January 1927 48 FEDERAL RESERVE BULLETIN JANUARY. 1927" DENMARK'S RETURN TO THE GOLD STANDARD The return of Denmark to the gold standard date to December 31, 1925, 5.64; and during at the beginning of 1927 follows upon a long the first half of 1926 at a rate not exceeding period during which the Government has car- 5.32. Thus it was intended gradually to ried out measures for the stabilization of raise the value of the krone. To assist in Danish currency. The continuous fluctua- carrying out these measures the National tions in the exchange value of the Danish Bank obtained an exchange credit for one year krone since the end of the war and the con- in the United States of $40,000,000, guaran- sequent fluctuations of prices were a disturb- teed by the Danish Government, which also ing factor in the economic conditions of the agreed to repay within two years to the country, and the Government undertook meas- CENTS PER KRONE CENTS PER KRONE 30 30 ures to reduce these fluctuations. By act of DANISH EXCHANGE IN NEW YORK November 16, 1923, the Danish Government received authority to establish credits in Eng- land and in the United States and the proceeds of the credits were used to establish a currency equalization fund of £5,000,000. For a brief period the downward trend of the Danish ex- change was stopped. During January, how- ever, the krone again began to depreciate and the Government adopted new measures to 15 prevent a further decline. On March 29, 1924, an act was passed establishing the central currency office, among the various powers 10 of which was the right to control foreign ex- 1924- 1925 1326 change transactions and to restrict dealings in National Bank a loan of 40,000,000 kroner foreign exchanges to a small number of banks. which it had obtained in 1922 in connection The improvement of krone exchange following with the reorganization of the Landsmands the establishment of the central currency Bank. The Government was to obtain this office, however, was of only brief duration, and money from special taxes. in May another period of depreciation began. The currency stabilization act was primarily In July the Government called a conference of intended to check the decline of the krone representatives of industry and trade as well and to bring about a gradual increase in its as of the various political parties to consider value. Soon after the passing of this act, the exchange question. The result of this however, Danish exchange rose so rapidly that conference was the currency stablization law at the end of December, 1925, it was quoted of December 20, 1924, which laid down broader at 4.08 kroner to the dollar instead of 5.64 principles for a return to normal exchange con- kroner, as had been anticipated by the law of ditions. December, 1924. The movement of Danish The chief provisions of the act may be sum- exchange during the past three years may be marized as follows: The National Bank of seen from the chart above. Denmark was exempted from its obligation The rapid rise of the Danish krone was due to redeem its notes in gold until January 1, chiefly to tw^o factors. First, a substantial 1927. The National Bank at the same time decrease of imports resulted from the pro- agreed to sell dollars, the par value of which is longed labor stoppage in 1925, so that the 3.73 kroner per dollar, at a rate which up to excess of imports over exports was reduced July 1, 1925, should not exceed 5.74; from this from 212,000,000 kroner in 1924 to 130,000,000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis January 1927 JANUARY, 1927 FEDERAL RESERVE BULLETIN 49 kroner in 1925. Even this figure, if appears, banks found themselves able to repay their represents the imports as larger than they debts to the National Bank with kroner actually were, for the import figures are obtained through the liquidation of their based upon the value of the goods at the time forign exchange holdings. During the entire when they were cleared into the country, period interest rates remained high, and the whereas payment is not made in most cases official discount rate stood unchanged at 7 until considerably later. Thus importers were per cent. •often able to take advantage of the rapid The central bank, however, realizing that appreciation of the exchange, and so to meet the influx of foreign funds was only temporary their obligations at a substantially lower and for speculative purposes, endeavored to rate than that obtained at the time of purchase. check this movement. On August 24, 1925, The actual payments in kroner, therefore, the bank rate was reduced to 6 per cent and were less than had been stated in the trade on September 8 to 53^ per cent. By the end statistics. An estimate places the saving of August the rapid upward movement of the •effected in this manner at about 30,000,000 krone was checked and foreign funds^began to kroner, so that the excess of imports over leave the country. Holdings of foreign bills exports may be further reduced to about of the National Bank declined to 90,000,000 100,000,000 kroner. In consequence of the kroner at the end of the year, a decrease of improved trade balance, the balance of pay- 64,000,000 kroner since the end of August. ments, which in the previous year had been Notwithstanding the heavy outflow of foreign unfavorable, became favorable by about 15,- funds, Danish exchange remained stable for 000,000 kroner. the rest of the year at about 4 kroner to the Second, and far more important than the dollar. improvement of the balance of payments, was On December 15, 1925, the currency stabili- the effect of foreign speculation in Danish zation act was amended. The National Bank exchange. Foreign speculators, in the ex- was placed under obligation to maintain a pectation of a rapid rise of the krone, began minimum dollar exchange rate of 23.8 cents to buy Danish bills heavily until foreign funds per krone during 1926, with the provision, to an estimated total of about 100,000,000 however, that if exceptional circumstances kroner had been placed in Denmark. Con- should arise the Minister of Commerce might current with the increased interest of foreigners authorize a temporary lowering of the rate, in the krone was the movement on the part of Danish holders of foreign bills of exchange but not below 23 cents. The exchange credit to convert them into kroner. The National of $40,000,000 which had not been drawn upon Bank took up these bills, as well as foreign was renewed for another year. Although not offerings which the market was unable to expressly stated in the act, it was taken as a absorb, with the result that the exchange matter of course that the bank would maintain equalization fund, which earlier in the year the rate of exchange obtaining at the end of had been practically exhausted, was again 1925 and would work toward a gradual return replenished, and the bank increased its own to par. During the first half of 1926 krone portfolio of foreign bills. Holdings of foreign exchange rose steadily, and since June it has bills of exchange by the National Bank in- been quoted at 0.9 per cent below par. On creased from 30,000,000 kroner at the end of January 3, the first business day after the February to 154,000,000 kroner in August of return to gold, the krone was quoted at 26.68 the same year. Loans and discounts of the cents, as against a mint parity of 26.80 cents. National Bank during the same period de- The rapid appreciation of the krone was creased from 262,000,000 kroner to 99,000,000 accompanied by a sharp decline in wholesale kroner at the end of August/because the private prices. The wholesale price index, as pub- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis January 1927 50 FEDERAL RESERVE BULLETIN JANUARY, 1927 lished by the Finanstitende, declined from 234 effect on industry and trade, and a large vol- in January, 1925, to 160 in December of the ume of unemployment prevailed. The num- same year. The rapid adjustment of whole- ber of unemployed among trade unionists sale prices to the value of the krone was due increased from 24,000 in June, 1925, to about primarily to the fact that stocks of commodi- 85,000 in December. During the early part of ties had been well nigh exhausted during the 1926 conditions improved rapidly and the num- labor conflict. Manufacturers and wholesalers ber of unemployed decreased to about 41,000 were able, therefore, after the settlement of in May. Since then unemployment has in- the strike, promptly to adjust their prices to creased slowly. the increased value of the currency. During Toward the end of 1925, when the return to. 1926 the wholesale price index declined still gold was discussed by a parliamentary com- further, reaching the lowest point in June. mittee, the bank made the following statement Since July Danish exchange has remained to this committee: "The bank does not con- practically stable, while prices have shown an sider it advisable to revert to gold payments upward tendency. until price levels and incomes have been Although wholesale prices adjusted them- brought into equilibrium and into correspond- selves with comparative rapidity to the move- ence with the ultimate value of the crown, ment of the exchange, retail prices followed and until sufficient time has elapsed to show but slowly.