The Economics of Neutrality: Spain, Sweden and Switzerland in the Second World War Eric Bernard Golson The London School of Economics and Political Science A thesis submitted to the Department of Economic History of the London School of Economics for the degree of Doctor of Philosophy, London, 15 June 2011. Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others. The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without the prior written consent of the author. I warrant that this authorization does not, to the best of my belief, infringe the rights of any third party. ‐ 2 ‐ Abstract Neutrality has long been seen as impartiality in war (Grotius, 1925), and is codified as such in The Hague and Geneva Conventions. This dissertation empirically investigates the activities of three neutral states in the Second World War and determines, on a purely economic basis, these countries actually employed realist principles to ensure their survival. Neutrals maintain their independence by offering economic concessions to the belligerents to make up for their relative military weakness. Depending on their position, neutral countries can also extract concessions from the belligerents if their situation permits it. Despite their different starting places, governments and threats against them, Spain, Sweden and Switzerland provided similar types of political and economic concessions to the belligerents. This thesis comparatively investigates neutral trade, labour and capital. Using standardized trade statistics, this study shows that while all three neutrals were dependent on the Germans for most basic goods, they were generally able to benefit from relative gains in prices and excess imports of goods in periods of German weakness. In trade with the Allies, at least two of the three countries permitted the illicit export of items necessary for the Allied war effort, and did so at reduced relative prices. All three neutrals benefitted from substantial services revenue and positive balance of payments in all of their belligerent relationships. In several cases the neutrals were able to force the belligerents to cover their balance of payments deficits in gold because they needed to maintain access to the neutral markets. The final chapters demonstrate that despite political promises, the Spanish and Swiss governments constructed labour transfer systems to limit the number of workers for Germany. ‐ 3 ‐ Acknowledgements With gratitude to all of those who have supported me through this project and during my education. Odd coincidences and sheer happenstance brought me to the London School of Economics, the University of Chicago and Marin Academy. During the last fourteen years I have taken classes from and taught with many inspiring teachers, enjoyed the company of good friends and been challenged by three of the best schools in the world. As a young child, I was intellectually impatient. I wanted answers. I am forever in debt to the late Yuri Smiley, who spent considerable effort teaching me Japanese and piano. I would never have completed this dissertation without learning the virtue of patience and how to control my intellectual curiosity. どうもありがとう スマイリー先生. The breadth of this project and the number of people who have contributed make the task of acknowledging each individual contribution on this page impossible. Specific thanks are due to Dr. Peter Howlett, Dr. Eve Richards, FDr. Peter Sims, and Dr. Christopher Colvin for their assistance with specific elements during the research and writing process. Professors Mark Harrison and Neville Wylie served as rigorous examiners and identified the many strengths and weaknesses of this work. Dr. Tim Leunig pushed me forward and gave me confidence. Countless other individuals contributed to this thesis and general thanks are due to so many it is impossible to acknowledge them on this single page. It is my sincere hope that as each of you read this dissertation you will notice the individual contributions you have made. ‐ 4 ‐ Figure 0.1: Axis, Allied and Neutral Blocs at September 1939 Axis Countries: the German Reich and the Italian Empire Allied Countries: Great Britain, France and Poland their associated Empires Neutrals: Belgium, Bulgaria, Denmark, Finland, Greece, Hungry, Ireland, the Netherlands, Norway, Portugal, Romania, Spain, Sweden, Switzerland, Turkey and Yugoslavia Source: Author ‐ 5 ‐ Figure 0.2: Axis, Allied and Neutral Blocs at June 1941 Axis Countries: German Reich, Italian Empire, Bulgaria, Finland, Hungary and Romania Axis Occupied: Belgium, Denmark, France, Greece, the Netherlands, Norway and Yugoslavia Allied Countries: Great Britain, the Soviet Union and their associated Empires Neutrals: Ireland, Portugal, Spain, Sweden, Switzerland and Turkey Source: Author ‐ 6 ‐ Contents Abstract ...................................................................................... 3 Index of tables ........................................................................... 13 Index of figures and illustrations .............................................. 16 Index of abbreviations .............................................................. 18 Tables of foreign exchange values ............................................ 20 Part One: The Economics of Neutrality Chapter One: Economics of Neutrality in the Second World War .... 23 Interpreting Economic Outcomes ............................................. 29 Neutrality as Impartiality .......................................................... 31 Realist Neutrality ....................................................................... 33 Belligerents’ Perspective ............................................... 37 Neutrals’ Perspective .................................................... 37 Realist Neutrality amidst Multiple Strong Belligerents ............ 38 The Mutli‐Belligerent Model ......................................... 42 Why Spain, Sweden and Switzerland ........................................ 45 Economic Concessions .............................................................. 49 Part Two: Neutral‐Belligerent Merchandise Trade in the Second World War Chapter Two: Swedish‐Belligerent Merchandise Trade .................... 54 Abstract ..................................................................................... 54 Remarks on Merchandise Trade ............................................... 54 Introduction .............................................................................. 58 Swedish Wartime Trade: Political Developments .................... 62 Swedish‐Belligerent Wartime Merchandise Trade ................... 71 Methodology ................................................................. 71 Overall Balance of Merchandise Trade ......................... 73 Swedish Nominal Trade with the German Bloc ............ 75 Swedish Trade with the German Bloc: Real Statistics .. 78 Swedish Nominal Trade with the Allied Bloc ................ 81 Nominal Illicit Trade ...................................................... 82 Overall Nominal Trade with the Allies .......................... 87 Swedish Trade with the Allied Bloc: Real Statistics ...... 91 Iron Ore Trade with Germany ................................................... 93 Measuring Iron Ore Exports .......................................... 94 Ball Bearings to Germany and the Allies ................................... 99 German Imports from Sweden ................................... 101 German Domestic Production .................................... 102 Allied Actions to Limit German Ball Bearings ............. 103 ‐ 7 ‐ Preferential Ball Bearings Pricing? .............................. 106 The United Kingdom ................................................... 109 Imports from Sweden ................................................. 111 Domestic Production .................................................. 113 Discounts Provided to the United Kingdom ............... 115 The Swedish Energy Supply Situation ..................................... 117 Conclusions ............................................................................. 122 Appendix 2.1: Swedish Exports to Germany Bloc ................... 123 Appendix 2.2: Swedish Imports from German Bloc ................ 125 Appendix 2.3: Swedish Exports to the Allied Bloc .................. 127 Appendix 2.4: Swedish Imports from the Allied Bloc ............. 129 Appendix 2.5: Swedish Energy Consumption ......................... 131 Notes to Appendices 2.1 to 2.4 ............................................... 132 Chapter Three: Spanish‐Belligerent Merchandise Trade .................. 145 Abstract ................................................................................... 145 Introduction ............................................................................ 145 Spanish Wartime Trade: Political Developments ................... 150 Spanish‐Belligerent Wartime Merchandise Trade .................. 164 Methodology ............................................................... 165 Overall Balance of Merchandise Trade ....................... 167 Spanish Nominal Trade with Germany ....................... 169 Spanish Trade with Germany: Real Statistics .............. 173 Spanish Nominal Trade with the United