Danish and Norwegian monetary policy failure in 1920s – lessons for today

History is fully of examples of massive monetary policy failure and today’s policy makers can learn a lot from studying these events and no one is better to learn from than Swedish monetary guru Gustav Cassel. In the 1920s Cassel tried – unfortunately without luck – to advise Danish and Norwegian policy makers from making a massive monetary policy mistake.

After the First World War policy makers across Europe wanted to return to the gold standard and in many countries it became official policy to return to the pre-war gold parity despite massive inflation during the war. This was also the case in Denmark and Norway where policy makers decided to return the Norwegian and the Danish krone to the pre-war parity.

The decision to bring back the currencies to the pre-war gold-parity brought massive economic and social hardship to Denmark and Norway in the 1920s and probably also killed of the traditionally strong support for laissez faire capitalism in the two countries. Paradoxically one can say that government failure opened the door for a massive expansion of the role of government in both countries’ economies. No one understood the political dangers of monetary policy failure better than Gustav Cassel.

Here you see the impact of the Price Level (Index 1924=100) of the deflation policies in Denmark and Norway. Sweden did not go back to pre-war gold-parity.

While most of the world was enjoying relatively high growth in the second half of the 1920s the Danish and the Norwegian authorities brought hardship to their nations through a deliberate policy of deflation. As a result both nations saw a sharp rise in unemployment and a steep decline in economic activity. So when anybody tells you about how a country can go through “internal devaluation” please remind them of the Denmark and Norway in the 1920s. The polices were hardly successful, but despite the clear negative consequences policy makers and many economists in the Denmark and Norway insisted that it was the right policy to return to the pre-war gold-parity.

Here is what happened to unemployment (%).

Nobody listened to Cassel. As a result both the Danish and the Norwegian economies went into depression in the second half of the 1920s and unemployment skyrocketed. At the same time Finland and Sweden – which did not return to the pre-war gold-partiy – enjoyed strong post-war growth and low unemployment.

Gustav Cassel strongly warned against this policy as he today would have warned against the calls for “internal devaluation” in the euro zone. In 1924 Cassel at a speech in the Student Union in Copenhagen strongly advocated a devaluation of the Danish krone. The Danish central bank was not exactly pleased with Cassel’s message. However, the Danish central bank really had little to fear. Cassel’s message was overshadowed by the popular demand for what was called “Our old, honest krone”.

To force the policy of revaluation and return to the old gold-parity the Danish central bank tightened monetary policy dramatically and the bank’s discount rate was hiked to 7% (this is more or less today’s level for Spanish bond yields). From 1924 to 1924 to 1927 both the Norwegian and the Danish krone were basically doubled in value against gold by deliberate actions of the two Scandinavian nation’s central bank.

The gold-insanity was as widespread in Norway as in Denmark and also here Cassel was a lone voice of sanity. In a speech in Christiania (today’s Oslo) Cassel in November 1923 warned against the foolish idea of returning the Norwegian krone to the pre-war parity. The speech deeply upset Norwegian central bank governor Nicolai Rygg who was present at Cassel’s speech.

After Cassel’s speech Rygg rose and told the audience that the Norwegian krone had been brought back to parity a 100 years before and that it could and should be done again. He said: “We must and we will go back and we will not give up”. Next day the Norwegian Prime Minister Abraham Berge in an public interview gave his full support to Rygg’s statement. It was clear the Norwegian central bank and the Norwegian government were determined to return to the pre-war gold-parity.

This is the impact on the real GDP level of the gold-insanity in Denmark and Norway. Sweden did not suffer from gold-insanity and grew nicely in the 1920s.

The lack of reason among Danish and Norwegian central bankers in the 1920s is a reminder what happens once the “project” – whether the euro or the gold standard – becomes more important than economic reason and it shows that countries will suffer dire economic, social and political consequences when they are forced through “internal devaluation”. In both Denmark and Norway the deflation of the 1920s strengthened the Socialists parties and both the Norwegian and the Danish economies as a consequence moved away from the otherwise successful  laissez faire model. That should be a reminder to any free market oriented commentators, policy makers and economists that a deliberate attempt of forcing countries through internal devaluation is likely to bring more socialism and less free markets. Gustav Cassel knew that – as do the Market Monetarists today.


My account of these events is based on Richard Lester’s paper “Gold-Parity Depression in Denmark and Norway, 1925-1928” (Journal of Political Economy, August 1937)

Update: Here is an example that not all German policy makers have studied economic and monetary history.

Leave a comment


  1. In economics, many times History is the best “model”!

  2. Marcus, I totally agree – unfortunately today’s policy makers seem rather ignorant about economic and monetary history.

  3. Greg Ransom

     /  June 12, 2012

    Hayek & Mises both opposed “return to the old parity” policies.

    It wasn’t just Cassel who understood this.

  4. Greg, thanks for stopping and thanks for the input. Yes, Hayek and Mises understood the dangers of deflationary policies in terms of the return to the old parity, but why did they both then fail to see the same disaster during the Great Depression? Any why do Austrians today scream about the need for the same kind of policies?

    Anyway, one of us should do a post on Hayek’s and Mises’s on this topic. You are very welcome to do an uncensored guest post on the topic here. I would truly enjoy that.

    • Greg Ransom

       /  June 12, 2012

      Hayek did see it in Britain — the weird and horse-blindered focus on America really seems distort every conversation on “The Great Depression”.

      The Great Depression unemployment problem began in Great Britain after the war, esp after the “return to gold” in Britain at the pre-war parity in 1925.

      When Hayek came to Britain in 1931 that policy was more than half a decade old.

      The question of what to do in Britain was very different more than half a decade later than it was in 1925.

      Hayek thought the adjustment process was almost completed — and that the policy might even finally help overcome the crippling political power achieved by the special privileges & wages achieved by the unions.

      Hayek later concluded he was wrong about the unions, wrong about the ability of the British political system to deal with union wages & unemployment benefits, etc. Wrong about the possibility of achieving flexibility in wages.

      As for the US, I don’t really know why Hayek failed to see the destructive secondary deflation in play their — the sort of downward destructive deflation he always opposes, and for which, in 1931/32 Hayek praised Keynes’s creativity in coming up with new solutions for the problem.

      My sense is that Hayek saw that the US was impossibly trying to back the British policy, and that it really had no choice but to back off its attempt to support the British gold policy when speculators began to challenge the US position in the late 1920s. I think Hayek failed so see that the situation was far beyond the limits of what he imagined, what with the effect of the world wide explosion of tariff wall, and their effect on the US credit system.

      Hayek at the tome really didn’t seem to appreciate what the collapse of the British gold exchange standard effort would mean for the world demand for gold or the credit system, eg the flight to gold in France and elsewhere.

      In his _Monetary Nationalism and the Trade Cycle_ Hayek fills in much of the picture, and points out the fatal flaws in the gold exchange standard.

      The key thing to appreciate with Hayek is that he usually is dealing only with developing various bits of pure theory or the over-arching explanatory strategy of economics / monetary economics.

      He never seems to have a good sense of what is actually taking place in the world.

      After 1929, I can thing of only one article where Hayek shows interest in the empirical facts on the ground concerning contemporary money and cycle matters.

      And note well, Hayek is living in London, and thinking about Britain and Europe more than anything.

      America always seems a very distant after thought — or no thought — in what very little Hayek wrote about contemporary events in the 1930s.

  5. There is only one conclusion about that, the government should not make any policy and the monetary market must be self-regulated while the stablishment of new currency is made in spontaneus order.

  6. Salvador, I would be happy to see that…

  7. Boy aint that the truth. If people would just get the old history book off the shelf dust it, and read it we all might be able to avoid some obvious problems. Of course if that started happening more often we would have to can the “history repeats itself” saying.

  8. Eric, if the ECB and the Fed could just learn a tiny bit from economic history I would happily can that saying;-)

  9. Cool piece – thanks

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