J.K. Paasikivi and his economic legacy

At a celebration at Kansallis-Osake-Pankki, Juho Kusti Paasikivi and Mauri Honkajuuri. The Finnish Heritage Agency, photographer: Pietinen, 1940.

Economics and politics were the two essential and inseparable elements in Paasikivi’s career. When drawing a portrait of Paasikivi as an economist, one should not concentrate exclusively on particular periods in his activities as, in reality, economics formed an overarching theme for his entire life work. Moreover, to form a full picture of his life’s work, his actions must be reflected against his economic ideas. Hie extensive literary output, famous speeches, and evocative diary entries provide an exceptionally good opportunity for research.

“In the Spirit of liberalism”

Economic problems occupied Paasikivi during his entire career and its three key stages. The first stage started in the early 1900s, when Paasikivi first appeared on the scene as a conservative Fennoman politician and civil servant and ended in 1918 with the resignation of the Senate led by Paasikivi. The second stage of his career covers his term as the Chief Executive Officer of Kansallis-Osake-Pankki, the leading commercial bank, between the two world wars, and the third and final stage the Second World War and the first decade of the post-war era. It is highly tempting to talk about Paasikivi the Director General of the State Treasury and the CEO of Kansallis-Osake-Pankki bank as a separate persona from Paasikivi the politician, senator, prime minister, diplomat, and the President of the Republic, but this would be grossly misleading. Through all these milestones, he always acted as both a politician and an economist.

In his memoirs, Paasikivi describes how he learned economics “in the spirit of liberalism”. He continues by saying that his further experience in banking had only reinforced his liberalistic views. Paasikivi wrote these words after the Second Word War in a situation where heavy state intervention in the economy was the norm. In his diary entry of February 1945, Paasikivi, then Prime Minister, concluded: “Every matter that we have discussed in my government have been such that did not exist during the liberal era. The outcome is almost always the same, poor.”

However, liberalism was only one of the ideologies that affected Paasikivi’s politics, and not even the most important one. Ultimately, Paasikivi was more a of a disciple of J.V. Snellman, the Finnish Nationalist philosopher, than Adam Smith or Anders Chydenius, both 18th century liberals, and his choices can be best understood from the perspective of pragmatic conservatism. In line with this characterisation, Paasikivi found his political home in the Finnish Party, which with its traditionalist value base and concurrent support for social reforms did not represent liberal values in the political landscape of Finland in the early 1900s. This also showed in the economic policies of the movement.

The proponent of land reform

The economic views of the figureheads of the Finnish Party, such as Yrjö Sakari Yrjö-Koskinen and J.R. Danielson-Kalmari, were mainly based upon the ideas of the German historical school of economics, which were marked by opposition towards economic liberalism and advocacy of vigorous social policies. The goal of the school was to defuse social conflicts and prevent the spreading of the social democratic movement as a political force. Gustav Schmoller and Adolph Wagner, two of the prominent leaders of the movement, were even referred to as “Kathedersozialist” – socialists of the chair – owing to their state-centred approach although in political orientation they were conservatives.

The main forum for the German historical school of economics was the learned society Verein für Socialpolitik, the German Economic Association, which remains one of the world’s oldest and most renowned economic societies. As an indication of the influence the German school had in Finland, the Finnish Party established its own economic society, Kansantaloudellinen yhdistys (The Finnish Economic Association) in 1884, and appointed Yrjö-Koskinen as its first chairman. Danielson-Kalmari chaired the association in 1903 and Paasikivi in 1908.

Following its German model, economics and social policy were integrally linked in the conservative Fennoman social-reformist ideology of the party. One of the central social policy issues of the time, and the one that was the most important for the Finnish Party, was the question of the landless rural population, such as tenant farmers, and the implementation of a land reform to improve their situation. Finland was still a deeply agrarian society in the early 1900s, even though industrialisation had been making substantial headway in the country since the 1890s. A large majority of the Finnish population still earned their living in agriculture and forestry. According to statistics published by the famous study group “subcommittee for the landless population”, there were more than 160,000 tenant farms in Finland 1901, which was nearly 60% of all farms. It was estimated that there were approximately 800,000 people in Finland classified as tenant farmers or their family members.

Paasikivi acquainted himself with the leaders of the Finnish Party soon after his university matriculation. His relationship with J.R. Danielson-Kalmari proved particularly important. Paasikivi also joined the Finnish Economic Association in 1900 and in the same year gave a lecture at one its meetings, published with the title “Resettlement policy in Russia”. The lecture already demonstrated what the young Paasikivi’s main interests were: Russia, land reform and legal history, which was also the topic of his doctoral dissertation. When preparing his talk, Paasikivi, who was 29 years old at the time, had already served as a secretary to a committee preparing the allocation of an appropriation granted by Emperor Nicholas II for the acquisition of land for landless farmers.

That Paasikivi would profile himself as an expert on rural policies was demonstrated when he was elected in 1907 from the Finnish Party list to the first unicameral parliament of Finland and subsequently appointed as the chair of the Agricultural Committee of the parliament. In the next parliamentary session in 1908, as a deputy chairman he continued to practically lead the committee because of the ill health of the chairman, Jonas Castrén of the Young Finns Party (the Liberals).

The policy of the Finnish Party, as well as that of Paasikivi himself, in the land reform question was heavily interventionist. The party advocated the statutory regulation of land tenancy contracts to eliminate the fear of evictions and to prevent unreasonable terms of contract. In this respect, Paasikivi’s views departed from those of the representatives of the Young Finns and the Swedish Party, who as liberals favoured extensive freedom of contract and opposed any limitations to landowners’ rights to determine the possession of their property. The Social Democrats, on the other hand, were supportive in principle of abolishing private ownership of land, but by the early 1910s, they had eventually resolved to demand the emancipation of tenant farmers on conditions to be provided in law as a first-line remedy. The social-reformist views of Paasikivi and the rest of the conservative Finnish Party on the tenant farmer question positioned them in the political centre, flanked by market liberals and socialists.

The land reform policies of the Finnish Party, of which Paasikivi was one of the main authors, achieved a major victory in 1909 when the new Land Tenancy Act was promulgated, providing that the shortest possible lease of agricultural land was 50 years and that this provision would be retroactively applied even to previously made contracts. This was a policy that the liberal Young Finns and Swedish Party had vehemently opposed on judicial grounds. Land tenancy rates would be locally determined by municipal tenancy boards. The legislation also included a moratorium clause, which extended all tenancy agreements in force at the time until at least 1916.

In the following years, the Finnish parliament saw heated debates on how the escalation of the tenant farmer question could be avoided once the moratorium clause expired. Paasikivi showed sober insight into the situation in his speech at the parliament in spring 1913:

“Bringing the question of landless population and tenant farmers to closure is one of the most important tasks of this parliament and one that bears the greatest of significance to our entire nation. I surmise that the future of our nation depends more on the successful conclusion of this matter than most things, possibly more than anything else.”

However, the decisiveness that Paasikivi was calling for was not to be found. The committee for the land tenancy reform, which was chaired by A. Oswald Kairamo, and of which Paasikivi was a core member, submitted their memorandum on the tenant farmer question in 1914, but the Senate (i.e. Government) proposal based on it was rejected by the parliament. No resolution on the matter could be achieved, and when the First World War broke out interrupting parliamentary work, the Emperor issued a unilateral declaration in 1915 by which land tenancy contracts were extended indefinitely, “until a settlement in the said relationships is achieved”. Paasikivi found the outcome regrettable as it compromised the authority of the parliament and considered the Imperial declaration legally invalid as it had not been approved by the parliament. However, the pressing goal of preventing tenant farmers from being evicted was achieved.

Director General of the State Treasury and Minister of Finance

In 1903, Paasikivi was appointed the Director General of the State Treasury, which made the young lawyer one of the most eminent civil servants in the Grand-Duchy of Finland. Besides controlling the government cash flow and debt, the State Treasury was also one of the key lenders in the country: the stock of loans from state funds was almost equal to any of Finland largest commercial banks (Suomen Yhdyspankki, Kansallis-Osake-Pankki and Pohjoismaiden Osakepankki). However, the lending policy of the State Treasury was strictly regulated, and the most significant loan decisions were subjected to rulings by the Senate, so in practice, Paasikivi had little room to exercise independent power in this respect. The State Treasury granted credit to build schools and other similar public services and utilities. The State Treasury also managed a substantial bond portfolio of mainly foreign government bonds.

During his term as Director General of the State Treasury, Paasikivi continued his political activities as an MP and, for a short period, as a senator (that is, as Government Minister). So, by 1908, as a member of Edvard Hjelt’s Senate and Head of the Department of Financial Affairs under the Economic Division of the Senate (present-day Ministry of Finance), he had made his way to the top echelon of Finnish economic policymaking.

Paasikivi’s major achievements during his first term as a senator included securing a large foreign loan for Finland in 1909 to fund railway construction. The loan arranged by Paasikivi was the largest loan Finland had received in ten years, amounting to approximately 45 million markkas. To put the significance of this loan into proportion, the amount of the loan was approximately equal to 60 per cent of the state’s annual tax revenue. Obtaining the loan from the financial markets of Paris, which Finland had previously relied upon, was no longer possible as the French government had made it a condition for the loan that Finland would commit not to enact laws on prohibition of alcohol. Since this was a request that could not be honoured, Paasikivi looked elsewhere and managed to obtain the loan in London’s financial markets, where Finland had not previously operated.

Paasikivi’s first term as a senator was cut short with the resignation of Hjelt’s Senate, after only one year at the helm, as a result of a dispute over the compensation that Finland was to pay Russia in lieu of providing conscription soldiers for the Imperial army. From 1905 onwards, Finnish citizens had been exempted from military service in the Russian army, and as compensation Russia had demanded that Finland contribute its share of the Imperial military expenditure in cash. In 1909, however, the parliament rejected that year’s proposal on military compensation, leading the Emperor to request the Senate to pay the money from Finland’s state coffers on an administrative order, i.e. without the approval of the parliament. The dispute led to the dissolution of the parliament and the resignation of Hjelt’s Senate.

The dispute over the military compensation continued in the next few years and eventually also led to Paasikivi’s resignation as Director General of the State Treasury. The State Treasury had under Paasikivi’s direction paid the requested compensation annually to the Russian Imperial treasury in compliance with the Senate’s decision, even without the Parliament’s approval. The matter came to a head when in 1913 the Parliament adopted a resolution according to which Finnish civil servants could not endorse the payment of the military compensation without violating the law. The resolution was aimed specifically at Paasikivi, who took the decision to resign from his service at the State Treasury. He explained his reasons:

“The Parliament resolution contained a most blatant reprimand and accusation against the Board of Governors of the State Treasury and, primarily of course, its Chairman [Paasikivi himself]. I do not, however, acknowledge any judicial merit of such resolution. But as the Parliament is the lawful representative of the people, this resolution has had the effect of releasing me of the moral concerns and consternations that would otherwise have prevented me from stepping down from my position in the State Treasury.”

From politics to banking – and back

Having resigned from the State Treasury, Paasikivi decided to apply for a position of a board member at the Bank of Finland, but the Parliamentary Supervisory Council would not even nominate him as a candidate. The person elected instead for the Board was Karl Basilier, a bank manager with a significantly more modest list of merits. The following year, 1914, Paasikivi’s aspirations to enter the world of banking were rewarded as he was invited to join the Board of Management of Kansallis-Osake-Pankki bank and appointed later that year as its Chief Executive Officer.

Kansallis-Osake-Pankki was Finland’s second largest commercial bank at that time. Paasikivi recounted that having made the decision to go into banking, his best friend Ernst Nevanlinna – in Paasikivi’s words “a man of ideas and ideals” – had said to him: “Poor man, what have you got yourself into.” Despite his friend’s trepidations, Paasikivi soon felt at home at Kansallis-Osake-Pankki, and during his 20-year-long term as CEO the bank grew rapidly. Under his leadership, the bank became Finland’s largest commercial bank despite its main competitors, Suomen Yhdyspankki and Pohjoismaiden Osake-Pankki, merging as Pohjoismaiden Yhdyspankki in 1919.

The transition from politician and civil servant to the CEO of a large commercial bank was not as dramatic a leap as one might imagine. At Kansallis-Osake-Pankki, Paasikivi naturally assumed the role of a businessman, but his political and societal interests would not fade. This was in line with the bank’s ethos: the founders of Kansallis-Osake-Pankki had never seen the bank purely as a business enterprise but also as an ideological project with the aim of supporting the development of Finnish-speaking business life and to increase the prosperity of Finland’s Finnish-speaking population. The governing bodies of the bank were run by leading politicians and academics from the Fennoman movement. This ideological stance would characterise the bank’s operations for decades to come.

Paasikivi made a brief return to politics in 1918 immediately after the Finnish Civil War, when he was elected “Vice-Chairman of the Economic Division of the Senate” (Prime Minister in present-day terminology); he was the second Prime Minister of the independent Republic of Finland. Paasikivi’s government remained in power from May till the end of November 1918, when Germany’s defeat in the First World War forced Finland to change its political course and the government had no choice but to resign.

Paasikivi’s government of 1918 relied on Imperial Germany in foreign policy as well as financially. The terms of its trade policy were determined by an agreement signed between Finland and Germany on economic and trade relations as part of a larger deal that had included Germany’s military intervention in Finland’s Civil War to support the Whites. The economic agreement has generally been deemed unfavourable for Finland as it gave Germany exceptional powers to intervene in Finland’s economy and control her foreign trade as best suited Germany’s own interests.

Introducing his government programme to the Parliament in June, Paasikivi implicitly referred to the problems in the economic relationship between Finland and Germany: “Our independence is the result of the war fought victoriously by Germany and her allies and the diplomatic and military assistance that Germany gave us. Since it is vital for the preservation of our independence to secure Finland’s strong economic position, it is to be hoped that retaining mutually satisfactory economic relations between Finland and Germany shall not meet with insurmountable difficulties.”

Finland was suffering from an acute food shortage and it was hoped the Germany could provide grain and other foodstuffs. At this stage of the war, however, Germany’s own food shortage had reached catastrophic proportions and she had little surplus grain to sell to Finland. In practice, the volume of foreign trade in 1918 remained dismally low, only some ten per cent of the pre-war level.

Paasikivi’s government was in a very difficult situation regarding government finances, and was forced to resort to methods that Paasikivi had previously strongly disapproved of  and would continue to do so in later years. As a stopgap measure, the government was compelled to rely on extensive borrowing from the Bank of Finland. Monetary financing of the deficit led to a steep rise in inflation. To stop the Finnish markka from plunging on the currency markets and to save the country’s scarce foreign currency reserves, Paasikivi’s government implemented extensive controls on currency trading that only Rafael Erichs’ government two years later was able to relax.

Alongside these drastic short-term measures, Paasikivi’s government also made decisions the effects of which would last long into the future. One of these decisions was the substantial expansion of state-owned industry, beginning with the acquisition of a majority holding in W. Gutzeit & Co. Originally Norwegian, the company represented large-scale industry in the Finnish context, and it held a leading position in the exploitation and processing of the forest resources of Eastern Finland. With the acquisition of Gutzeit, the state also acquired possession of all major rapids in the vast Vuoksi river system. According to Paasikivi, the motives for the deal were nationalistic: the purpose was to make sure that “foreign moneyed circles” would not get their hands on “Finnish rapids and forests”.

Paasikivi’s government also pushed through the tenant farmers’ emancipation act, which was passed by the Parliament in July 1918. The law was largely based on the memorandum initially submitted by the committee for the land tenancy reform in 1914. Regent of Finland Svinhufvud confirmed the act in October and following the implementation decrees, the implementation of the new law began in May of the following year. This finally concluded the land reform question that had long divided not only the parliamentary parties, but the entire nation, and which Paasikivi had considered his most important political priority for nearly two decades.

That the land reform could finally be realised was the sum of many factors. The Civil War and Russian Revolution had changed the general political climate, which was now more favourable towards seeing through radical reforms to remedy social ills. Oddly enough, the rampant inflation, caused by the First World War, expedited the reform: because the redemption price of land was determined on the basis of the pre-war price level, but landowners were paid in money that had lost its value, the reform became financially feasible.

The market liberal

Entering the 1920s, Paasikivi’s economic ideas underwent a clear shift. His former social-reformist tenets faded into the background and were replaced by a more ideological, market-liberalist thinking. As for the entire economic elite in Finland of the time, his earlier source of influence, the German historical school of economics, was replaced by neoclassicism as represented, in particular, by the Swedish economist Gustav Cassel.

Cassel was probably the most influential economist internationally during the interwar years, until John Maynard Keynes’ ideas in the 1930s gradually achieved a wider impact.  Cassel – and Paasikivi – maintained that the aim must be to reduce state intervention in economic life and to allow market mechanisms to operate as freely as possible. In practice, this meant striving for a return to the gold standard, which succeeded in Finland in at the beginning of 1926, and low taxation to boost the accumulation of private capital.

In the 1920s, Finland was living in an age of economic optimism and great expectations. As the CEO of a leading commercial bank, Paasikivi naturally became involved in this enterprise. The Finnish Transoceanic Trading Co. Ltd was established in 1918 with the ambitious aim of giving Finnish-speaking businessmen a competitive advantage in the export of forest industry products and the import of coffee, sugar and other “colonial goods” as well as automobiles. Paasikivi’s Kansallis-Osake-Pankki was the main financier of the Finnish Transoceanic Trading Co. Ltd and Paasikivi also served as Chairman of the Board for a short period. One of the initial board members was Risto Ryti, who would become Central Bank Governor and later President of the Republic, and it is at this point at the very latest that Paasikivi and Ryti became well acquainted. However, the Transoceanic Trading Co. Ltd soon ran into difficulties because of excessive risks taken and collapsed.

Otto Stenroth, Governor of the Bank of Finland, was forced to resign in 1923 following accusations of insider trading, at which point Ryti as the Minister of Finance asked Paasikivi to accept an appointment as Governor of the Bank of Finland. Paasikivi, however, had no interest in the role because he suspected that he would not manage on the Governor’s salary and because he was unwilling to work under the Parliamentary Supervisory Council as part of a most “divided and heterogenous” board of management. Paasikivi had grown used to wielding absolute power and earning a high salary at Kansallis-Osake-Pankki. Perhaps he was also holding a grudge for the dismissive reception he had met with when seeking a position in the Bank of Finland ten years earlier.

Later, Paasikivi regretted the free risk-taking of the early 1920s. In his diary entry of early 1930 he wrote: “Only after 8 to 10 years in the bank did I begin to understand things. In other words, it takes experience to succeed in banking as well as in business. This is something civil servants and academics fail to understand. But experience alone is not enough. Experience only creates men of routines. You must also be able to think – and be an experienced thinker.” It must be assumed that by “experienced thinker” Paasikivi was referring to himself.

In times of crisis

Although Paasikivi had left daily politics, as the CEO of a bank his influence in Finland’s economic policies extended far and wide. Together with Risto Ryti, the Governor of the Bank of Finland and Väinö Tanner, the de facto leader of the Social Democratic Party, Paasikivi was part of a small core group that made many of the key economic decisions in Finland in the 1920s and 1930s.

Suddenly in 1928, a crisis hit the Finnish financial markets and the economic boom of the 1920s was over. Paasikivi, who was usually likely to agree with Governor Ryti, blamed the financial crisis on the Bank of Finland’s lax financial policy following the return to the gold standard. In the following years, the Finnish economy was sucked into the vortex of the global depression. In Finland, the Great Depression meant unemployment, spiralling agricultural and business debt, and forced public auctions, particularly among farmers. Banks were targeted by vocal protest movements for their high interest rates.

Paasikivi argued that the reason for the recession of the 1930s lay in the interventionism exercised by governments and central banks that had eventually undermined the market mechanism. In his opinion, the high interest rates showed that the crisis was caused by lack of private capital, which no public measures could resolve. Public borrowing would only reduce the amount of funds accessible to the private sector, which would make things even worse. This approach was also endorsed by the committee that was established in 1931 to reduce government expenditure and chaired by Paasikivi.

In practice, however, the crisis impelled Paasikivi to compromise on his free market purism. As the Chairman of the Finnish Bankers’ Association during the very worst period of the 1930s crisis, he was an instigator of the interest rate cartel between banks, the aim of which was to push the interest rate on deposits down and thereby help lower the lending rate. When Maakuntain Osakepankki, Finland’s third largest bank, ran into difficulties in 1931 owing to substantial credit losses, Paasikivi agreed on a merger with Kansallis-Osake-Pankki backed by the Bank of Finland. When the UK withdrew from the gold standard in September 1931, Paasikivi suggested to Risto Ryti that Finland should follow suit. Ryti was initially unwilling to do so, but two weeks later he would have to back down on his position.

On Paasikivi stepping down as the CEO of Kansallis-Osake-Pankki in 1934, the Finnish economy was back on track of robust growth. He remained a political power figure and continued as the leader of the Finnish Chamber of Commerce and served as the Chairman of the National Coalition Party (the Conservatives, which had replaced the Finnish Party as the centre-right force in the independent Finland) for a period. In his speeches, Paasikivi would repeatedly warn against the rise of totalitarianism in Europe and the dangers of allowing protectionist foreign trade policy stymy economic growth, particularly so in the case of small countries. In one of the talks he gave in 1934 he pointed out:

“Should the trend of restricting economic enterprise continue worldwide and in Europe in particular and should the dark prophecies of reduced standards of living at home and abroad be fulfilled – given the irrational nature of humankind – we are in the danger of running into great difficulties perhaps in a very near future. It is in the interest of our survival to hope that the fantasies of a planned economy and other such things attract as little support as possible around the world, and that international trade is allowed to flow more freely.”

Despite his advanced age, Paasikivi rose once again to the centre stage of political life after the Second World War. He became Prime Minister in November 1944 and the President of the Republic in spring 1946. As President, Paasikivi famously directed his attention to foreign policy, but in post-war Finland, economic problems were no less pressing and could not, any more than today, be detached from foreign or social policy. Finland suffered from an extreme shortage of commodities, the country’s foreign trade had to be rebooted from scratch, and often there was foreign currency only enough to cover a mere two weeks’ worth of imports. Despite price and salary controls, inflation accelerated alarmingly so that in 1945, when Paasikivi was serving as Prime Minister, the cost of living nearly doubled. On top of all this came the war reparations that Finland was forced to pay the Soviet Union, mostly in manufactured goods, making a kick-start of the manufacturing industry not only an urgent economic but also a political necessity.

Right at the beginning of Paasikivi’s premiership, the most acute economic and social challenge was the acquisition of land for the Karelian population, evacuated from the territories ceded to the Soviet Union,  and for the servicemen who had fought in the war. He noted in early 1945 that “we must now give our fullest attention to the resettlement of the Karelians. Alongside war reparations, it is such a large issue that complicating the situation by bringing in any other matters into it is more than we can handle.”

The total number of resettled Karelian evacuees was approximately 420,000, most of whom were farmers and other agricultural workers. This made for a peculiar, if also familiar situation for Paasikivi: after all he had made his political name in land reform. Now, half a century later with his career nearing its end, he found himself in a position where he had to push through another, equally extensive land reform, and with great urgency.  

Paasikivi naturally understood the political necessity and social grounds for resettling the Karelian evacuees, but he also found it counterproductive to split up existing farms into smaller and thereby less profitable units. He considered it a better option to clear new land for the resettled population. The need for new arable land was evident, as some 12 per cent of Finland’s cultivated land was lost as part of the ceded territories. Paasikivi’s approach was now more motivated by economic concerns than earlier in the century when he was preparing the tenant farmer legislation. Paasikivi saw that from the perspective of efficiency, an overly large proportion of the labour force in Finland was about to be tied down to unprofitable small-scale farming. Reducing the size of farms through land division was economically a highly questionable choice.

To resolve the by then critical question of housing the Karelian evacuees and ex-servicemen, the Land Acquisition Act was enacted in a rapid order in May 1945. Under the new law, a total of 2.8 million hectares of land was distributed, some half of which was taken from private landowners. Paasikivi’s own farm Jukola in Kerava was also among the farms to undergo division.

The most contested aspect of the Land Acquisition Act in the later stages of its preparation was exempting Swedish-speaking regions from having to accept new Finnish-speaking population. Paasikivi supported this idea as he found it reasonable not to tip the linguistic balance of localities following the arrival of the resettled population. He was also mindful of not alienating the other Nordic countries – with their presumed sympathies for the Swedish-speaking community – towards Finland with its land acquisition and housing policies.

Builder of international trade relations

During his presidency, Paasikivi’s specific concern was to establish Finland’s position on the international stage and towards the Soviet Union. The East-West relations also had a significant economic dimension in a world that was entering the Cold War period. Gaining access to Western markets was vital for Finland but this could not take place at the expense of good relations with the Soviet Union. Western economic relations were a financial necessity: after the war Finland was suffering from an acute shortage of foreign currency and was desperate for dollar loans to fund reconstruction and war reparations.

The United States had initially provided credit, but when Paasikivi in 1946 discussed new loans with the then US ambassador Hamilton, Hamilton declined the requests and instead urged Finland to join the World Bank and the International Monetary Fund. Paasikivi suspected that membership in these organisations would not be possible until Finland had been accepted into the United Nations (in fact the UN membership was realised much later). He appealed to Hamilton saying: “We want to overcome our difficulties without losing our freedom. This is why we are turning towards the West for assistance. We do not wish to rely on the East.”

Paasikivi informed Sakari Tuomioja, the Governor of the Bank of Finland, and Uuno Takki, Minister of Trade and Industry, of his discussions with Hamilton. These discussions set in motion a process that led to Finland’s membership in the Bretton Woods institutions, that is the World Bank and the International Monetary Fund, in 1948, and to Finland’s financial integration with Western economies.

In July 1947, when Finland’s application to join the IMF was still on the table, Finland was invited among other European countries to a conference in Paris introducing the new Marshall Plan. The Marshall Plan provided aid by the United States for the reconstruction of Europe and it would have been of great economic importance to Finland, but the Soviet Union regarded the Marshall Plan as an attempt to create a bloc against it and declared that it expected Finland to abstain from the plan. Paasikivi had to make a choice. The matter was considered for a week, after which the Government approved Finland’s decision as drafted by Paasikivi to decline the invitation. “This is a miserable situation,” Paasikivi wrote in his diary.  

Paasikivi’s economic doctrine

Paasikivi has been characterised as a political realist, an image that stems from his foreign policy thinking. The same realism was also evident in Paasikivi’s economic thinking. He was never enough of a purist not to respond to a situation at hand as he saw it, whether in case of the tenant farmer question, state intervention in the Finnish forest industry or withdrawal from the gold standard. A liberal? Perhaps yes, in principle, at times, to some degree. Ultimately, however, he was always, in his economic thinking and otherwise, a pragmatic conservative. The Italian novelist Giuseppe Tomasi di Lampedusa has perfectly summarised the essence of pragmatic conservatism in his novel The Leopard: “Everything needs to change, so everything can stay the same.” This could have been Paasikivi’s personal motto. He always understood that he was operating in a historical context and aimed to make decisions that were expected by history at a given moment. In other words, a prime proponent of Snellmanian, historicist thinking.  

Juha Tarkka, Dr. Soc. Sc., is an economist and a researcher of economic history. Since 2020 he has served as the editor of Kansantaloudellinen aikakauskirja (The Finnish Economic Journal). He has previously worked as the Head of Research and as an Adviser to the Board at the Bank of Finland.


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