Introduction

The Norwegian krone was back on the prewar gold parity in May 1928. This was achieved only after a protracted period of deflationary monetary policy. However, the restored gold standard regime did not last more than three and a half years before Norway once again went off gold together with Britain and the other Scandinavian countries in September 1931. This decision may have been seen as a financial disaster at the time it happened, but it was widely acknowledged that following its main trading partners off gold was the only viable option for Norway.

After an interlude of nearly two years of managed float in the summer of 1933 it was decided to peg the international value of the Norwegian krone to pound sterling. This monetary regime prevailed until the onset of World War II in the autumn of 1939, when the US dollar was substituted for the pound. The exchange rate peg against the pound was fixed at 19.90 kroner to the pound, implying a 10 per cent devaluation compared with the gold standard parity of 18.16 kroner. The trade-weighted nominal exchange rate index shows a depreciation of the Norwegian krone of about 20 per cent from 1929 to the late autumn of 1931. Apart from the first year of the sterling peg beginning in the summer of 1933, there were few problems with maintaining the exchange rate at the target level. In fact, the balance of payments was in surplus during the 1930s and the stock of foreign reserves at Norges Bank rose appreciably.

On the background of the fierce controversies associated with the resumption of gold in the 1920s it may be wondered why the golden fetters were so easily broken in 1931. We believe that the main approach to this issue must be founded on the notion that the basic motive of Governor Rygg was a quest for monetary stability, rather than a desire to fix the price at which the central bank bought and sold gold per se. The latter served only as a means to enjoy the benefits of a well-established international regime of fixed exchange rates, ensuring orderly conditions on international capital markets. When the most important trading partners left the gold standard, it no longer represented the best instrument for preserving monetary stability.

The writing of this book actually started many years ago when a senior policymaker at Norges Bank, Jan F. Qvigstad, was inspired by the work published at the Bank of England around the time of their 1994 tercentenary, covering hundreds of years of monetary history. He then initiated work at Norges Bank to collect and provide documentation of a similar set of historical time series for Norway. This resulted in three books published by Norges Bank on Historical Monetary Statistics, 2004–2007.

A Monetary History of Norway 1816–2016 provides a historical narrative which places these two hundred years of historical data in perspective. This book presents a broad overview of monetary developments in Norway over two centuries, using a rich variety of graphical illustrations, and we have endeavoured to put these illustrations in a broader historical narrative, providing the necessary institutional context in some detail. The extended set of historical monetary statistics which is a by-product of writing this book will be documented and made available at Norges Bank website. We hope this dataset, together with similar historical datasets for other countries, will be viewed as valuable additions to be applied in future research. The availability of such datasets will certainly encourage a host of modelling exercises and applications of modern econometric techniques to be undertaken.

For the authors the publication of this study constitutes – at least for the time being – the end of a collaboration on monetary history that in various forms and with varying intensity spans more than a decade. Our collaboration – in particular the writing phase during the last few years – has challenged us to derive insights and qualities which go beyond what we brought to the table at the outset. As authors we all have an equal stock in this book. We share responsibility for its weaknesses as well as for whatever praise it might receive. Stating this is more than mere form, but genuinely reflects how we as a team have approached the project. Together we have discussed the data and how to assess the insights they provide, developed the overall analytical framework and formed the narrative outline. In the process we have read (and reread many times over) each other's drafts, given extensive comments and provided, at times quite substantial, text contributions to manuscripts drafted by the other(s).

The first half of the nineteenth century was a period of political upheaval and formative nation-building in Norway. At the dawn of the century, Norwegians could look back on more than four hundred years of attachment to the Danish king's dynastic conglomerate state. Within this conglomerate Norway had played a subordinated political role, governed from Copenhagen more like a set of Danish provinces than as a partner in the dual monarchy of Denmark-Norway. Following the endgame of the Napoleonic Wars all this changed. In the Kiel peace treaty of January 1814, the king of Denmark was forced to cede Norway to the king of Sweden.

In reality the Danish king freed the Norwegian people from the old oath of allegiance sworn by their forefathers under the personal union with Denmark, but the king could not transfer this allegiance to another sovereign without asking the people for consent. The Norwegian elites revolted, with large popular support, and hastily called for a constituent assembly. During the course of 1814, arguably the most eventful year in its political history, Norway declared independence, held a constituent assembly that gave a liberal constitution and elected a Danish prince as king, fought a short futile war with Sweden, accepted defeat, rewrote the constitution to accommodate a personal union with Sweden and acknowledged the Swedish king as head of state. The outcome of 1814 was very different from what was envisaged at the beginning of the year. Norway was not added to the Swedish realm but retained most of the political framework established by the constituent assembly. Most significantly, Norway was to enjoy full sovereignty in all domestic questions, including monetary affairs. Foreign policy, however, was to be decided in a Swedish-dominated joint council.

A new nation resurfaced from its previous subordinated state. But this could easily have become a short-lived episode. The pivotal year 1814 constituted in a sense a giant leap into the unknown where the key challenge was to turn visions about a sovereign Norway into a well-functioning nation-state. Establishing credible legal, political and economic institutions played a key role in the subsequent nation-building, which aimed at both knitting the people together and gaining international recognition.

Introduction

The previous chapter told the history of two international financial crises that tested the commitment of the monetary authorities to maintaining currency convertibility and a well-functioning monetary system. In turn, the crises influenced their understanding of their task. Moreover, the chapter covered the breakthrough of deposit banking, which transformed the financial landscape of Norway and provided a new important channel for monetary growth. Furthermore, we discussed the beginning of the prolonged process in which Norges Bank came to develop features that resemble modern central banking, not least the shift away from long-term lending to discounting and a more active approach to bank rate setting.

The two decades covered here, the 1870s and 1880s, lack the dramatic financial crises that shaped the time around the middle of the century. The financial sector continued to grow along the lines established earlier, but no fundamental shift took place. It was growth in scale, foremost through a geographical dispersion of banking, not in scope, a widening of type of business undertaken or of source of funding.

Lack of financial crises proper does not imply a lack of drama. Indeed, the 1870s and 1880s witnessed some of the most dramatic shifts in fortune in modern Norwegian economic history. The period started off with a flourishing boom only to be arrested by a most severe recession 1877–1879. The volatility continued into the 1880s. This was not unique for Norway but reflected an international period of deflation, sluggish growth and high volatility. For obvious reasons these movements play centre stage in this chapter with an emphasis on the relationship between international business cycles, the domestic economy and monetary development.

Although it was a time of great volatility, the international monetary regime was stable. In the course of the 1870s, the gold standard became the first truly international monetary regime. A stable regime, however, does not necessarily translate into monetary (i.e. price) stability. In a steadily more integrated world economy, an open regime will serve as a transmitter of price movements and business cycles, reducing the already low barrier between international and domestic money. In these decades, the Norwegian money supply was subject to abrupt shifts originating from abroad. How this affected Norway and influenced monetary policy will be an important theme of this chapter.

Introduction

The chartering of Norges Bank in 1816 heralded what became a new era in Norwegian monetary and financial history. For the first time since the Middle Ages Norway gained a viable domestic currency separate from that of its union partner. This step was important. Not only as a political demarcation vis-à-vis Sweden but maybe even more important in terms of the economic and financial structures that monetary stabilisation on Norway's own keel brought about. Without entering deeply into the counterfactual, a common currency in the years after 1814 would have altered the monetary history of both countries and arguably also enhanced the sustainability of the institutions that bound them together. Instead 1816 became year 1 in the modern monetary history of Norway.

This chapter, in essence, is about what came before: the monetary experience of the Dano-Norwegian realm, the prevailing financial and economic structures at work and the devastating deterioration of the domestic currency system after 1807. Our study here will not track the monetary history back to the beginning of human exchange of goods and services. Nor will we offer much for those appreciating numismatic detail. Our aim is to provide a context, establishing a sense of the time in which Norway took the first, tentative steps into what can be described as the modern money world. As such the chapter points forward; the criterion for what is covered is in which way what came before can enlighten our understanding of what came after.

In the last half of the eighteenth century paper money became the primary medium of exchange and unit of account in Norway. By 1814, Norwegians ‘talked and counted’ in notes. Although paper failed utterly as a store of value during the years of war-induced monetary expansion from 1807 onwards, for most of the Danish era paper money maintained fairly stable values in terms of silver. This reflected partly that inconvertibility was not the same as amonetary policy freed from constraints. The king had an interest in providing stability, as a common good, for the benefit of his own tax system and not least in order to preserve his own credibility and access to future credit. Although putting the printing press in the hands of an absolute monarch is a bad idea, most of the time the king behaved with restraint at least when war was not looming.

Introduction

This chapter analyses in broad terms how the monetary restoration was carried out and eventually materialised in the form of a stable currency and an embryonic monetary system that served the needs of the economy. The centre stage of the chapter is occupied with the thorny road to resumption. The legislation introduced in 1816 laid down a principle, that the note issue should be backed by specie and that notes should be freely convertible into silver. From the beginning this was a weak pledge, a commitment for the future. The year set for the resumption of specie payments, 1819, passed without Norges Bank being anywhere near the objective. In 1822, a course was adopted where Norges Bank started paying out in silver, but at a discount for the note holders. Gradually the premium commanded by silver was reduced, bringing the value of notes closer and closer to their promised par value in silver. Although far from their ultimate target, this change of course in effect promoted monetary stability by securing a lower limit below which the exchange rate, i.e. the silver value of the bank notes, would not depreciate. Resumption took time. Not until 1842 did the weak pledge finally materialise in the tangible conversion of one speciedaler note into one speciedaler silver coin.

That resumption would take more than twenty years reflected the fact that monetary restoration was not only a question of monetary stability. In essence, Norway was in strong need of a well-functionin gmonetary system. An early move to specie payments might have jeopardised the vital role Norges Bank had in supplying credit and means of payments. As the case is today, monetary authorities of the past had to balance different and at times conflicting objectives. In this case, taking time provided the answer. Over these years the Norwegian economy grew into its monetary coat. This chapter also describes the fiscal prudence of Norwegian governments after 1814 and provides a brief comparison of the Scandinavian countries’ divergent roads to resumption.

In the final section of the chapter we take a closer look at the early credit market in Norway and the role of Norges Bank in the credit economy. From the beginning Norges Bank was the only institutional provider of credit in the country and would remain in a dominant position throughout the period in question.

Two Hundred Years of Norwegian Monetary History

It all began with an institution chartered to issue circulating means of payments, legal tender bank notes. Two hundred years later, Norges Bank has recently commissioned what some believe might be its last series of bank notes. The recent media attention includes a number of voices who are campaigning for changes in the current legal tender regulations in order to facilitate the phasing out of paper bank notes. The end of bank notes made of paper at some future point in time does not, however, entail the end of money, but rather emphasises two fundamental historical points: the ever-changing characteristics of money and their never-changing character.

In the beginning of modern Norwegian monetary history money was bank notes, as coins had been in earlier times. At the time, bank notes were recognised as money because they were accepted as representatives of the physical units that embodied the common perception of what money really was, namely the full-bodied coins of silver, and later gold, in the vaults of Norges Bank. The understanding, perhaps even illusion, of money as a commodity has been long gone. Today we think about money as something that fulfils certain vital functions in society, notably as means of exchange, store of value and unit of account. The focal point in this monetary history, looking both backwards and forwards in time, has been to illustrate how and to what extent money has fulfilled these functions.

Bank notes came to represent, when the society's commitment to monetary stability had been successfully anchored in the early 1840s, a low risk form of money. Backed by the monetary authorities they were universally accepted, represented stable values and could easily be carried around compared with silver coins. Norway after 1816 had no substantial circulation of full-bodied coins, and the only coins in wide use were small change tokens. Although bank notes entered the bloodstream of the economy, they were not without disadvantages. Beyond the minor problems of risk of theft or destruction, notes were a costly form of money. Bank notes by definition are a non-interest-bearing liability of the issuer, and the excess holding of notes, beyond what is needed for current transactions, entails lost income for the holder.

Introduction

The year 1986 can easily be singled out as one of the most important defining moments in the newer monetary history of Norway. The year witnessed the inglorious end of the devaluation decade followed by decisive steps taken to restore a credible monetary anchor. By the end of the year, bank rate setting had returned to Norges Bank and had been defined as a monetary instrument to be used to maintain the renewed commitment to fixed exchange rates. For the first time since 1945, the central bank had a clear monetary stability mandate and was entrusted with the means to achieve that end.

The perception of 1986 as defining is a product of hindsight, a consequence of how the monetary authorities managed to stick to the course set out that year. Such an outcome was not inevitable. Following the fall in oil prices, the years 1987–1993 turned out to be the bleakest since the interwar period with sluggish growth, falling investments and substantial unemployment. On top of this, the reckless credit expansion and bad banking following the partial deregulation of financial markets in the first half of the 1980s turned sour. Property prices, inflated by the earlier lending boom, fell sharply.

In the banking crisis of 1988–1993, following substantial losses, the major commercial banks were taken over and recapitalised by the government. In such a macroeconomic landscape, maintaining a fixed exchange rate necessarily brought hardship to many. A distinctive procyclical policy was made even worse after 1990 as the leading economy of Europe, Germany, increased interest rates in the aftermath of its reunification. Moreover, a tax reform effective from 1992 reduced the effect of interest rate deductions. Consequently, this increased real interest rates after taxes even further to their peak level, which was reached in 1993.

Staying the course undoubtedly carried a high cost. In the face of substantial opposition from both within own ranks and the trade union movement, the social democratic government showed resoluteness. There was no turning back and the government came to spearhead the move towards more liberal, market-oriented policies. By 1990 the last remnants of the postwar policy model, including capital controls, had been removed.

Introduction

In the previous chapter the volatile interplay between the international business cycle and domestic monetary development played centre stage. This chapter has a different setting. By the mid-1890s, the deflationary tendencies that had marred the economy for two decades were broken and a mild inflationary climate set in. The economic cycles became less volatile. In retrospect these years became one of the most stable periods of the long nineteenth century, a stability that would turn with a vengeance as the ambitious posturing of the great powers led to war. For the European generations that came to be marked by the Great War, these decades became ‘La Belle Époque’, embraced as a time of peace, progress and prosperity. The transformation of the monetary scene that started in the 1870 continued with the last remaining stragglers joining the gold standard. By 1908 only China, Persia and few other Asian countries still retained silver as a monetary standard.

Although the rise of protectionism from the 1870s continued, international trade still grew at a more rapid rate than world production. The world became more closely knitted together, but was at the time same changing. The economic predominance of the United Kingdom, taken for granted fifty years earlier, was in decline. London was by 1913 still the financial and trading capital of the world, but Britain had been surpassed by both Germany and the United States in terms of industrial production. Perhaps as a symbol of the American ascendance the epicentre of the major international financial crisis of the period, that of 1907, was New York.

Compared with both the long depression and the interwar debacle, these decades became a period of growth and stability for Norway as well. With a better international climate, conditions improved for traditional export industries. More important, technological advances unleashed the hydroelectric power potential of Norwegian waterfalls and triggered comprehensive industrial transformation: first with advances in pulp and paper in the 1890s, then in electro-chemical and electro-metallurgical industries after the turn of the century. Particularly the decade after 1905, the year of the amicable dissolution of the union with Sweden, became one of rapid industrialisation. Although Norway continued to export raw materials and semi-finished goods, the new export industries were much more capital and knowledge intensive.

Introduction

The first decade after the war had been one of unfettered ambitions and high hopes for a new world. By 1955, many of the aspirations formulated ten years earlier had been met. Reconstruction had taken place at a much swifter pace than anticipated, the growth record had been impressive, full employment had been maintained and a high investment level had put Norway on the path to economic transformation. At the same time, however, it was acknowledged that vital elements of the postwar economic policy had run their course. In the face of trade and payments liberalisation, the direct regulations of foreign trade had slipped through the fingers of the ruling Labour Party. The devaluations of 1949 showed the futility for a small open economy of attempting to maintain price stability by decree and shelter the domestic price formation from that of the outside world.

The postwar planners had dreamt of a world freed from ‘unenlightened financialism’. This never quite came through. Even under a system of extensive public regulation of the flow of goods and prices, money trickled through, influencing profitability, incentives and economic dispositions. Often these influences tended to distort government plans by stimulating parts of the economy that were not high on the list of political priorities, such as the ashtray industries referred to in Section 11.3. Following the loss of key direct regulation instruments, by the early 1950s, money had returned to forefront of economic policymaking as well. However, the return of money came with a distinct twist. Although the preferred instruments had gone, the ambitions for the future were still intact. There was no return to the alleged unfettered monetary orthodoxy of the interwar variety. Rather, the return represented a change from steering through the physical command posts of the economy to steering through credit aggregates. From a monetary point of view, financial repression became the key characteristic of the following decades.

What came to be referred to as money and credit policy rested on three pillars. First, the persistent commitment to low interest rates in place after the war was retained in order to support further growth and social redistribution.

Monetary development in the years after 1945 necessarily reflected the financial and economic challenges created by World War II. A huge monetary overhang had to be dealt with and there was an urgent need for restoring broken trading links and production capacity. The scare of a repetition of the 1920s, when the end of World War I represented the beginning of a long period of crisis and hardship that lasted throughout the 1920s and well into the 1930s, was at the forefront among the new generation of leaders. It should prove that the challenges arising from the war, although substantial, were all short term in nature and were fairly soon overcome. Already by 1947 output in per capita terms had surpassed the 1939 level. By the mid-1950s the monetary overhang had been more or less eliminated.

The international monetary system following the 1944 Bretton Woods agreement and the establishment of the International Monetary Fund (IMF) was intended to pave the way for a return to a financial order based on a fixed exchange rate system with limited opportunities for competitive devaluations. On the domestic scene, Norway laid out ambitious plans for reconstruction, full employment and modernisation centred on Keynesian economic policy and government planning. Within the new political economy, Norway turned out to be an outlier. The potential for planning was taken further than in almost every Western country and postwar regulations were in place for a much longer period of time. Not until 1990 were its last remnants (capital controls) finally removed. The early postwar years were a period of great unorthodoxy of monetary policy in many countries, and Norway turned out to be the most unorthodox country of all.

Monetary and credit policy in the postwar economy rested on three pillars. First, the persistent commitment to low interest rates prevailing after the war was retained in order to support further growth and promote income redistribution. Second, with politically determined interest rates consistently below the level needed to clear the market, credit had to be subjected to forms of rationing other than the price mechanism in order to maintain macroeconomic stability.

The last part of our study covers the period from the eventful year of 1986 to the present day. The starting point represents the onset of the greatest economic and financial crisis in Norway since the interwar period. The end point, the late autumn of 2014, represents the culmination and potential reversal of one of the most long-lasting economic booms in the country. In a sense this part ends with a déjà vu of 1986.

The three decades had strong formative influence on the Norwegian economy and politics. In its course Norway became a very rich country, but also an economy where much hinged on one factor, the oil price, for good and for bad. Although Norway became an altogether more sophisticated and technologically advanced economy, its traditional exposure as an open economy with a dominant resource-extracting bias was segmented and perhaps taken even further. The volatile price fluctuations of raw materials and semi-finished goods in international markets continued to set the pace. After 1986 a decade and more of low and, at times, very low oil prices followed.

The fall produced a substantial crisis, with profound ramifications for the banking industry, but in the aftermath of the crisis and throughout the 1990s, decisive steps were taken to strengthen Norwegian competitiveness and adjust to a less oil-dependent future. Some of these steps were realised through the implementation of important reforms, such as a new monetary policy framework, through revisions to the Norwegian tax system and through concerted efforts to improve the cost-effectiveness of Norwegian export industries. Equally important was the implementation of the sovereign wealth fund mechanism, which was decided many years before actual surpluses materialised. Over time, however, these gains were put under pressure by the strong performance of oil-related activities from the late 1990s. The unprecedented and sustained improvements in the terms of trade in the following fifteen years were to a substantial degree taken out in the form of real wage growth and public welfare provisions.

Introduction

In simplistic language monetary history deals with money, its different forms and uses over the course of history and the different institutions involved in producing it. The concept of money is, however, intrinsically connected with a society's payment system and its institutions. Irrespective of whether money predominantly circulates among the general public in the form of coins and bank notes, as was the case in the eighteenth and early nineteenth century, or, as is the case in modern societies of the twentieth and twenty-first century, of money mainly appearing in the form of bank deposits, a well-functioning payment system is always built on trust. Historically, the general public had to trust the issuer of coins, typically the sovereign, to preserve the value of his coins and restrain himself from debasement or clipping. Likewise the issuers of bank notes had to be trusted that they would restrain themselves from the temptation of letting the printing works run, such that the overissuing of bank notes led to the undermining of their value. Finally, as deposits in private banks gradually evolved to become the main component of modern societies’ money stock, the general public would need to have a similar faith in the banks with whom they entrusted their funds, believing that the banks could be trusted as custodians of their deposits. We will in the following denote the sum of the general public holdings of coins, bank notes and bank deposits as ‘broad money’, and we will often refer to this as M2 or ‘the money stock’, as is common in the literature on monetary aggregates.

A monetary history of Norway over the past two centuries spans a period that starts dramatically with Norway leaving the union with Denmark in 1814. Norway's monetary system was in a chaotic state and had to be completely redesigned from scratch. In the following years Norway transited from a tight union with Denmark, without her own national institutions, to enter into a loose union with Sweden. All main national institutions of Norway – its parliament, central government departments, supreme court, national auditing and a bank of issue, Norges Bank, all separate from the similar Swedish institutions – were all established in the formative years 1814–1816.

Introduction

In the introduction to Part II, we sketched the broad lines of economic and monetary change in the second half of the long nineteenth century. In particular, we stressed the importance of the middle of the century as the beginning of a shift along a far-reaching front that, in the course of two to three generations, transformed the country. In Chapter 4 the focal point is how the first stage of this transformation influenced monetary growth, the expansion of a financial sector and the conduct of the bank of issue.

In addition to the overall focal point, the chapter has a strong emphasis on financial crises with detailed examination of both the crisis of 1847– 1848 and that of 1857. A number of reasons justify this choice. First, crises are important in their own right and defend their place in a monetary history. Second and more important, crises are the testing ground for the commitment and resolve of monetary authorities. Central banking, to simplify the question somewhat, is plain sailing most of the time. Normal times, thus, are not necessarily the best source for understanding the conceptual development of central banking. Although finding the right balance between conflicting policy objectives might not always be easy for a bank of issue, it will eventually be reached. In crisis, these conflicts are accentuated to the fullest degree possible, often involving hard choices or revealing deficiencies in the thinking of monetary authorities. Analyzing the crisis management of monetary authorities over time becomes a key to understanding how banks of issue eventually were transformed into central banks proper. Third, and closely related to the second, crises are triggering events: the perception of how a crisis was handled, for good or for bad, influences future policy and central bank development as lessons learnt. Thus, crises can both build and ruin the reputation of monetary authorities. Fourth, crises are also a testing ground for the well functioning of financial markets. In the aftermath deficiencies are acknowledged, often triggering financial innovations, structural change and regulatory reform.

In this chapter we will argue that the two crises around the middle of the century were handled quite differently by the monetary authorities. In 1847–1848, the sole objective of Norges Bank was to maintain the de jure convertibility of the currency expressed through the legally proscribed ratio between silver reserves and notes.