The Investment Manager

This chapter assesses how the management of the nation’s long-term savings in what is now the Government Pension Fund Global brought Norges Bank a brand new responsibility from the mid-1990s, and an unusual one for a central bank. While many central banks have historically played an important part in contributing to government financing and investing government debt in liquid securities, this had never been one of Norges Bank’s main roles. Indeed, one of the key aims of the acts of 1816 and 1891 was to prevent the government from funding itself through the central bank. From the mid-1990s, however, Norges Bank was in a way given the opposite task: a separate mandate to manage the country’s financial wealth on behalf of the government by investing it abroad in long-term bonds, shares, and eventually real estate. Within twenty years, thanks to high oil prices and substantial inflows from the government, the fund’s market value soared from nothing to around NOK 7 trillion. In recent years, the fund’s rapid expansion and financial importance have brought Norges Bank—and Norway—at least as much international attention as the bank’s more traditional roles in monetary policy and financial stability.

Downfall of the Regulatory System and Triumph of the Market

This chapter discusses how, in the 1970s and 1980s, Norges Bank began to develop instruments with a view to steering economic policy under freer market conditions. However, governments of changing political hues were unwilling to let go of the low interest rate. The oil price fall in 1986 brought an abrupt change in interest rate and credit policy. The government’s tightening actions included the introduction of a more binding fixed exchange rate policy. The frequent recourse to corrective devaluations was to be a thing of the past. Hence, there was a justification for using the interest rate as an ongoing instrument to stabilize the exchange rate. This task fell to Norges Bank. The transition to an independent, active interest rate policy on the part of the central bank was abrupt and came as a surprise. Barely a year before the collapse of the oil price, the Storting had passed a law that made Norges Bank one of the least autonomous central banks in all of western Europe. Ultimately, it was the external situation, and in no sense an increase in government’s and the public’s recognition of the bank and its institutional legitimacy, that restored greater operative autonomy to Norges Bank.

The Pyrrhic Victories of the 1920s

This chapter describes Norges Bank in the 1920s. Following the chaotic years during and after the First World War, politics ceded the economic realm to institutional technocrats, represented especially by the governor of Norges Bank, Nicolai Rygg. Rygg started out with strong support from the political and intellectual milieus in his programme for restoring the pre-war value of the krone. Gradually, the support eroded. The growing labour movement and Labour Party came to represent the most important threat to Norges Bank’s policies in its final stage. Labour came out as the winner of the parliamentary election in 1927 and formed a new, short-lived government in early 1928. When the government was overthrown after a few weeks in office, the parity policy could be completed and ‘normalcy’ restored. However, Rygg and Norges Bank won a costly victory. In the aftermath, the parity policy was mainly seen as erroneous and misguided. Rygg’s active role in overthrowing the Labour government in 1928 became a formative element in the labour movement’s perceptions of Norges Bank’s and its governor’s past and future role in Norwegian society.

A Bank of Issue Forged in Silver and Tears

This chapter discusses the formation of Norges Bank. Norges Bank was formed in 1816 by resolution of the Storting, Norway’s new parliament. The bank was not given any explicit role in government financing. However, two tasks—providing credit for the public and stability in the monetary system—were fundamental to the bank’s creation and almost every discussion of its operations for the next quarter of a century. Moreover, when chartering Norges Bank in 1816, the Storting resolved that the Norwegian monetary unit—the speciedaler—should be convertible into silver at an exchange rate that was well above the note’s purchasing power and market value at the time. Indeed, one fundamental premise in all of the proposals that proliferated in 1816, influenced by the monetary chaos during the Napoleonic Wars, was that the value of the nation’s new paper money must be backed by silver.

Conclusion

A central theme in this book has been the shifting relations between the state and Norges Bank. To some extent—but only to some extent—the bank’s independence from political institutions has been at the centre of the narrative. The concept of independence is useful when studying the means available to the bank in contributing, for example, to financial stability and efficiency in the payment system. For understanding its long-term institutional development, the bank’s fundamental ...

Blurring the Borders

This chapter looks at the criticism of Norges Bank’s role during the First World War. In particular, historian and economist Wilhelm Keilhau severely criticized Norges Bank in his comprehensive review of economic policy during the war. Keilhau commented that, together with the captains of finance, the central bank contributed to ‘the destruction of the Norwegian monetary system, which the first generation after 1814 had made tremendous sacrifices to establish and which had been in pristine order for 62 years’. By suspending the banks’ obligation to redeem banknotes for gold, and then issuing massive amounts of notes, in addition to the financing of and integration into government activities, Norges Bank’s monetary policy has been largely held responsible for the sharp rise in inflation and krone depreciation—and by implication for the strongly criticized parity policy of the 1920s. As a non-belligerent country, one would have thought that the mandate for Norges Bank’s activities would have remained more or less intact. The chapter explains why that did not come to be.

A Bank with a Divided Mandate

This chapter examines the two mandates of Norges Bank. In autumn of 1818, Norges Bank began providing ordinary services to the public, discounting bills and lending directly against real estate. The institution was now both the nation’s bank of issue and its sole bank. Expectations of what the bank was to achieve pulled in two diametrically opposed directions. On the one hand, the bank was to take control of the inflated monetary system and bring the value of money back to par, namely the silver value guarantee issued when the Storting established the bank in 1816. Based on both contemporary and modern wisdom, this would speak in favour of tightening the money supply. On the other hand, the bank was to meet the country’s considerable need for credit, which would speak in favour of adding liquidity. However, a desire to supply more credit to farmers, merchants, timber traders, and others competed with the long-term goal of returning money to par. Indeed, the reason why the road to par became so long and winding has to do with the desire to supply the nation with credit: both the money supply and credit volumes were expanded repeatedly to meet the country’s borrowing needs.

Introduction

This is a book on the 200-year history of Norges Bank, a central bank in a relatively small and remote country. It is—to some extent, but only to some extent—a contribution to the relatively broad literature on the history of national central banks. The present Norges Bank is a modern, well-functioning central bank, with strong likenesses to similar institutions in other countries....

The 1930s Crisis

This chapter examines Norges Bank during the 1930s. There is hardly any single year that stands out as prominently in the history of Western central banks as the year 1931. That was the year when the gold standard collapsed, caused by the severe banking crisis on the continent, negatively impacting the entire Western world and rapidly developing into a deep and widespread international crisis. In addition to that, problems brought forth by the crisis stretched beyond the sphere of the financial system. The aftermath of the crisis was dominated by bankruptcy and unemployment, with adverse effects that would persist for the entire decade. The year 1931 was one of economic crisis, yet one of the finest moments in Norges Bank’s institutional history. The new exchange rate policy prevented a tight policy with high interest rates to defend the value of the krone. This new policy also made room for support measures and a relatively flexible monetary policy, first during the run-up to the new banking crisis, and later as a more general policy throughout the decade.

A Bankers’ Bank

This chapter details the Storting’s passing of a new law in 1892 which superseded all former laws pertaining to Norges Bank. As with the bank’s foundations of 1816, the 1892 act reflected its era and responded to the perceptions and needs of that period. The new law facilitated the transformation of the regionalized bank of issue into an institution more closely resembling central banks elsewhere. Discussions on the legal framework were thus held with varying intensity from the 1870s and onwards. Three conditions in particular influenced the process and the final character of the law. The first was the international context the law itself was a part of. The second condition was the integration and centralization process already underway in Norway. The third significant condition was the conflict between the government authorities that framed Norway’s entry into the Scandinavian Monetary Union.