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Sweden's Financial Sophistication in the Nineteenth Century: An Appraisal

Published online by Cambridge University Press:  03 March 2009

Douglas Fisher  and
Walter N. Thurman
Douglas Fisher
Affiliation:
Professor and Associate Professor of Economics, respectively, at North Carolina State University, Raleigh, NC 27695.
Walter N. Thurman
Affiliation:
Professor and Associate Professor of Economics, respectively, at North Carolina State University, Raleigh, NC 27695.
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Abstract

The article tests a variant of Lars G. Sandberg's “financial sophistication hypothesis.” Sandberg argues that Sweden had an unusually large stock of financial capital in 1850 which, along with a highly literate populace, was paramount in the subsequent economic explosion. Unable to test the hypothesis directly, we use a variant—that the financial sector was a leading sector in Swedish development—amenable to time-series tests of the Granger-causality form. These tests on data from 1861 to 1910 do not show causality from financial variables to real; indeed, the converse holds.

Type
Articles
Information
The Journal of Economic History , Volume 49 , Issue 3 , September 1989 , pp. 621 - 634
Copyright
Copyright © The Economic History Association 1989

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References

1 Sandberg, Lars G., “The Case of the Impoverished Sophisticate: Human Capital and Swedish Economic Growth before World War I,” this Journal, 39 (03 1979), pp. 225–41.Google Scholar

2 Ibid., p.225.

3 Ibid.

4 Ibid.

5 The Swedish aggregate data for the last half of the nineteenth century are possibly the best available for any country in that period. The national income accounts are complete on an annual basis and have been carefully built up from raw materials that are both very reliable and very detailed; the source used here is the work of Krantz, Olle and Nilsson, Carl-Axel, Swedish National Produc, 1861–1970 (Lund, 1975), pp. 217. The monetary data are equally precise and are largely the work of Lars Jonung of the University of Lund;Google Scholar see his “Studies in the Monetary History of Sweden” (Ph.D. diss., University of California, Los Angeles, 1975), pp. 222.Google Scholar Not only are these statistics also built up from individual records, for each year, but they enable a separation of the money stock into an Ml and an M2 series. This detail is rare before the twentieth century. For our purposes, perhaps the most important point about the data is that they exist in long and parallel runs of annual observations.

6 In general the extractive industries are included in the “agricultural” sector in this study.Google Scholar

7 Kindleberger, Charles P., “Sweden in 1850 as an ‘Impoverished Sophisticate’: A Comment,” this Journal, 42 (12 1982), pp. 918–20.Google Scholar

8 Heckscher, Eli F., An Economic History of Sweden (Cambridge, MA, 1954), pp. 308.Google Scholar

9 Ibid., pp. 247–48.

10 Friedman, Milton and Schwartz, Anna J., Monetary Trends in the United States and the United Kingdom (New York, 1982), pp. 664.CrossRefGoogle Scholar

11 Bordo, Michael D. and Jonung, Lars, “The Long-Run Behavior of the Income Velocity of Money in Five Advanced Countries; An Institutional Approach,” Economic Inquiry, 19 (01 1981), pp. 96–116,CrossRefGoogle Scholar and The Long-Run Behavior of the Velocity of Circulation (Cambridge, 1987), pp. 181.Google Scholar

12 The tests are described in Granger, Clive W. J., “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica, 37 (07 1969), pp. 424–38,CrossRefGoogle Scholar and Sims, Christopher A., “Money, Income, and Causality,” American Economic Review, 62 (09 1972), pp. 540–52.Google Scholar

13 Friedman and Schwartz, Monetary Trends, pp. 145–53.Google Scholar

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15 Sandberg, Lars G., “Banking and Economic Growth in Sweden before World War I,” this Journal, 38 (09 1978), p. 661.Google Scholar

16 Ibid., pp. 650–51.

17 Jonung, Lars, Studies in the Monetary History of Sweden; “Money and Prices in Sweden, 1732–1972,” Scandinavian Journal of Economics, 78 (No. 1, 1976), pp. 40–58;CrossRefGoogle Scholar“Sources of Growth in the Swedish Money Stock, 1871–1971,” Scandinavian Journal of Economics, 78 (No. 4, 1976), pp. 611–27; “The Long-Run Demand for Money—A Wicksellian Approach,” Scandinavian Journal of Economics, 80 (No. 2, 1978), pp. 216–30; “Monetization and the Behavior of Velocity in Sweden, 1871–1913,” Explorations in Economic History, 20 (Oct. 1983), pp. 418–39; and “Swedish Experience under the Classical Gold Standard, 1873–1914,” in Michael D. Bordo and Anna J. Schwartz, eds., A Retrospective on the Classical Gold Standard, 1821–1931 (New York, 1984), pp. 361–99.Google Scholar

18 Jonung, “Swedish Experience under the Classical Gold Standard,” p. 376.Google Scholar

19 As calculated in Cagan's, PhilipThe Determinants and Effects of Changes in the Stock of Money, 1875–1960 (New York, 1965), pp. 380, the contributions to the money stock of the currency-money ratio (C/M), the reserves-deposit ratio (R/D), and the monetary base (generally defined to be bank reserves plus currency in the hands of the public) are measured under the assumption that these proximate “determinants” are uncorrelated with each other. Jonung, in “Sources of Growth in the Swedish Money Stock,” finds that over the period from 1871 to 1896 the monetary base contributes slightly less than 50 percent to the growth of the money stock while from 1897 to 1913 it has a much closer relation to money growth. The two (presumably endogenously determined) ratios provide the remainder of the effect.Google Scholar

20 Relative to other countries, the United Kingdom in this period is clearly sophisticated financially. In the United Kingdom the velocity of money rose very slightly over the same period. See Figure 2.Google Scholar

21 Bordo and Jonung, “The Long-Run Behavior of the Income Velocity of Money,” p. 98. In an earlier work (“The Long-Run Demand for Money”) Jonung puts forward roughly the same view.Google Scholar

22 Proxies suggested and used by Bordo and Jonung are the percentage of the labor force in nonagricultural activities, the currency-money (C/M) ratio, and the ratio of nonbank financial assets to total financial assets. A broader set of financial variables is tested separately by Jonung in “Monetization and the Behavior of Velocity,” over the period from 1875 to 1913. Here C/M, the ratio of cash payments to the total wages of farmhands, labor's share in national income, and the ratio of urban population to the total population produce significant coefficients in a log-linear test of the velocity equation.Google Scholar

23 See Granger, “Investigating Causal Relationships.”Google Scholar

24 The national income and price data employed in this study come from Krantz and Nilsson, Swedish National Product. The financial and monetary data are from Sandberg, “Banking and Economic Growth,” and Jonung, Studies in the Monetary History of Sweden. Michael Bordo kindly supplied corroborating data and a long-term interest rate from a recent study (co-authored with Lars Jonung) of velocity (The Long-Run Behavior of the Velocity of Circulation).Google Scholar

25 In the tables that follow, generally only results for 1871 to 1910 are presented. In every case where it was possible, the tests were extended back to 1861. This did not make any appreciable difference to the results.Google Scholar

26 While one might argue that it is the development of financial services that affects investment and not money per se, we maintain the assumption that monetization of the economy (that is, financial sophistication) is highly correlated with the size of the money stock.Google Scholar

27 In The Long-Run Behavior of the Velocity of Circulation, pp. 22–23, Bordo and Jonung argue that the period of declining velocity is the result of the monetization process, whereas the period of rising velocity is the result of increasing financial sophistication. “Financial Sophistication” in this case is defined as both the emergence of a large number of substitutes for money and the development of various methods of economizing on money balances. Because we examine the period in which monetization of a barter economy is far more important than the development of money substitutes, we equate the decline in velocity with an increase in the flow of financial services. The increased flow of services we take to be highly correlated, in turn, with financial sophistication.Google Scholar

28 Friedman and Schwartz, Monetary Trends, p.146.Google Scholar

29 Bordo and Jonung, “The Long-Run Behavior of the Income Velocity of Money”; Bordo and Jonung, The Long-Run Behavior of the Velocity of Circulation; Jonung, “Monetization and the Behavior of Velocity” and Jonung, “Swedish Experience under the Classical Gold Standard.”Google Scholar

30 In any event, the same tests were run using MI. There are some differences, with interest rates affecting the Ml version of the financial sophistication index, and the industrial structure variables not providing any effect in that case.Google Scholar

31 The reason one might expect a “causal” link from any of these determinants to the financial sophistication index is simply that when they change, the stock of money (and therefore the flow of financial services) changes. The expected signs here are positive for H and negative for R/D and C/M.Google Scholar

32 Sandberg, “The Case of the Impoverished Sophisticate.”Google Scholar