1766 - The Caps create deflation

The Caps took over power from the Hats and assigned the board of governors the task of restoring the value of money to what it had been 30 years ago. This led to a severe deflation crisis.

The idea was to double the value of the riksdaler by successively halving the exchange rate from 72 to 36 riksdaler (hamburger banco) to the mark, which was the trading currency at that time. The plan was to proceed slowly and gradually. In February 1766, the exchange rate was set at 70 marks, according to a royal announcement, and, in November, it was cut again to 66 marks.

But far too many people were involved in monetary policy for the plan to be remain secret. The general public quickly realised what was happening. An increasing number began to hoard the Riksbank's notes. If the riksdaler was going to be worth twice as much in a few years' time, why not wait until then to use the money? When so many riksdaler disappeared from circulation, their value against the mark rose much faster than the authorities had expected. Over the summer of 1767, the exchange rate fell to 42 marks per riksdaler. The severe deflation led to speculation companies going bankrupt. Many companies engaged in simpler manufacturing had to close and properties were sold at a loss. The crisis became the worst so far in Swedish history.

Facts

The Hats and the Caps were the political parties that alternated in power in Sweden over most of the Age of Liberty of the 1700s.