Working Paper

2008 | 14 Working Paper Norges Bank´s bicentenary project Monetary policy under the gold standard – examining the case of Norway, 1893-1914 by Lars Fredrik Øksendal Working papers fra Norges Bank kan bestilles over e-post: [email protected] eller ved henvendelse til: Norges Bank, Abonnementsservice Postboks 1179 Sentrum 0107 Oslo Telefon 22 31 63 83, Telefaks 22 41 31 05 Fra 1999 og senere er publikasjonene tilgjengelige på www.norges-bank.no. Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning. Working papers from Norges Bank can be ordered by e-mail: [email protected] or from Norges Bank, Subscription service P.O.Box. 1179 Sentrum N-0107Oslo, Norway. Tel. +47 22 31 63 83, Fax. +47 22 41 31 05 Working papers from 1999 onwards are available on www.norges-bank.no Norges Bank’s working papers present research projects and reports (not usually in their final form) and are intended inter alia to enable the author to benefit from the comments of colleagues and other interested parties. Views and conclusions expressed in working papers are the responsibility of the authors alone. ISSN 0801-2504 (printed), 1502-8143 (online) ISBN 978-82-7553-453-6 (online) Monetary policy under the gold standard - examining the case of Norway, 1893-1914 Lars Fredrik Øksendal PhD-fellow, Department of Economics, Norwegian School of Economics and Business Administration (NHH) Abstract This essay examines Norwegian monetary policy under the final decades of the classical international gold standard regime prior to World War I. While the evidence clearly demonstrates that the commitment to gold convertibility was the overall objective, the character of monetary policy was determined by the inherent tension between Norges Bank’s role as the guardian of the nation’s most important reserve of foreign exchange and the role as manager of the domestic currency. In order to solve this tension, a core point of monetary policy was to shelter the domestic money supply from changes in the balance of payments. Rather than forcefully reducing domestic circulation during seasonal fluctuations in the flow of gold, Norges Bank operated with a relatively large reserve of notes and foreign securities which took the strain. The effect of this policy was interest rate smoothing and increased freedom for exercising discretionary judgment. Moreover, I present evidence demonstrating that interest rate decisions were influenced by a number of domestic concerns and not only the external balance. JEL Codes: E42, E52, E58, N13 Keywords: Central banking, Monetary history, Gold standard, Bank rate policy 1 Preface The study presented here constitutes a part of my doctoral thesis in economic history at the Norwegian School of Economics and Business Administration (NHH). The theme for my research project, in a broad sense, is the Norwegian monetary policy experience under the classical gold standard, from the early 1870s until the outbreak of World War I. In this particular study, the subject is monetary policy in the two decades following enactment of the new central bank legislation in 1893. A few words on the format might be appropriate. As the conscientious reader will recognise, this study goes beyond the standard length of articles written for international scientific journals. This is a conscious choice. Although the findings presented here could have been moulded into the specific format of that genre, and might very well be so in the future, much of the empirical evidence and contextual text necessary for my arguments would have been lost. Preliminary drafts of this study were presented at the 6th Conference of the European Historical Economics Society, Istanbul, September 2005; a joint seminar of economic historians from NHH and the University of Bergen in the autumn of 2005, a faculty seminar at the Department of History and Classical Studies, Norwegian University of Science and Technology in the autumn of 2005, as well as at a seminar for PhD-students at NHH in April 2006 and a staff seminar at NHH in January 2007. I am indebted to professors Jan Tore Klovland, Ola Grytten and Bjørn Basberg; associate professors Stig Tenold, Magnus Lindmark (all NHH) and Pål Sandvik (Norwegian University of Science and Technology); PhD-fellows Monica Værholm (NHH), Gunhild Ecklund (Norwegian Institute of Management), Bjørn Haugstad (Oxford University), and finally Research Director Øyvind Eitrheim, Norges Bank, who all, at differing stages, read the whole manuscript and provided stimulating discussions, valuable suggestions and firm warnings. 2 1. Introduction and argument Norway adhered faithfully to the classical gold standard from its introduction in 1874 to its demise at the dawn of World War I. The central bank, Norges Bank, honoured notes in gold and the commitment to convertibility was never questioned. The gold standard coincided with long periods of economic growth, increase in international trade and economic modernisation. Adherence facilitated trade, capital import and integration in international financial markets. As such, the gold standard in the case of Norway can easily be described as a success story. Norway belonged to a group of countries that adhered to the gold standard, but which has attracted surprisingly little scholarly interest outside the perimeter of national research. The international literature on the gold standard is mainly concentrated on systemic approaches, the role of the core countries of the Atlantic economy or the periphery of Southern Europe or Latin-America. The Scandinavian countries — Denmark, Sweden and Norway — were not a part of the core but had nevertheless little in common with the impoverished periphery. Culturally, politically and economically they had strong links with the core, but their size meant that they had only limited influence in global finance. We can label these countries the advanced periphery. Our knowledge from domestic sources of monetary policy in Norway under the pre-war gold standard is limited as well.1 According to one source, Keilhau, Norway was among the countries that loyally followed ―the rules of the game‖. Keilhau neither outlines his understanding of this concept nor substantiates his claim.2 However, more recent historical studies have not moved the understanding much beyond this interpretation and his now sixty- year-old postulate still stands as the verdict on Norwegian central banking under the gold standard. The ambition of this study is to fill this gap in Norwegian historiography and at the same time contribute to the international understanding of the advanced periphery under the gold standard. My point of departure, following the lead given by Keilhau, is to discuss the concept of 1 The lack of literature applies for Denmark as well. Sweden, however, has been the subject of a number of good studies in recent years. Talia discusses the Scandinavian Monetary Union from a Swedish perspective, Lobell writes on the Swedish foreign exchange rate until 1880, while Ögren’s thesis on the Swedish credit market 1834- 1913 is a model study. I will return to his study in my discussion. Talia, Krim, The Scandinavian Currency Union, 1873-1924 - Studies in Monetary Integration and Disintegration, Stockholm School of Economics 2004; Lobell, Håkan, Vaxelkurs och marknadsintegrasjon, Lund Studies in Economic History 14, Ögren, Anders, Empirical Studies in Money, Credit and Banking, The Swedish Credit Market in Transition under the Silver and Gold Standards, 1834-1914, EHF Stockholm School of Economics. Studies in Economic History no 2. 2 Keilhau, Wilhelm, Den norske pengehistorie, Aschehoug 1952 pp. 124-5 3 ―rules of the game‖ in light of the international literature and examine whether it is a framework that gives meaningful insights into Norwegian monetary policy in the last decades of the gold standard. To jump to the conclusion: it is not. Rather than stern rule adherence, the evidence suggests that Norges Bank played a broader game and in fact frequently exercised considerable discretionary judgment. Gold convertibility, although clearly at the forefront of monetary policy, was only one of several objectives of Norges Bank. My thesis is that the character of Norwegian central banking before 1914 is to be found in the in-built tension between Norges Bank’s two key roles, to preserve the nation’s most important reserves of gold and foreign exchange and simultaneously manage the domestic currency. In order to avoid a situation where external constraints might force the bank to an unwarranted curbing of domestic credit, Norges Bank aimed at sheltering the domestic money supply from fluctuations in the external balance. The bank did this by keeping relatively large reserves of legally backed notes not in circulation and foreign securities as buffers against fluctuations in the gold balance. A part of this policy included monetary sterilisation and husbanding with gold resources. The result was interest rate smoothening and a note circulation mainly determined by the domestic demand for money. This successfully managed gold standard created latitude for the monetary authorities to pursue discretionary policies. I demonstrate that interest rate decisions were influenced not only by the external balance but also by a number of concerns, most prominently the state of the domestic money market and the business cycle. In practice, the room for exercising some discretionary judgment was present in the long run as well. In the business downturn following the Christiania bust of 1899, Norges Bank maintained domestic discounting at a record high level in the face of dwindling gold reserves, thus easing the impact of the economic cycle. The external anchor served Norway well in this period. The commitment to gold convertibility was never in question and created credibility for monetary policy. Long-run credibility created latitude for monetary authorities to play a broader game than that argued by Keilhau.

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