The Early Escape from the Golden Fetters, 1928–1940

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.