The Origins and Nature of Scandinavian Central Banking

The paradox is that although no generally accepted definition of a “central bank” seems ever to have existed, everybody will recognize a “central bank” when they see one. However, the question could very well be asked if they are banks at all, or whether or to what extent they are just special government offices staffed possibly by a few bankers, countless numbers of a peculiar type of economists, bureaucrats, and occasionally even politicians. This, of course, also raises the question whether “central banks” are really necessary. After all, the world did quite well (from an economic point of view) a long time before anybody had invented the term “central banking” or “central banks”. The answer is, of course, that the concept of a “central bank” has developed over time, and that the concept has, historically, differed considerably between countries.

Virtually all of today’s central banks in the Western world have been founded by special royal charters or direct legislation. That does not by itself make them “central banks”. Those charters were issued long before the concept of “central banking” was born. Originally, they were just commercial banks endowed with special privileges laid down in their charters or the legislation. Their charters had been given because of special circumstances at the time they were granted, but they were still just commercial banks with ordinary shareholders expecting a profit. In some cases charters were granted in return for favours given to the king/government (war financing). That was not the case in Scandinavia. In all cases, however, their charters gave the respective banks a more or less special status, from which they gradually developed into central banks. They steadily fulfilled the four criteria discussed below. Eventually, some of them became so immersed in government business and politics that they became more of a department of the country’s ministry of finance than a central bank. In 1946–49, some of them were nationalized (e.g., the Bank of England, the Banque de France, and Norges Bank).

From the 15th century until 1866, Sweden was governed by a combination of the king/government and the Ständerförsamling (representatives of the “Four Estates”, i.e. the nobility, the burghers, the clergy, and the farmers). For the history of “central banking” in Sweden, the year 1544 is of some relevance.

For about 400 years Denmark and Norway had constituted a dual kingdom with the Danish kings as heads of state. In Norway, the king was represented by a statholder (governor) and a local administration residing in Christiania (spelt Kristiania since 1877, and renamed Oslo in 1925). The local administration was comprised mostly of civil servants educated in Copenhagen and recruited from the Danish central administration. The local administration would collect taxes, customs, and duties and remit the proceeds to Copenhagen where these incomes would contribute to the joint defenses and administration of the kingdoms.

By the mid-1860s, the interest in switching from the predominantly silver standard to a new gold standard, or a bimetallic standard, was spreading throughout Europe, including the Nordic countries. The background was the declining price of silver relative to gold. It became increasingly difficult to maintain the traditional 15½:1 price relationship between silver and gold.

The rapid industrialization and urbanization sweeping through Scandinavia during the 1890s and early 20th century left all three countries with sizeable net foreign debts by 1914. Large sums were owed to German, British, French, Swiss, and American banks, and large amounts of Scandinavian bonds and stocks were circulating on the stock exchanges, particularly in Berlin and Paris. Also, large blocks of real estate in the Scandinavian capitals had been acquired by German and British insurance companies.

Since its foundation in 1668, the Riksbank had been governed by the six “fullmägtige”, appointed by and representing the three guaranteeing estates (two from each estate––see Chap. 3). They had a role comparable to non-executive directors. The practical daily affairs were taken care of by six “kommissarier”, each reporting to the relevant fullmägtiga. Some fullmägtige were members of the Assembly of the Estates, but mostly they were not. They reported to the “Sekrete Utskott”, (the “Secret Commission”) i.e. the commission of the Estates dealing with secret matters of state.

The developments and problems in Denmark during the early post-war years and later in the 1920s were generally not much different from elsewhere. First, soaring inflation and a speculative boom (1918–20), followed by depression (1920–24), bank failures, and a renewed boom in the second half of the 1920s.

In 1920, in Norway, the mood was bleak. Incomes from shipping, fisheries, and timber exports were decreasingly able to finance imports of necessities. It is significant that in the official history of Norges Bank, much space is used to discuss fishing volumes, fish prices, and freight rates, e.g. p. 215 (my translation): “In 1919, fishery was good. 657.000 tons were fished. Prices at first hand were not bad…and substantially better than in 1917 and 1918. In 1920, fishery was less good––only 484.000 tons were fished––and prices were much lower than the previous year.” It was explained that the drop in fishing volumes and prices in 1920 was partly caused by the sales of stocks built up during the war years. The stocks were sold in a market where capacities were being rebuilt elsewhere.

The schedule presented below intends to give an overview of the main points relating to the origins and nature of the Scandinavian central banks (Table 11.1).