Scandinavian Monetary Cooperation 1873-1914: A trade off between efficiency and vulnerability

This Paper examines monetary cooperation among the Scandinavian central banks during the union period. In 1885, the Scandinavian Currency Union was strengthened by the adoption of a clearing agreement. The agreement was proposed by the Danish Nationalbank, with the aim of improving the efficiency of inter Scandinavian monetary transactions. It gave the central banks the right to draw commission free checks on each other. In theory, this clearing agreement eliminated the gold points among the three Scandinavian countries, thus maintaining their currencies at par. A further step was taken in 1894 when the Swedish Riksbank and Norges Bank agreed to accept each other’s notes at par, an arrangement joined by the Danish Nationalbank in 1901. This, however, marked the high point of Scandinavian monetary cooperation. In 1905 Sweden gave notice of termination of the clearing agreement, and only after three months of intense negotiations were the three banks able to compromise on a new, more restrictive, clearing mechanism. The paper argues that monetary cooperation involved a trade off between financial efficiency and economic vulnerability. It establishes that the cancellation of the original agreement can not be attributed solely to the political conflict between Sweden and Norway that raged in 1905. The Swedish Riksbank had for some time been irritated that the agreement had not been performing the function for which it was originally intended. This irritation, however, did not, reach the point of triggering withdrawal from the agreement, until Norway dissolved the political union between the two countries. This act increased the risk for the Riksbank of holding part of its gold reserves in the Norwegian national bank and thus served as a catalyst for the renegotiation of the clearing agreement. The new agreement was less efficient, but also less risky.