8 202.3 193.6 181.2 180.7
Europe 100 100 100 100 100 100 100 100 100 100
a Three-year averages except for 1913.
Source: Paul Bairoch, "Europe's Gross National Product, 1800-1975," The Journal of European
Economic History, 5 (Fall 1976), 286.
United States.8 There is no doubt that, on average, the emigrants
greatly improved their economic lot. In all probability, by reducing
crowding on the land, they also increased the productivity of those
who remained behind. Thus' emigration almost certainly improved
the average economic position of both those who went and those who
stayed behind.9 Since the emigrants overwhelmingly consisted of
young, healthy, and ambitious people, however, it is still possible
that the net effect was to lower Swedish per capita GNP.
Modern Growth
As noted above, rapid industrialization became the dominant feature
of the Swedish economy starting sometime between 1850 and
1870. The exact timing is a matter of dispute or, perhaps more
accurately, a matter of taste. The year 1870 is a popular choice
because the early 1870s witnessed a spectacular industrial boom. It is
possible, however, to trace important elements of Swedish industrialization
back before 1870. In particular, the export boom in
timber, which may be viewed as having ignited the whole process,
8 Carlsson, Svensk historic, pp.454-62.
9 This conclusion also depends on the extent to which emigrants continued to support
dependents left behind.
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654 Sandberg
started around 1850. In any case, for the periods 1860-1913, 1863-
1913, or 1870-1913, Sweden had the most rapid rate of growth of per
capita output of any country in Europe.10
The key element in this growth was exports. Increasing world
demand for Swedish resources and, later, Swedish manufactured
goods was reflected in a fast-growing export sector and in an improving
trend in the terms of trade.' But to view the process of Swedish
economic growth as an automatic response to foreign demand would
be naive. A more accurate interpretation is to say that developments
in foreign demand and in technology created a set of opportunities for
Swedish entrepreneurs, businessmen, workers, and savers and that
these opportunities were exploited with skill and alacrity. History is
replete with countries who faced similar opportunities but did not
perform nearly as well.
Early examples of these opportunities for Sweden are the British
demand for oats and, more importantly, its demand for timber. The
combination of reduced British timber tariffs, increased British demand,
improved sawing technology, lower transport costs, and the
exhaustion of the more advantageously located Norwegian forests
created a golden opportunity for Swedish timber exports. By mobilizing
capital, building sawmills, gathering a labor force, and organizing
and improving the flotation of logs, a major industry quickly developed.
By the beginning of the twentieth century the industry faced
serious timber supply problems, but by then the country had sold its
"forest primeval" for a good price. The creative response was also
apparent on the technological side. As sawing timber supplies waned,
the adoption of foreign technology, together with important domestic
contributions, resulted in the creation of a dynamic, export-oriented
pulp and paper industry. The rising world demand for paper created
the opportunity and, once again, it was eagerly seized.
Similar developments occurred with regard to a number of other
products. The combination of growing demand and Swedish technological
contributions led to the emergence of a series of industries
utilizing Swedish resources-especially wood, high quality steel, and
a disciplined, generally literate and, at least initially, cheap labor
force. Some prominent examples are safety matches, ball bearings,
10 See Table 1 and W. A. Cole and Phyllis Deane, "The Growth of National Incomes," in H.
J. Habakkuk and M. M. Postan, eds., The Cambridge Economic History of Europe, Vol. VI,
Part I (Cambridge, 1965), p. 26.
11 Lennart Jorberg, "Structural Change and Economic Growth: Sweden in the Nineteenth
Century," in Franpois Crouzet, William Chaloner, and William Stern, eds., Essays in European
Economic History (London, 1969), p. 276.
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EconomicG rowth in Sweden 655
cream separators, and telephone and electrical equipment. At the
same time, of course, the rapidly growing level of personal income
created opportunities for the development of consumer goods industries,
including the construction of modern housing. Meanwhile the
economy's infrastructure, especially the railways, was created in tune
with growing needs and here the government played its most important
active role.
The sources of the capital required for this growth is a matter of
considerable interest, particularly for a study that deals with the role
of banks. Among the relevant questions are: What was the role of
foreign capital? What were the sources of domestic savings? And what
was the role of various types of financial institutions?
There is no doubt that foreign, especially French, capital played a
major role in facilitating Swedish economic growth before World War
I, even though its role was not a direct one.12 For example, the
Swedish merchant houses that played a key role in financing the early
growth of the timber trade obtained much of their funds abroad. This
was done by collecting payment for exports at the time of shipment
from Sweden but delaying payment for imports until after the goods
had arrived; thus foreign capital financed Swedish foreign trade in
transit.13 More importantly, the Swedish national and local governments
and Swedish mortgage institutions relied primarily on foreign
bond markets. Between 1860 and World War I well over 80 percent
of the national government debt was normally held abroad. In 1908
the percentage was 89.2 percent for the national government and 54
and 56 percent respectively for the mortgage banks and the local
government authorities. By contrast, only 13 percent of all other
Swedish bond issues were held abroad. 14 Thus a very large percentage
of the capital needed for the construction of railways and cities
was raised abroad, thereby freeing domestic savings for direct industrial
and commercial investments.
It was natural that this division of functions should occur. Foreign
investors had less knowledge of detailed Swedish conditions and had a
greater need of government guarantees. The received, but not yet
dispersed, proceeds of foreign bond placements also financed many of
12 Torsten GArdlund, Svensk industrifinansering under genombrottsskedet, 1830-1913
(Stockholm, 1947), pp. 123-26.
13 J6rberg, "Structural Change," pp. 267-68. See also Kurt Samuelsson, Det stora kopmanshusen
i Stockholm, 1720-1815 (Stockholm,1951), esp. pp. 196-97.
14 Ingvar Sundbom, "Sveriges kapitalimport fran Frankrike, 1870-1914," in Studier i
ekonomi och historia (Uppsala, 1944), p. 232.
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656 Sandberg
the important industrial engagements of the Swedish banks, especially
those of Stockholms Enskilda Bank.
During the period from 1870 to World War I there was a marked
change in the sources of domestic savings invested in Swedish industry
and in the financial institutions utilized. At the beginning of the
period outside industrial finance was largely provided by the "free
note market," by merchant houses, and by the remnants of the then
declining system of governmental subsidy loans. The note market
involved wealthy private individuals, private money brokers,15 and
various charitable and other non-profit organizations and associations.
Mortgage and insurance firms also participated in this market. The
private money brokers, the merchant houses, and some of the nonprofit
associations (burial, accident, sickness, and so on) accepted
deposits from the public.16 The growth of commercial banks and a
lively bond market during the succeeding decades, however, resulted
in a larger and more efficient system of financial intermediaries.
Banks were a more convenient, flexible, and secure receptacle for
savings than were the money brokers and the non-profit associations.
The economies of scale inherent in the gathering of financial information
and the division of risk could be utilized better by the banks. In
addition, the governmental supervision applied to the banks made
them at least seem safer. Similarly, freely traded bonds were a more
attractive instrument than the traditional six-month notes which
dominated the free note market. By World War I the borrowing of
Swedish industrial firms overwhelmingly consisted of bank loans and
bond issues.17
The Theory of the Impoverished Sophisticate
What most needs to be explained about Swedish industrialization is
its remarkable rapidity. Why was it that in Sweden it was possible to
mobilize capital, labor, entrepreneurship, and research capability so
efficiently and so very quickly in response to new economic opportunities?
My view is that this phenomenon can best be explained by the fact
that mid-nineteenth-century Sweden was an "impoverished sophisticate."
That is, compared to other countries with similar levels of
income and at a similar "stage" in their industrialization process,
15 These individuals and partnerships are very similar to what are called private bankers in
the Cameronian studies of other countries.
16 Gardlund, Svensk industrifinansering, ch. 4.
17 Ibid., ch. 6.
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EconomicG rowth in Sweden 657
Sweden was a relatively advanced society. Its governmental, technical,
and educational institutions were much more advanced than the
country's income level would lead one to expect. Even more important,
the educational level of the population was much higher and
their attitudes and values were much more modern and more conducive
to economic growth than was the case in other countries with
similar income levels.18
This sophistication was reflected in a high degree of public acceptance
of modern financial institutions and procedures. Already by
1850 Sweden had for some time been converted largely to a paper
currency. In addition, it had a well functioning non-commercial bank,
financial market, and at least the rudiments of modern commercial
and savings bank systems. By 1870 Sweden had as sophisticated a
financial system as most nineteenth-century countries achieved only
at an advanced stage of industrialization, and at a much higher level of
per capita income.
The Early Period (1656-1863)
The "early" period in Swedish banking history stretches from the
founding of the precursor of the National Bank of Sweden (Sveriges
Riksbank) in 1656 to the passage of the Bank Reform Act of 1863. The
particular importance of this act lies in two of its provisions. First, it
permitted the establishment of limited liability joint stock banks
without the right to issue bank notes and, second, it ended legal
limitations on bank interest rate charges. The act can therefore be
viewed as ending a period of 200 years during which the principal
functions of the formal banking system had been the provision of
means of payment and of subsidized loans to favored industries, firms,
and persons. These two functions were joined in that the chief source
of the subsidies was, in effect, the income the note issuing institutions
derived from the public's willingness to hold bank notes. The legal
limitation of interest rate charges on loans below free market levels19
meant that the formal banking system, including both privately and
18 For a broader theoretical and empirical discussion of this question, see my paper, "The
Case of the Impoverished Sophisticate: Swedish Industrialization Before World War I." forthcoming
in this JOURNAL, 39 (March 1979).
19 Sven Brisman, Sveriges affdrsbanker, Del I (Stockholm, 1924), p. 224; and Soderlund,
Skandinaviska Banken, pp. 84-89.
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658 -andberg
publicly owned institutions, was not in a good position to compete for
private deposits, which went largely to merchant houses, money
brokers, and various types of non-profit associations.
Within a few years of its founding the Bank of 1656 began issuing
deposit receipts for specie (copper) deposits. When deposit receipts
quickly became accepted as circulating currency, the bank began to
issue receipts well in excess of its actual copper holdings. A rise in the
price of copper, and the ensuing rush to exchange the receipts for
metal, caused the insolvency of the bank. As a result the national
government took over responsibility for the receipts, making them
legal tender, and reorganized the bank into a national, governmentowned
and controlled institution.20 Although formally forbidden to
issue credit notes to serve as currency before 1701, Lhe Riksbank
supplied paper currency by the issue of permanently circulating
(accepted)c hecks that requirede ndorsementf or each transactionA. t
the end of the eighteenth century Riksbank paper money was supplemented
by certificates issued by the National Debt Office. Although
remaining a separate unit of account, these certificates were
taken over by the Riksbank in 1803.21
As might be expected, these paper currencies went through various
crises resulting from overissue. The usual result was suspension of
convertibilityf ollowedb y depreciationi n terms of specie, althougha
very painfulr evaluationo f the currencyw as engineeredi n the 1760s.
By the time the currencyw as finallyr eorganizedin 1855, the ratioo f
the value of silver coins (riksdaler species) to Riksbank notes
(riksdaler banco) to National Debt Office notes (riksdaler riksmynt)
was approximately4 to 1.5 to 1. The last of these became the official
monetary unit, later renamed the crown (krona).22 Although the
performanceo f the paperc urrenciesm ay be viewed as unsatisfactory,
it in no way compares with experiences such as that of the assignats in
revolutionaryF rance. In any case, there was no lasting populara nd
political revulsion against the principle of paper money.
As noted above, the Riksbankw as involved in grantings ubsidized
loans. To some extent this was done via privately owned banking
institutions. For the most part, however, the procedure was for the
Riksbank to make loans at interest rates below free market levels to
the ManufacturersD' iscount Office (Manufakturdiskontota, gov-
20 Alfred Flux, The Swedish Banking System (Washington, 1910), pp. 13-17; and
Samuelsson, From Great Power, p. 11.
21 Flux, Swedish Banking, pp. 18, 22-23, 27-28.
22 Sven Brisman, Det moderna affdrsbankerna (Stockholm, 1915), pp. 18-19.
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EconomicG rowth in Sweden 659
ernment agency) and the Iron Office (Jarnkontoret, an organ of the
Association of Swedish Iron Masters). These organizations, in turn,
issued loans to officially approved industries and firms on favorable
terms. Not only were interest rates low but, perhaps more important,
the borrowers were assured that the loans would be renewed even in
periods of tight credit. In absolute terms, these support loans reached
their maximum level in the 1850s.23
Starting sometime around 1770, the government developed an
interest in the creation of privately owned commercial banks. The
motives appear to have included facilitating the spread of Riksbank
and especially National Debt Office notes and increasing the flow of
investment funds, especially to government-favored industries and
firms. The upshot of this interest, starting in 1773, was the chartering
of a series of so-called "discount companies." These were a form of
mixed private and public commercial bank: their capital came from a
combination of private subscription and low interest Riksbank or
National Debt Office loans and their management involved various
mixtures of shareholder representation and government appointees.
24 They contributed to the money supply by issuing drafts on
their credit in the Riksbank or the National Debt Office and by
issuing deposit certificates payable on demand to the holder. Both of
these types of paper circulated freely as currency. But excessive,
unsound, and illiquid investments eventually led to the demise of all
the discount companies by 1817.25 With their end all nongovernment
financial activities reverted to the free note market and
the merchant houses.

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