Open mouth operations: Monetary policy by threats and arguments: The monthly meetings between the Riksbank and the commercial banks, 1956-1973

After World War II and prior to the financial deregulation of the 1980s,
monetary policy in Sweden as well as in other western European
countries rested chiefly on a system of far-reaching non-market-oriented
controls of credit flows and interest rates. How was monetary policy
conducted in such an environment of financial repression, where the
central bank was unable to rely on traditional monetary policy
instruments working on "free" and "unregulated" money and capital
markets? This study provides an answer from the Swedish experience. It
is based on a unique set of confidential minutes from about 160 monthly
meetings between the Riksbank and the commercial banks during the
years 1956-73.

The examination of the minutes demonstrates that monetary policy was
framed in a process involving threats and arguments in a small and
closed club involving the central bank and the chief executives of the
commercial banks. According to a joke assigned to Erik Lundberg, “open
market operations were replaced by open mouth operations” – albeit the
dialogue was kept within the club. When Swedish financial markets were
deregulated in the 1980s, the standard tools of monetary policy rapidly
replaced the meetings between the central bank and the commercial
banks.