Introduction

In terms of dramatic events in monetary history, the 1920s saw it all. A nationwide and virulent banking crisis, large capital flows, steeply rising unemployment rates and extreme fluctuations in prices and exchange rates, culminating in the resumption of gold payments at the prewar parity on 1 May 1928, dominated the financial scene during most of the 1920s. New information on the fragility of the central government's financial position and the true extent of debt liabilities incurred by the government during World War I and its aftermath, which dawned on the political environment during the 1920s, represented an additional cliffhanger. The chief actor in this drama was early identified as Nicolai Rygg, who took over as governor of Norges Bank in November 1920.

Two main themes stand out as fundamental in shaping the monetary history of the 1920s in Norway: the banking crisis and the effects on the domestic economy of the return to the gold standard. In our view it is essential to bear in mind that the severity of the banking crisis and the economic downturn had its roots in the wartime events and policy errors in the previous decade. Glasses were broken in the washing-up in the 1920s as well, but given the excesses of the wartime party, the task of the cleaners was no doubt formidable.

The relationship between the banking crisis and the gold resumption policy has been a somewhat controversial issue in Norwegian monetary history. We argue that the initial and most severe phase of the banking crisis was primarily a consequence of the events of the previous decade, largely independent of the resumption of gold. The main reason is simply that the banking crisis started several years prior to when the deflationary impulses associated with the return to gold began to be felt. It is true that monetary policy was tight in the early 1920s during the onset of the banking crisis, which may have precipitated some bank failures. But monetary policy was hardly more contractive than in, e.g. Sweden, which escaped nationwide banking failures. In Norway the monetary expansion had been brought further and had lasted longer than in Sweden, which is why Norwegian banks were less able to handle the severe deflationary shock that hit nearly all countries in the early 1920s.