7 - TheWartime Money Glut, 1914–1920

Summary

Introduction

The outbreak of World War I marks the beginning of a troubled period for Norway as a nation and for the Norwegian economy. The overriding objective of foreign policy during the war was to preserve Norway's neutrality. The government did succeed in manoeuvering between the belligerent nations in such a way that Norway was not directly drawn into the military conflict. This was a great relief to the nation, although it could be achieved only by giving some financial concessions to Britain and Germany in connection with the export of fish to these countries. This seems to be a low price for achieving neutrality, but as will emerge from the narrative of this chapter, this policy greatly exacerbated the liquidity problems that Norges Bank had to struggle with in the final years of the war.

In the first part of World War I the Norwegian economy boomed. The demand for some of the staple export goods, such as metals, ores, fish and hardened fats, soared to unprecedented heights. The Norwegian merchant fleet profited enormously from the steeply rising freight rates. The surge in export revenues and freight income provided the initial injection of money into the domestic economy. In the final war years and for some time beyond, however, disruptions to foreign trade and shipping greatly diminished the flow of income from abroad. But the base money creation continued largely unabated; now the main sources of liquidity injections stemmed from the government's various efforts to ensure the supply of consumer goods to the public, and, as referred to above, from funding operations on British and German account. As a consequence of the abundant liquidity of the commercial and savings banks, a significant expansion of bank credit could take place.

A main theme in the monetary history of Norway during World War I is thus how the monetary authorities coped with the initial money glut due to booming export revenues and later added to the problems by creating more money themselves. The challenges facing the monetary authorities that were caused by the war economy were truly demanding, and, it is fair to say, grave policy errors were committed. We say this not only with the benefit of hindsight but, as it will turn out, by reference to the contemporary critics of economic policy.