International Capital Flows, Monetary Policy, and Banking Instability : Lessons from Sweden, 1877-1939

This dissertation investigates the intricate dynamics between international capital flows, banking instability, and central bank policies in Sweden from 1877 to 1939, providing insights into the connections between external monetary shocks and domestic financial stability. While international capital can drive economic growth, it also introduces significant risks, particularly for smaller, open economies like Sweden. The research examines the strategies employed by the Swedish banking system and the Riksbank, Sweden’s central bank, within the context of different monetary regimes and across multiple episodes of financial upheaval, offering both bank-level and micro-level perspectives.A significant contribution of this dissertation is the development of a comprehensive database, "Monthly Information of Swedish Banks 1877-1939," which underpins the empirical analyses presented in the study. Each paper within the dissertation draws on different aspects of this database, supplemented by a wealth of historical sources, to explore the behaviours of banks and the central bank during this critical period. The research identifies four major banking crises, each linked to risky pre-crisis behaviours by banks, mainly driven by exogenous factors such as inflation and capital inflows. The Riksbank’s responses during these crises demonstrate a delicate balancing act between maintaining exchange rate stability and serving as the lender of last resort, underscoring the nuanced and adaptive nature of its monetary policy.Papers 1,2 and 3 investigate how banks’ behaviour was influenced by price instability and fluctuations in exogenous liquidity. The first paper presents a detailed case study of the 1921/1923 banking crises, while the second provides a comparative analysis of the four major banking crises between 1877 and 1932. The third paper analyses how private banknote issuance interacted with external liquidity supply between 1878 and 1900. Papers 4 and 5 shift the focus to the central bank’s decision-making processes, examining how the Riksbank balanced the "rules of the game" with its role as lender of last resort. The fourth paper analyses the central bank's actions during the 1931/32 financial crisis, and the fifth compares the Riksbank's responses and monetary policies across various monetary regimes from 1878 to 1939.