The Middle Way Swings Left

May 26, 1947

STOCKHOLM—Neutrality has obvious advantages. You are struck by the freshness and brightness of Stockholm, its nocturnal wealth of neon lights, its rich display of goods, its fine food, and not least of all by the clothes of its men and women, so much newer and smarter than one finds elsewhere in Europe.

The net effect is one of prosperity and opulence. Industrial production is in fact 30 percent above that in 1935 and at the highest level ever reached in spite of the shortage of coal and constant complaints of the shortage of manpower. The money value of foreign trade last year broke all previous records. Many firms have enough orders on their books to keep them in full production for years to come.

Yet there are signs of serious trouble ahead. On March 15 the government suddenly imposed a licensing system to curb nonessential imports, among them motorcars, fruits, and coffee. The public was jolted by the re-imposition of coffee rationing. These measures were taken because of the alarming reversal in Sweden’s trade balance. An export surplus of 674,000,000 kronor in 1945 had turned into an import surplus of 842,000,000 kronor in 1946. Though exports had actually mounted from 1,757,000,000 kronor in 1945 to 2,529,000,000 in 1946, imports more than tripled, jumping to 3,370,000,000 kronor. A great part of these imports represented not the coal, oil, and raw materials that Swedish industry is so eager to get but consumer luxuries. This meant an alarming drain on the central bank’s gold and foreign exchange reserves, which dropped from 2,973,000,000 kronor last June to 1,364,000,000 by March 15.

This result is generally blamed here on the freedom of private individuals to import. It is, however, a perfect illustration of how one control makes another necessary until nothing can be left alive. Last July, following Canada, Sweden revalued its currency upward by about 16 percent because it feared an American price rise. By making its imports cheaper, however, it simply encouraged an increase in the volume bought. The government, moreover, held down the export prices of timber, pulp, and paper below the world market and so reduced the amount of foreign exchange that Swedish exports could bring in. Its rigorous internal price fixing more importantly left “an inflationary gap” between the supply of money and the supply of goods at official prices. The excess money naturally flowed into abnormal purchase of imports. Under free exchanges the situation might have corrected itself automatically by a fall in the krona, making imports more expensive and exports more profitable. But in Sweden, as elsewhere, it is illegal to buy or sell currencies in accordance with the values established by supply and demand and no self-adjustment takes place.

Sweden has bilateral trade treaties with nearly every country in Europe. These also create inflexibility. Sweden is bound to take luxury import quotas from treaty countries. A sudden import ban must therefore hit principally American exporters because the United States has not taken part in the bilateral-treaty game.

The recent outflow of gold and exchange reserves was most disturbing, however, in connection with the huge volume of foreign loans and credits extended by Sweden. Part of these went to Norway, Denmark, Finland, and Holland, as Sweden’s contribution toward rebuilding Europe. Part were extended to facilitate Swedish exports. Hardest to explain from Sweden’s standpoint is its loan to Russia. This reaches 1,000,000,000 kronor, bringing the total of Sweden’s foreign credits to 4,500,000,000. Comparing population and national incomes, this total would be equivalent to at least $45,000,000,000 from the United States.

The Russian credit is variously explained as good-neighbor policy, a substitute for vanished German trade, and an anticyclical measure. But it means, in the next few years, a tremendous drain of unrequited exports.

A final factor in the Swedish trade picture is the actual and potential flight of capital. Social Democrats of the Swedish labor party are in power. Wartime government controls have not been appreciably relaxed. There are rumors of devaluation of the krona. There is fear of further socialization. The combined income and capital taxes are almost confiscatory. And the threatened flight of capital brings hints of even more stringent controls.