The Riksbank, Emergency Finance, Policy Experimentation, and Sweden's Reversal of Fortune

38 Pages Posted: 10 Mar 2018 Last revised: 3 Oct 2018

See all articles by Joshua R. Hendrickson

Joshua R. Hendrickson

University of Mississippi; American Institute for Economic Research

Date Written: March 9, 2018


At the beginning of the 18th century, Sweden was an imperial power that had just sustained a century of economic growth. In 1800, Sweden's empire was gone, after a series of military defeats. Real GDP per capita had fallen to the same level as the early 1600s. In other words, the 18th century witnessed the end of the Swedish Empire and a startling reversal of economic progress. In this paper, I propose a possible explanation for both of these outcomes. First, I argue that the creation of the Riksbank should have facilitated government borrowing and military spending as the Bank of England did for the British. However, limits on bank note issuance placed constraints on emergency government finance that led to Swedish defeat in the Great Northern War. Later, during the Hats' Russian War, rather than suspending convertibility with the promise of restoration as the British successfully did during the 18th and 19th centuries, the parliament-controlled Riksbank simply issued bank notes to finance the war. Subsequently, convertibility was suspended without a future promise of restoration and the Pomeranian War was financed with irredeemable paper money creation. The evidence suggests that these regimes quickly led to binding constraints on government borrowing. Second, when the Hats took power in the Riksdag in 1739, they dramatically changed economic policy by using the bank (directly and indirectly) to give loans to firms, which were financed through the issuance of bank notes. The objective of the loans was to increase investment and economic activity. I use the local projection method to estimate the dynamic response of real GDP per capita to both loans to private firms and the supply of bank notes. I find no evidence that these loans had any effect on real GDP per capita. However, the supply of bank notes has a negative and statistically significant effect on real GDP per capita. In addition, inflation has a negative and significant effect on output during the period of inconvertible paper money. The combined evidence suggests that Hat policy contributed to the decline in economic activity during the reversal of fortune.

Keywords: Sweden, Frihetstiden, Riksbank, Central Banking, Commodity Money, War Finance, Mercantilism, Inflation, Quantity Theory

JEL Classification: E58, N13, N43

Suggested Citation

Hendrickson, Joshua R., The Riksbank, Emergency Finance, Policy Experimentation, and Sweden's Reversal of Fortune (March 9, 2018). Available at SSRN: or

Joshua R. Hendrickson (Contact Author)

University of Mississippi ( email )

Oxford, MS 38677
United States

American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
United States

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