The First Practical Guide to Price Level Stabilization: Confidential Reports to the Riksbank in 1931

Thursday, April 25, 2024
Hoover Institution | Stanford University
Lars Jonung, senior professor at Lund University, Sweden discussed “The First Practical Guide to Price Level Stabilization: The Confidential Reports to the Riksbank in 1931 by Gustav Cassel, David Davidson, and Eli Heckscher.”
PARTICIPANTS
Lars Jonung, John Taylor, Annelise Anderson, Patrick Biggs, Michael Bordo, Doug Branch, Luca Branco, John Cochrane, Sami Diaf, David Fedor Andy Filardo, Jared Franz, Paul Gregory, Bob Hall, Rick Hanushek, Robert Hetzel, Nicholas Hope, Ken Judd, Evan Koenig, Roman Kraussl, David Laidler, Christopher Meissner, Radek Paluszynski, Alvin Rabushka, Valerie Ramey, Jack Tatom, Carl Walsh
ISSUES DISCUSSED
Lars Jonung, senior professor at Lund University, Sweden discussed “The First Practical Guide to Price Level Stabilization: The Confidential Reports to the Riksbank in 1931 by Gustav Cassel, David Davidson, and Eli Heckscher.”
Jonung served as chairman of the Swedish Fiscal Policy Council (2012-2013). He is a former research advisor at the European Commission, Brussels (2000-2010), professor at the Stockholm School of Economics, Stockholm (1989-2000), and chief economic adviser to Prime Minister Carl Bildt (1992-94). He holds a PhD in Economics from UCLA.
John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.
PAPER SUMMARY
When Sweden left the gold standard on September 27, 1931, the Swedish government declared that the aim of monetary policy should be to stabilize the domestic purchasing power of the Swedish currency, the krona. With this step, price level stabilization became for the first time the official goal for a central bank. Soon after, the Riksbank (Bank of Sweden) sent a questionnaire to three prominent economics professors-Gustav Cassel, David Davidson and Eli Heckscher- asking for advice about the new monetary situation. In a few weeks, the Riksbank received their replies.
This paper presents the three reports, for decades kept as classified documents in the Riksbank’s archives. The reports give an excellent view of the monetary thinking in the early 1930s of the leading Swedish economists, just before the outbreak of the world depression of the 1930s and shortly before the emergence of the Stockholm School in macroeconomics. The reports are strikingly modern. They deal with central issues in the present discussion on inflation targeting, such as the choice of price index to target, the proper instrument to use, the importance of creating public credibility for the new monetary rule, potential legal changes to anchor the new standard, and the appropriate central bank response to changes in the exchange rate. In short, the three economists prepared the first practical guide to inflation targeting, with a target rate of zero percent.
The paper considers the events leading to the adoption of price level stabilization, the debate on the monetary program of 1931 and the impact of the reports on the policy of the Riksbank. Most strikingly, the Riksbank started to construct and collect a weekly consumer price index to use as a guide for implementing the new policy of price stabilization. Dag Hammarskjöld contributed to this task under the guidance of Erik Lindahl. The paper also considers why the monetary program of 1931 was abandoned in Sweden until a new area of inflation targeting started in the 1990s.
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