4 - Newfound Stability in Times of Crisis and Financial Breakthrough, 1850–1870

Summary

Introduction

In the introduction to Part II, we sketched the broad lines of economic and monetary change in the second half of the long nineteenth century. In particular, we stressed the importance of the middle of the century as the beginning of a shift along a far-reaching front that, in the course of two to three generations, transformed the country. In Chapter 4 the focal point is how the first stage of this transformation influenced monetary growth, the expansion of a financial sector and the conduct of the bank of issue.

In addition to the overall focal point, the chapter has a strong emphasis on financial crises with detailed examination of both the crisis of 1847– 1848 and that of 1857. A number of reasons justify this choice. First, crises are important in their own right and defend their place in a monetary history. Second and more important, crises are the testing ground for the commitment and resolve of monetary authorities. Central banking, to simplify the question somewhat, is plain sailing most of the time. Normal times, thus, are not necessarily the best source for understanding the conceptual development of central banking. Although finding the right balance between conflicting policy objectives might not always be easy for a bank of issue, it will eventually be reached. In crisis, these conflicts are accentuated to the fullest degree possible, often involving hard choices or revealing deficiencies in the thinking of monetary authorities. Analyzing the crisis management of monetary authorities over time becomes a key to understanding how banks of issue eventually were transformed into central banks proper. Third, and closely related to the second, crises are triggering events: the perception of how a crisis was handled, for good or for bad, influences future policy and central bank development as lessons learnt. Thus, crises can both build and ruin the reputation of monetary authorities. Fourth, crises are also a testing ground for the well functioning of financial markets. In the aftermath deficiencies are acknowledged, often triggering financial innovations, structural change and regulatory reform.

In this chapter we will argue that the two crises around the middle of the century were handled quite differently by the monetary authorities. In 1847–1848, the sole objective of Norges Bank was to maintain the de jure convertibility of the currency expressed through the legally proscribed ratio between silver reserves and notes.