Written by prof. Sven Fritz
Introduction
Administration
Operations 1600-1800
Operations 1800-1900
The Riksbank in politics
References
Introduction
Although the Palmstruch bank (Stockholms Banco) had occasioned losses and difficulties, arousing indignation and bitterness, the need for a bank was considered self-evident. During the 1668 Riksdag (diet), the responsibility for determining how the "banking office" could be maintained and strengthened was transferred from the government to the Estates of the Realm. Towards the end of the session, at the request of the Estates, the government gave an "assurance…on certain terms and advantages for the best of the Bank". In this way, both the management of the bank and all powers of legislation and ordinance over it were transferred to the Estates. Soon afterwards, the Estates issued the 1668 banking ordinance and instructions for the management of the Bank. The ordinance and the 1681 regulations (subsequently renewed and revised) remained in force until 1897, when they were replaced by the Sveriges Riksbank Act, which laid the formal foundations for the Riksbank's development into a relatively modern central bank.
The new institution in 1668 was simply referred to as "the Bank" in the royal assurance and as "the Bank in Stockholm" in the banking ordinance. For a long time, the term "Bank" with a capital B was retained as an abbreviation for what officially came to be known as the Bank of the Estates of the Realm (or during the Caroline autocracy as the Bank of His Majesty's Estates). When the Estates were replaced by a bicameral parliament in 1866, the bank's name was changed to Sveriges Riksbank.
In some respects the new bank appeared to be a continuation of the Palmstruch bank. It was a state institution and adopted the organisation of the old bank, with two main departments. In other respects, the bank was a completely new institution. The old one had been controlled by the government, issued banknotes and was governed by a director. The new bank was controlled by the Riksdag and governed in the same way as other civil service departments - collegiately by a politically-appointed governing board. During the initial period its operations were largely founded on interest-bearing deposits.
The historically most important innovation was, however, that the Bank became a public authority under the Riksdag. For a long time it played an important role as provider of credit to the general public but it was also highly significant politically until the end of the 19th century. During this period it became one of the most important parliamentary instruments in the struggle with the government for control of the state finances as well as of monetary and foreign exchange policy and credit policy. Banking matters had a leading role in politics during the 18th and, above all, the 19th centuries. However, only certain aspects of this multi-faceted subject can be covered briefly in the review that follows the sections on the management and operations of the Bank.
Prior to the 19th century, the four Estates of the Realm had little direct dealings with their bank. Banking issues could not be treated as general parliamentary business, partly because of the secrecy surrounding the Bank and also because the Peasants Estate had no share in the power over the bank until 1800. Up to that year, the Peasants had reason to regret their statement in the 1668 Riksdag that they "had no understanding thereof… and would have nothing to do with the Bank". In the 1820s it was decreed that the Bank's position, the reports of the governing board and the banking regulations were to be public.
With effect from the 1800 Riksdag, each of the four Estates appointed three delegates to the governing board. In connection with the introduction of a bicameral parliament in 1866, the number of delegates was reduced to seven, to be appointed annually by 48 electors, 24 from each chamber. In 1894 a three-year mandate was introduced; two delegates were to resign each year.
The right of the Estates of the Realm (prior to 1800 the three higher estates) to issue instructions was exercised during the Caroline period by the bank committee, special commissions and delegations, during the Age of Liberty by the secret committee and its bank delegations, during the Gustavian period by the bank committee and secret committee, and from 1809 by the parliamentary standing committee on banking. The Bank's operations were regulated in detail by extensive regulations that from the Age of Liberty onwards could only be amended during a Riksdag session. Bank delegations and bank committees, besides deciding future bank policy, closely examined whether and how well the governing board had followed the current regulations.
When the 1772 Instrument of Government empowered the King to decide when a Riksdag was to be summoned, this threatened the periodic examination of the management of the Bank in connection with a Riksdag. To protect the Estates' power over the Riksbank and prevent abuse of the constitution by the Crown, the 1778 Riksdag therefore established the Bank audit. The regular audits entailed a detailed control of the accounts and ensuring that the governing board had followed the Riksdag's instructions. The model was copied for the auditing of the new Riksgäldskontoret (National Debt Office) that the Riksdag set up in 1789. In 1800 the two audits were merged.
Prior to the 1897 Sveriges Riksbank Act, the Riksdag had the sole power to appoint the Bank's Board of Directors, the Governing Board and, apart from the years 1688-1700, unrestricted rights to issue instructions for its operations. In the heyday of the Caroline autocracy, Karl XI proclaimed that all decrees regarding the Bank, both old and new, were invalid without his approval; at the start of the Great Northern War, however, the right to issue decrees and instructions regarding the Bank was returned by Karl XII to the Estates of the Realm.
After the fall of the autocracy, the Bank's position was defined increasingly clearly in constitutional law. As regents in 1719 and 1720, Ulrika Eleonora and Fredrik I issued special validations of the privileges and benefits of the exchange bank and the loan bank. Adolf Fredrik's accession pledge in 1751 included a statement that, in future as in the past, "the banking office was to be under the Estates' own and particular care and be protected from all incursions". This formula was repeated in the pledge of Gustav III in March 1772 but in the new Instrument of Government after his coup d'état in August that year, § 55 states that, as previously, the Bank of the Estates of the Realm would remain under the Estates' "own guarantee and care" and be administered in accordance with the regulations and statutes the Estates had already issued or would issue. A similarly worded enactment appeared in § 72 of the 1809 Instrument of Government and was elaborated in § 70 of the Riksdag Ordinance with the provision that only the Estates had the right to direct the governing board (and the auditors).
Administration
In its early years the Bank rented premises in Oxenstierna House in Storkyrkobrinken and moved from there in 1680 to a new building, designed by the architect Nicodemus Tessin the Elder, in Järntorget. This building was erected by the City on behalf of the Bank, which provided loans for the purpose. Having rented it at first, in 1693 the Bank became its owner and initiated an annex.
For two hundred years the Bank's administration was complex and cumbersome. Its operations were divided into two segments: an 'exchange bank' and a 'loan bank'. Riksdiskontverket ('the national discount office') was added at the beginning of the 19th century and reorganised in 1815 as Bankodiskontverket ('the bank discount office'); formally independent of the Bank, it was housed in the same premises and functioned in practice as a part of the Bank.
The routine work was managed by the bank commissioners in accordance with the ordinance, current regulations and directives from the governing board. The Bank did not have a chief officer. Neither were its routines customer-friendly. In order to collect a loan or withdraw a deposit, as well as to repay a loan or make a deposit, for example, two visits were necessary, one in the morning and the other in the afternoon, with calls at various offices and cash-desks located in different parts of the two buildings. A source from the mid 19th century states that such a transaction passed through the hands of 13 officials. The arrangements were so tiresome and time-consuming that many customers in Stockholm and all those living elsewhere paid agents, Bank employees and others to undertake their business.
In the 1820s a move to bring the Bank's procedures up to date was begun, as already mentioned, by publishing its reports and regulations. But progress was slow. In 1836-37 the exchange bank's giro operations were taken over by a deposit department and the loan bank was replaced by a lending department. A reorganisation in 1841 resulted in seven departments, each managed by a bank commissioner. The discount office was formally incorporated as a department in 1872, accompanied by a simplification of customer relationships; all transactions with the general public were concentrated to a single hall and the system of agents was abolished.
Many years also passed before the Bank had a single governor. Exchange operations were becoming more important and in 1845 two members of the board of directors were delegated to direct them. In 1867 it was decided that these two delegates would also manage the presentation of loan transactions and supervise the internal administration. In 1873 these duties were separated so that one delegate was responsible for exchange business and the other for internal administration and certain credits. The following year a banker was appointed as exchange delegate and during his twenty-six years in this position he became de facto governor. This was codified in 1901 by naming the post First Delegate.
The external organisation of the Bank likewise started to change in the 1870s. In 1872 the two partially independent loan offices in Göteborg and Malmö - both established in 1824 in place of the private discount houses, which had been abolished - became branch offices of the head office in Stockholm, followed by the loan office in Visby in 1851. A branch in Luleå was opened in 1876 along with one in Malmtorgsgatan in Stockholm (the Norrmalm district was becoming the city's new commercial centre). In the period 1880-96 nation-wide coverage was achieved by establishing new branches in another eleven provincial capitals.
Although they were modernised in the early 1870s, the buildings that had housed the head office since the 17th century had become obsolescent. In 1873 the governing board reported that the holdings of gold and silver were spread over the basement and five floors of the two buildings at the Bank's disposal. The regular banking operations, together with the documents recording loans, pledges and other securities, were housed in the top storey of a building that also contained the printing press with a drying stove, a furnace for destroying notes and a bookbinding shop. The need for new premises was already generally recognised at that time but the matter dragged on interminably. So it was not until 1906 that the former state commercial bank and subvention institute, now a regular central bank, was able to move to a new building behind the houses of parliament on Helgeandsholmen.
Operations 1600-1800
The lesson of the Palmstruch bank led to the new Bank being prohibited from issuing notes. A Crown proposal to change this in 1711 was rejected. The Bank's operations were based to some extent on accumulated profits but above all on deposits, interest-free sight loans in the exchange bank and interest-bearing time deposits in the loan bank.
The exchange bank's giro account deposits were never very large but tended to grow whenever the loan bank was closed for deposits. They were used in the first place by central and local government authorities. In that people used certain internal payment notices and receipts as notes, to some extent the exchange bank reluctantly provided more convenient means of payment than the cumbersome copper-plate money.
Each deposit in the loan bank represented a loan to the Bank against a 'certificate of deposit' made out to the bearer with a six-month maturity and six-week notice. The annual interest rate was 6 per cent initially but was lowered to 5 per cent when the maximum lawful rate and thereby the Bank's lending rate was reduced from 8 to 6 per cent.
Loans were granted against real surety, sometimes backed by a personal guarantee, never just against a signature. They were granted for between six months and a year and could be prolonged. Loans secured with real estate made up the major share. There were times when the large deposits exceeded the stock of loans to the general public. It used to be thought that the Bank provided credit mostly for consumption and failed to establish connections with industry and trade. This seems to be a misconception. Then as later, the noble names and high-ranking titles of many borrowers stood for people with business interests. Moreover, attempts in the 1690s to extend lending to the iron trade - the growth industry par excellence at that time - seem to have succeeded: during this decade, 11-13 per cent of the loans went to owners of iron works, and wholesalers with an interest in exporting iron took stock-holding credits.
When deposits rose sharply during the war in the late 1670s and again in the early phase (1702-09) of the Great Northern War, the Bank's difficulties in investing the funds were eased in that the Crown borrowed large amounts. So in practice the wars were financed in part by the government borrowing from the people through the Bank.
The Bank experienced major problems with liquidity, ultimately because it was not entitled to issue notes and, since its interest rates were laid down in the regulations, it was largely unable to influence deposits and borrowing by adjusting rates to the extent that the law otherwise allowed. For two centuries the Bank was debarred from conducting an interest rate policy with a view to balancing supply and demand for credit. The liquidity problem was resolved instead by closing the loan bank at times for deposits and at times for lending.
After the disastrous battle of Poltava, the Bank virtually ceased to function as a credit institute. When the news reached Stockholm in August 1709, there was a run on the Bank. All lending was stopped and cancelled deposits could not be withdrawn; interest was paid on deposit certificates, which could also be used for loan repayment and interest payments. The loan bank's deposits dwindled and lending to the general public was close to nil. In the years 1711-13 the Bank was forced to provide the Crown with rather large advances, to be repaid from government revenue. There were long delays before either interest or principal was received - although the Bank protested strongly, the promised funds were used to finance the war.
During the Age of Liberty (1718-72), the character of the Bank changed markedly. As indicated above, the Caroline era's commercial bank financed from deposits had been transformed into little more than a giro bank. Some lending, against both fixed and movable pledges, re-started in the 1730s but the terms failed to attract more than a very limited demand for credit. When the Hat party came into power in the Riksdag of 1738-39, an expansionary economic policy was launched with the Bank as its primary instrument. As the government bank, it had always administered the authorities' funds; now, however, it became the principle means for state financing of industry. Support and subsidised credits from public authorities and institutions were financed with loans from the Bank and its rapidly growing and increasingly cheap form of lending against real estate and movable pledges also involved an element of interest subsidies. Moreover, an unsuccessful war was financed in the Bank.
The generous supply of cheap credit from the Bank led to the re-creation of an institutional sector in the Swedish credit market and also amounted to an attempt to lower the level of interest rates there. However, the credit and fiscal policy placed an excessive strain on exchange rate and monetary policy and led to inflation, a currency depreciation and the export of copper plate. The redemption of notes at face value had to cease in 1745. Sweden moved to a paper currency and a floating exchange rate. The continuation of an expansionary credit policy and the monetary financing of large government deficits, partly generated by another unsuccessful war, fuelled inflation and the currency's depreciation. In 1747 and 1759 there were two half-hearted attempts to ration credit to the general public and the experiment with a managed float 1747-61 through three successively operating exchange offices had to be abandoned.
Monetary and exchange rate policy came to the fore in the early 1760s. At the beginning of 1762 the Riksdag decided that virtually all lending to the public should cease, followed at the end of the year by an order that outstanding loans were to be repaid more quickly. This contraction by the Hat party was continued by the Caps when they took over in the Riksdag of 1765-66. All lending was stopped and so were the interest-bearing deposits that had accompanied the end of note redemption in 1745 and grown fairly rapidly in the 1750s. All that remained was the giro operations of the exchange bank.
Exchange rate policy focused on a return to a metal standard at the earlier par values with the leading international currencies. The deflation and the currency appreciation were intended to occur successively over a number of years but this plan capsized on people's expectations and the process became much more turbulent. Severe economic shocks resulted and the Caps were driven from power.
The reorganisation of the monetary system continued to attract strong interest in the remaining Riksdags during the Age of Liberty but the plans came to nothing. The Bank was reopened to borrowers in 1769 but only for short-term credit against liquid security, above all stock-holding credit against iron and other metals, weighed on the city's scales and stored there. From the exchange office, moreover, the Bank took over the task of stabilising exchange rates, with the result that it came to manage a large reserve of foreign currency in bills.
As the Age of Liberty drew to a close, there was fairly general political agreement that a stabilisation of Sweden's currency required a metal standard, that is, a fixed exchange rate regime with a par value in silver as the norm for the value of money. The changeover from a paper currency to a metal standard meant that the notes would be redeemable on demand in metal coin. After Gustav III's coup d'état, the 1771-72 Riksdag presented the government with a 'finance plan', drawn up in the Standing Committee on Banking, and petitioning the Crown to ordain the realm's 'minting and financing system'. The extent of the powers of the King in Council was never clarified but in the lengthy negotiations that followed, the Board of the Bank ultimately agreed to the King in Council's claim to manage the currency reform at the prevailing rate.
The exchange of notes for silver coins began in 1776, though the formal date of the reform was 1 January 1777. The earlier coins, where 1 daler silver money had equalled 3 dalers copper money, with 1 daler divided into 32 öre, were replaced by riksdaler specie (silver riksdaler) at the rate of 1 riksdaler specie for 18 dalers copper money or 6 dalers silver money. The riksdaler specie was divided into 48 skillingar, each made up of 12 'round pieces'.
As of 1777 the Bank's primary task was to safeguard the effective silver standard, that is, to redeem its notes on request with silver coin or metal. The guidelines for this were drawn up in connection with the Riksdag of 1778-79. The importance of expectations was clearly recognised. In modern terminology, a tight, preventive monetary policy would make exchange rate policy credible, dispelling any doubts that the redemption of notes would hold good for a long time to come.
The Bank was set a very high liquidity requirement. The ratio of metal cash to the amount of notes in circulation plus the exchange bank's sight deposits was not to be less than the prevailing 2:3 and was to be raised to 3:4 by augmenting metal cash and sterilising some notes. A certain amount of lending was permitted in order to counter deflation but it was to be short-term against liquid security so as not to weaken the Bank's high liquidity. The principle was observed almost without exception both in the general lending operations (mainly stock-holding credits for iron and other exported metals) and the central bank functions for the Crown and the discount houses. In order to prevent inflation, long-term mortgage loans were prohibited until further notice and the Crown was debarred from deficit financing in the Bank in peacetime.
As practically all the Bank's lending rates were below both the current statutory maximum and the rates outside the organised credit market, virtually all its borrowers gained from a form of interest subsidy. In practice, however, it was mainly certain sectors that benefited in this way: the iron and metal works, textile industries and trade in their products. By limiting the Bank's lending operations it was possible to resolve the conflict between the Bank's primary function of safeguarding the silver standard as an expression of the internal and external stability of the value of money and its task of mediating the state's industrial subsidies.
It has been argued that the liquidity requirement was unduly severe and that the restrictions on Bank lending were excessive, that is, that higher lending by the Bank would have been compatible with safeguarding the silver standard. Such counterfactual statements are, however, difficult to confirm or disprove. But it is probable that to some extent the lending restrictions were countered by the discount houses having credits in the Bank that functioned as liquidity reserves. They should have enabled the regular credit market to provide a larger volume of credit than would have been the case if the Bank's own lending had been augmented with the discount houses' credits. As the monetary system was intended to work automatically and was conditioned by factors beyond its control, the Bank management had a more passive role than before in monetary and exchange rate policy. And instead of exercising the scope that existed for discretionary measures, it was rather an instrument for government policy. Thus, on a couple occasions the management, with no support from the regulations, allowed the Bank's reserves to be used to counter disturbances in the foreign exchange and credit markets. Similarly, it was at the government's initiative that the Bank became the lender of last resort for the discount houses. After 1777 the relationship between the government and the Bank management was smoother than before because, compared with the Age of Liberty, the Crown fulfilled its commercial commitments with the Bank to a much greater extent. Matters became worse again after 1786, probably because of the change in the political climate. Moreover, the strong opposition to the power of the Crown that emerged in the 1786 Riksdag seems to have affected the composition of the governing board.
Link to the Discount Companies and Monetary systems that worked "automatically"
When the war against Russia that started in 1788-90 had failed, the precarious state of the government finances led the Estates to set up a new agency, the National Debt Office, with responsibility for managing the national debt and government borrowing. The unusual arrangement of a national debt agency that was independent of the government as well as the Riksdag, restricted the financial powers of both.
To cover the government deficit, the National Debt Office issued a large quantity of short-term interest-bearing promissory notes, intended to function as means of payment. A little later they were transformed into non-interest bearing notes and in practice not redeemable in the national currency (the Bank's notes). The National Debt Office (Riksgäldskontoret) became a note-issuing institution parallel with and soon outdoing the Bank. The growing volume of the former's paper currency (riksdaler riksgälds) depreciated relative to the Bank's silver currency (riksdaler banco) and almost drove the latter out of circulation.
Operations 1800-1900
Another currency reform followed in 1803. The riksdaler riksgälds were made redeemable in riksdaler banco in the ratio 1.5:1. A disastrous war against Russia in 1808-09 led again to a large volume of notes and high inflation. The exchange of notes for silver was restricted and in 1809 it almost ceased without a formal decision. Further large issues of riksgäld notes in connection with the war against Napoleon in 1812 generated more inflation and disorder in the monetary system. Prices fell when the extensive wars were over but as the international price level dropped even more, the external value of the Swedish currency continued to decline. By the beginning of the 1830s its value was a third lower than in 1812-14.
The 1803 currency reform was managed, as in 1777, by the government. From a constitutional point of view this was clearly questionable since, at the royal command, the governing board of the Bank deviated from the plan prescribed by the 1800 Riksdag. The Bank's auditors drew attention to this and at the 1809-10 Riksdag the standing committee censured the Board for yielding to the Crown but admitted that the latter's plan was in fact better than the Riksdag's.
After a long political struggle and many delays, the 1834 Riksdag approved a new, immediate return to a silver standard at current rates; 2 2/3 riksdaler banko or 4 riksdaler riksgälds were equivalent to 1 riksdaler in silver. The metal standard lasted until World War One. In 1855 the currency unit was renamed riksdaler riksmynt (national currency riksdaler), with a division into 100 parts called öre. In the early 1870s, moreover, Sweden, Norway and Denmark introduced a common monetary system based on gold, with krona (crown) as the name of the monetary unit; in the 1890s the monetary union was extended to include the notes.
During the protracted preparations for the currency reform in 1834, Sweden had - in the person of Karl Johan - a regent and, from 1818, a king who took a great interest in such matters. In the 1810s and 1820s he arranged exchange operations to raise the currency's external value or at least prevent it from falling. During the 1817-18 session the currency question was transferred by the government to the Riksdag but the Estates failed to reach a conclusion during either of the next two sessions, in 1823 and 1828-30. During the latter, however, the king agreed to a reform at current rates in exchange for a say in the Bank legislation; this was of no consequence for power over the Bank's operations.
After three decades of inflation, a brief attempt to stabilise the value of money and renewed, rapid inflation and currency depreciation, it was hardly surprising that the Riksdag was so intent on achieving long-term credibility for the economic policy objective of monetary stability, defined as parity with the silver standard. This was clearly expressed in a statement by the combined standing committees on finance and banking at the 1823 Riksdag, recommending a postponement of the currency reform. The reason was the public lack of confidence in the Bank's long-term ability to meet its commitment to redeem notes on demand, even though the metal holdings (referred to by the committees as 'real funds') were equivalent to almost half of the stock of notes. The committees did not share the opinion that "the course and durability of a reform depended solely on a certain relationship between the Bank's real funds and its notes in circulation"; on the contrary, it was "the general conviction that the Bank, in addition to what its assets in hard cash show, can continue to pay for its notes with real money, which has to be recovered" (italics here). There is evidence that the rapid inflation prior to the 1803 currency reform had eroded confidence in this endeavour to stabilise the value of money and the course of events after 1809 presumably worsened expectations.
In order to maintain the silver standard, in 1834 it was considered, as in 1777, that the Bank needed a very high level of liquidity, though this time the requirement was set somewhat lower at 2/5 coverage in metal under normal circumstances. The regulations again gave the governing board little scope for discretionary measures. Up to 1845, measures for preventing a drain on metal cash had been prescribed but as of that year policy was to be repressive. In the event of a continuous outflow of silver from the Bank, the deflationary effect of the inflow of notes was to be reinforced primarily through a reduction of lending. The change had to do with the circumstance that in 1841-43 the stock of metal cash had more than halved and the metal:notes ratio had fallen below 2:5, raising serious concern about the permanence of the silver standard.
Another change in 1845 was the replacement of the ratio system by a 'contingent' or quota system. The stock of notes was not to exceed an amount equivalent to metal cash plus a cover-free quota of 20 million riksdaler, a figure that was subsequently increased. At the same time, the problem of maintaining or augmenting metal cash was facilitated by authorising the governing board for this purpose to purchase foreign bills and treat them as a part of metal cash. The lending this entailed conferred two advantages: the increased stock of notes did not encroach on the cover-free quota and the statutory maximum interest rate could be evaded in that the interest rate lay in the rate at which the bills were purchased.
During the crisis in 1857 the Bank purchased bills to meet a public demand for loans, not to maintain or augment its metal cash. The Riksdag's criticism of this may have contributed to the Bank refraining from supporting the credit market during the troublesome currency policy crises in the 1860s. When the Estates were replaced by a bicameral parliament in 1866, the name of the Bank had to be amended; the new name, Sveriges Riksbank (Bank of the Realm of Sweden) was adopted the following year. The breakthrough for new ideas about monetary and exchange rate policy abroad had no immediate counterpart in Sweden. The interest rate on no-mortgage loans with a maturity of up to six months was deregulated in 1864 but the Riksbank continued to follow the earlier guidelines for exchange rate policy and its credit policy focused on keeping interest rates down. The 'squeeze' system, involving a withdrawal of credit, was used on a number of occasions, the last of which was in the crisis of 1878-79, when the largest government intervention as lender of last resort was financed, not in the Riksbank but by the National Debt Office. In general, however, by buying currency when the rates were below par and selling at a handsome profit when they were above par and approaching the silver export point, the Riksbank held exchange rate fluctuations inside the band represented by the silver points.
In time the Riksbank's arsenal of exchange rate policy instruments was enlarged. After it had been decided in 1872 that foreign bills would no longer be treated as a part of metal cash, the Bank built up a separate fund of foreign bills and government bonds. This ended the automatic connection between domestic lending and fluctuations in the foreign exchange reserves. By selling, or pledging, foreign bills and government securities abroad and placing the proceeds in foreign banks, the right to issue notes could be increased and with it the Riksbank's ability to maintain internal liquidity. During the calm period for monetary and foreign exchange policy in the 1880s the Riksbank began to apply the principle of holding its metal cash constant and above the stipulated minimum. The varying demand for foreign currency was mostly, though not always, met from the foreign reserves. Moreover, greater importance was attached to the Riksbank having a reserve of notes, that is, an unutilised right of issue.
When effects of the Baring crisis reached Sweden in the late autumn of 1890, the squeeze system was finally abandoned. The Riksbank declared that a sharp interest rate increase was preferable to a direct withdrawal of loans. During the 1890s the Bank took the lead in setting interest rates; previously it had been more prone to follow the other commercial banks. Towards the end of the decade it became the lender of last resort in that the commercial banks made rediscounting agreements with it more generally; in 1901, in connection with a move towards giving the Riksbank the sole right to issue banknotes, a sizeable rediscounting obligation was imposed.
Prior to 1874, note-issuing private banks were under an obligation to redeem their notes on demand in the national currency (Riksbank notes). When the latter flowed into the Riksbank - to be exchanged for silver or because the Bank withdrew credit - this lowered private banks' holdings of the national currency, forcing them to reduce their loans and their notes in circulation in order to maintain liquidity. An Ordinance in 1874 rendered the holdings of national currency of no consequence for note issues by private banks, thereby depriving the Riksbank of the ability to influence their lending. The Ordinance stipulated that these banks' head offices must redeem their notes on demand in the current statutory gold coin and that such coins must be held in the head office to an amount of at least 10 per cent of the share capital.
The right of private banks to issue notes had been a contentious political issue, for instance in the 1840s and later 1860s. It was not considerations of exchange rate policy that drove the political criticism but mainly an objection to private capitalists obtaining a profit on note issues that ought to go to the government finances via the Riksbank. The 1881 Bank Commission proposed that in principle the Riksbank should have the sole right to issue notes but differences of opinion between the two chambers of parliament led to delays. It was not until the 1897 Riksbank Act that note issues by private banks were successively curtailed and brought to an end as of 1904.
To enable the Riksbank to make up for the absence of private issues, its right had to be enlarged. The cover-free quota was increased in 1901 from 45 to 100 million kronor and the regulations were amended. If the stock of notes not covered by metal were to exceed 60 million kronor, the minimum holding of gold, 25 million kronor, was to be increased by 30 per cent of the difference. In addition, the quota system was supplemented with further cover. If the value of gold holdings rose, the right to issue notes rose by twice as much, while an increase in credit balances with foreign banks increased the right correspondingly.
The establishment of a national debt office in 1789 had reduced the significance of the Bank not only as an issuer of notes but also as a lender to the general public. The 1803 currency reform, besides reviving the Bank's role in these respects, meant that the more commercial segment of its operations came to be managed by the formally independent National Discount Office (Riksdiskonten) and subsequently by the Bank Discount Office (Bankodiskonten) together with the Trade and Industry Discount Office (Handels- och Näringsdiskonten). Apart from the issuing of notes, the giro accounts and metal cash, this left the Bank proper with the provision of loans against gold and silver security, loan bank certificates, export metals, and the credits that subsidised canal construction, waterway clearance and the lending operations of Manufacturdiskontfonden ('manufacturing discount fund') and Järnkontoret (Iron Masters' Association). In 1815 the Bank resumed lending against real estate, mostly to farmers.
The Bank's function as an instrument for the government's subsidisation of economic activities complicated its task of maintaining high liquidity to safeguard the silver standard's credibility. Its lending was spread over a number of funds for particular economic sectors or groups. Loan requirements were to be met within as many sectors as possible and also within each sector. There was therefore a ceiling on the size of loans. The credits were provided at artificially low rates of interest, prescribed for each sector in the Bank regulations and therefore fixed. Besides the motive of providing support, the low rates were intended to avoid an unduly low level of lending to any of the sectors. The loans were mostly not very liquid.
The development of the Bank's lending operations was exposed to many conflicting wills and interests, giving the impression of confusion. There was, however, a tendency to transform the operations to bring them more into line with the primary objective of safeguarding the silver standard and the related definition of monetary stability. The main thrust contains three features. (a) Lending to certain sectors that gave rise to illiquid claims was discontinued. Real estate loans were discontinued in the 1820s and both the 'cultivation' loans and the long-standing loans for canal construction and waterway clearance were run down. Outstanding real estate loans and renewal loans decreased as a share of total lending. The establishment of a central mortgage bank led to the rural real estate loans being transferred to the agrarian credit associations, leaving the small amount of urban real estate loans to dwindle away. (b) Lending was brought up to date and made more efficient by expanding the discount office for trade and industry. Lending against officially weighed metals for export, shares and government paper was added to their lending against domestic bills and other claims, which was also supplemented with the purchase of the latter instruments. Overdraft facilities were provided for private banks and savings banks. (c) For a time, moreover, the Riksdag worked for a transition from predominantly direct lending to the general public to indirect loans, mediated by private banks that did not issue notes and were subsidised with credit in the Bank and used its notes (these institutions, known somewhat confusingly as 'affiliated banks', are discussed further on).
The modernisation of the Bank's lending operations was completed when the internal administration was reformed in the early 1870s. The allocation for 'affiliated banks' was reduced successively and the last of them disappeared. The subsidised credits to Manufakturdiskontfond and Järnkontoret were withdrawn. The system with separate funds for specific branches of lending was dropped, except for the fund for instalment credits. All the other regular lending was transformed into bill discounting, commercial loans against personal surety, lending against securities and officially weighed metals, and overdraft facilities. Bill discounting and lending against securities grew in particular at the expense of the other two categories.
The Bank's lending operations, as well as the interest-bearing deposits that had been introduced at the beginning of the 1860s, had been in the doldrums and declined during that decade. With the economic upswing in the early 1870s the modernised Bank grew again, in keeping with the political programme that it should be a strong state-owned commercial bank to counterbalance the private banks. Its capital more than doubled up to the beginning of the 1890s, when it matched the combined share capital of all the note-issuing private banks. Deposits grew at much the same rate until the end of the 1890s, when the Bank started to close them down. The commercial lending almost quadrupled up to 1895, when the Bank had the largest loan stock of all the commercial banks. Its borrowers were primarily large companies.
When the 1897 Act gave the Riksbank the sole right to issue notes and prohibited almost all interest-bearing deposits, its stock of deposits had become negligible. The Act also necessitated a rearrangement of lending operations. Discounted bills were the only form of lending that was eligible for inclusion in the supplementary note cover. As the sole right of issue led to a very large increase in the required cover, the Riksbank was obliged to turn bill discounting into its main form of lending; in the first five years of the 1890s it more than quadrupled, while the other branches of lending stood still or decreased. By 1907, loans against personal surety had ceased to exist and loans secured with shares had almost disappeared. Overdraft facilities continued at a negligible level. Bond borrowing held up best but these loans and, in time, bill discounting went entirely to the banks.
This status of the Riksbank as provider of credit and lender of last resort to the private banks had emerged by degrees. For a long time the Bank had been reluctant to do business with private competitors and the function of lender of last resort had been performed by other institutions: the National Debt Office, Stockholms Enskilda Bank and Skandinaviska Kreditaktiebolaget. It happened that the Bank lent to private banks against bonds in the 1870s; in the crisis in 1878-79 this occurred along with bill discounting. In the 1880s it became the practice for the banks to be able to borrow from the Bank against government securities but more regular rediscounting was done only on a small scale and for banks that did not issue notes. The rediscounting of banks' bills became a regular operation in 1893 to reduce the risks in the Bank's bill portfolio; the banks' endorsement of the rediscounted bills protected the Bank from attendant losses.
A rediscounting agreement was concluded with each interested bank. It was some years before they became particularly interested, after certain restrictive conditions had been removed. The discounting obligation imposed in 1901 led the governing board to decide not to renew current contracts and announce that the Riksbank was prepared to discount all bills endorsed by private banks and approved by the Bank. The banks' rebate on the official discount rate was to be ½ percentage point, to be deducted immediately, irrespective of the size of the rediscounted amount.
The Riksbank in politics
In banking politics as in other politics, the relationships between the Crown and the Estates of the Realm assembled in a Riksdag did not always comply in practice with the constitution. The right of Karl XI to have the last word was formal. Usually, what the Bank requested was granted without further ado. The Crown did not initiate changes or interfere with the Bank's business. In1701 Karl XII returned the right to decide about the Bank to the Riksdag but in the 1710s the Bank experienced less considerate methods of government.
During the rule of the Estates in the Age of Liberty, the party in power was in command of the Bank as well as the government. It was under Gustaf III that the constitutional struggle between government and parliament began, even in the sphere of banking policy, and it is this that is outlined below up to the end of the 19th century.
Through the Bank and its other agency, the National Debt Office, in the late 18th and early 19th centuries the Riksdag had gained ground in its fight for power over the government finances. In the Age of Liberty, as indicated, large government deficits had been financed with monetary instruments in the Bank, at the expense of the domestic and external value of the currency. When the 1778 Riksdag approved the currency reform, the Crown's earlier debts to the Bank were regulated and its possibility of borrowing from the Bank was strictly limited as part of the effort to make the reform credible. The immediate consequence was that the Crown set up a national debt directorate that raised foreign and, to a lesser extent, domestic loans on behalf of the government. When the Estates established the National Debt Office in 1789 to manage the new national debt and government borrowing, the Crown was enjoined not to involve the realm in any new liabilities. To strengthen the Riksdag's influence over the Crown still further in this field, the 1809-10 Riksdag decided that a part of tax revenue was to pass directly to the National Debt Office for distribution. This arrangement lasted until 1875.
Proposals designed to reduce the Riksdag's absolute power over the Bank in favour of the Crown were put forward several times in the 19th century, for many years without results. During the 1800 Riksdag there was a proposal to wind up the Bank and replace it with a note-issuing bank established by private individuals. A similar proposal appeared in 1822: the Bank (along with the earlier National Discount Office) should have 3/8ths of its capital in private hands and be controlled in this reorganised form by a charter conferred by the King in Council.
In 1830 the efforts to give the Crown a share in the legislative power over the Bank led to a law, jointly enacted by the Crown and the Riksdag, but this did not diminish the latter's absolute power over the Bank's operations. However, the 1828-30 Riksdag had preliminarily passed an amendment to § 72 of the Instrument of Government that would strengthen the Crown's influence over the Bank, but both this proposal and the draft of a new Riksbank Act with greatly increased influence for the government were rejected by the 1834-35 Riksdag.
The 1858 finance committee and the 1881 bank committee also revived the old ideas about private part-ownership of the Bank and a greater say for the government. The latter committee's proposal that the King in Council should appoint one of seven members, the chairman, of the Bank's governing board was enshrined in the 1897 Riksbank Act. In that this legislation was enacted jointly by the Crown and Parliament and contained all the major provisions for the organisation of the Riksbank, as well as its note issuing and other operations, it can be said that the King in Council had finally acquired a say in the statutory power over the Riksbank.
The struggle for power to regulate the rest of the banking system proceeded in stages. It was the King in Council that issued the privileges and regulations for the earliest discount institutions, the short-lived Riksgäldsdiskontkontoret and the newer discount offices in Göteborg and Malmö. The Riksdag won the next round when Riksgäldsdiskonten was placed under the National Debt Office in 1792 and when, in 1803, the discounting operations in Stockholm were restricted to the Bank through Riksdiskonten, as well as when the Bank early in the 1820s set up loan offices in Göteborg and Malmö after the private discount houses had ceased to exist.
In the 1830s and 1840s the King in Council granted charters to eight note-issuing banks outside Stockholm. Citing a constitutional right (of uncertain extent) to ordain on economic matters, in 1846 the Crown also issued a statute for the private banks. These banks were unpopular in many quarters, not least among the Fourth Estate, the Peasants. The criticism mainly concerned the legislative power of the government, the lucrative nature of note issues by private banks and their associations with the noble and wealthy classes. In 1848 the Riksdag requested the government to examine how the private banking system could be closed down and the Riksdag of 1850-51 decided that in time, a new system of commercial banks would be built up. These banks, misleadingly called 'affiliated banks' (to the Riksbank), were to be privately-owned joint-liability companies without a right to issue notes. They would operate with the Bank's notes and be entitled to credits in the Bank at low interest rates. They were intended to eliminate the private banks through competition and, as mentioned above, take over the Bank's general lending operations.
The 'affiliated banks' were not a success and the experiment was ended after little more than a decade. Instead, it was envisaged that the Riksbank would become a major, modern, nation-wide commercial bank that would counterbalance the private banks. This idea gave way to the notion of transforming the Riksbank into an (almost) out and out central bank. Even so, the idea that the Riksbank could incorporate operations as a means of competing with the privately-owned commercial banks, or that another major state-owned commercial bank might be set up for that purpose, lived on for a long time.
Notwithstanding parliamentary criticism, the Crown's private banking legislation continued. The last royal ordinance to do with private banks was issued in 1874 and remained in force until 1903. The 1886 Bank Act gave the new, bicameral parliament a part in legislation on the privately-owned commercial banks.
Moreover, the government retained a possibility of issuing banking regulations on its own. The banks had to abide by the articles of association as laid down in connection with the charter they were required to obtain from the government, leaving the government free to formulate the articles as it saw fit. The government could do this when issuing a charter for a new bank or prolonging an existing charter (mostly every ten years), as well as when a bank had occasion to amend its articles in the meantime. Such amendments in the articles of a number of banks were subsequently combined and codified when new banking laws were drafted.
References
Bredefeldt, R. (forthcoming), The genesis of the Bank of Sweden in the economic and social context of the late 17th century.
Brisman, S. (1918), Den Palmstruchska banken och Riksens Ständers Bank under den karolinska tiden (The Palmstruch Bank and the Bank of the Estate of the Real in the Caroline era), in Sveriges Riksbank 1668-1918. P.A. Norstedt & Söner, Stockholm.
Id. (1918), Tiden 1803-1834 och den stora reformperioden 1860-1904 (The period 1803-34 and the great reform period 1860-1904). Ibid.
Davidson, D. (1918), Riksbanken 1834-1860 (The Riksbank 1934-60). Ibid.
Fritz, S. (2002), Olof Burenstam. Ett bidrag till en brukspatrons biografi (Olof Burenstam. A contribution to the biography of an ironmaster). Research report 15. Institute for Research in Economic History.
Id. (1967), Studier i svenskt bankväsen 1772-89 (Studies in the Swedish banking system 1772-89).
Hallendorf, C. (1918), Bankens öden från mossväldet till den andra realisation 1766-1803 (The fate of the Bank from the rule of the Caps to the second currency reform 1766-1803) in Sveriges Riksbank 1668-1918. P.A. Norstedt & Söner, Stockholm.
Ludvigs, F. (1998), Riksarkivets beståndsöversikt. 2. Riksdagen och dess verk. Allmänna kyrkomötet (Survey of the collections in the National Archives. 2. The Riksdag and its agencies. General church assembly). Skrifter utgivna av Svenska Riksarkivet.
Montgomery, A. (1918), Riksbanken och de valutapolitiska problemen 1719-1778 (The Riksbank and the exchange rate policy problems 1719-78), in Sveriges Riksbank 1668-1918. P.A. Norstedt & Söner, Stockholm.
Nilsson, G.B. (1981), Banker i brytningstid. A.O. Wallenberg i svensk bankpolitik 1850-1856 (Banks in a time of change. A.O. Wallenberg in Swedish bank policy 1850-56).
Id. (2001), Grundaren. André Oscar Wallenberg 1816-1886 (The founder. André Oscar Wallenberg 1816-86).
Nygren, I. (1985), Från Stockholms Banco till Citibank. Svensk kreditmarknad under 325 år (From Stockholm Banco to Citibank. The Swedish credit market over 325 years).
The Discount Companies
Towards the middle of the 18th century the debate in Western Europe over the importance of credit for economic progress paid particular attention to the question of organising the short-term credit market into institutions that issued short loans against promissory notes with the interest deducted in advance. These ideas reached Sweden at a relatively early stage. At that time the Riksbank was the only bank in Sweden. Since the end of the 1730s it had been the instrument for an expansionist economic policy and in the 1750s it had an extensive lending operation with low interest rates, mainly long-term loans secured against property but also shorter loans secured against gold, silver and other commodities.
The new ideas of lending against personal guarantees were first put into practice by Manufakturdiskontfonden (the Manufacturing Discount Fund) in the 1750s and Jernkontoret (the Ironmasters Association, now the Swedish Steel Producers' Association) in the 1760s. A more advanced version arrived in the shape of the discount companies in the 1770s an 1780s, which heralded a new era in the history of Swedish banking in terms of both their corporate form and their business.
Alongside the Riksbank, these discount companies dominated the Swedish credit market's institutional sector until they had to go into liquidation in 1817-18, albeit after 1802 only in the provinces and in a slightly modified form. The institutional credit market was built up alongside a completely dominant private credit market. It was in this non-institutional market that credit, payments and payment transfers were arranged for the Swedish economy's leading sectors, agriculture, export industry and foreign trade.
Monetary systems that worked "automatically"
Throughout the period considered here, international payments were normally transacted with bills. A person or firm in Sweden that owed a sum for goods or some other liability to a party abroad purchased a claim in the form of a bill made out in the appropriate foreign currency from another person or firm in Sweden with such a claim for sale and remitted it (forwarded it by mail) to the party abroad. The latter presented the bill to the countryman on whom the claim was made and exchanged it for cash in the currency in question.
Exchange rates were noted in Swedish money per unit foreign currency, for instance Reichsthaler Hamburger Banco, which for Sweden in the mid 19th century was still the main international silver currency.
If the exchange rate for a Reichsthaler Hamburger rose above what was known as the upper metal point, it became more expensive to purchase a claim founded on a bill in Reichsthaler Hamburger and remit it to the creditor abroad than to send the amount of the payment (including transport and insurance costs) in silver obtained from the Bank in exchange for its bills. Conversely, if the exchange rate fell below the lower metal point, it paid to repatriate a claim abroad in silver and exchange this in the Bank for Swedish notes instead of selling a claim founded on a bill at the low exchange rate.
The theoretically more advanced view in the first half of the 19th century was that if notes were exchanged for silver (gold) on a large scale and the issuing bank held onto the notes, the stock in circulation would contract, leading directly to deflation that indirectly raised market rates of interest and lowered prices. If these changes were greater than in the rest of the world, increased exports, decreased imports and changes in other items would drive the balance on current account towards equilibrium and bring exchange rates down towards par. If, instead, the central bank bought coinage metal against notes because the exchange rate had fallen below the lower metal point, the effect would be inflationary, with the opposite course of events.