Creating a new role for an old central bank: The Bank of Norway 1945-1954

How does a central bank respond when the political, economic and institutional preconditions underlying its authority and autonomy fundamentally change? When its role traditionally has been characterized by independence from the political authorities and the monetary policy has been based on flexible interest rates, situated in an international setting of free capital movements, what happens when the international payment system breaks down, the political and economic climate changes, and the general public cries for stronger political control not only of the central bank but of the economy in general – what does the central bank do? Contrary to what it may seem, the above questions are not generated from a future scenario for today’s ideal of central bank independence. Instead, they are based on a specific historical experience: the shift from central bank independence towards increased political control that took place after the breakdown of the Gold Standard system and the economic crises of the 1920s and 30s. Starting from curiosity as to why these changes took place and how one central bank – the Bank of Norway (BoN) – faced the new emerging ideals of increased political planning and control, this research project seeks to discuss how and why the Norwegian central bank found a new role after World War II. Inspired by the theoretical concepts of “boundary organizations”, which interprets central banks as agencies operating in the boundary between state, society and economy, and “embedded statism”, which brings focus to the international context in which national institutional changes take place, this thesis carries out an in-depth empirical examination of the extent and nature of the BoN’s participation in policy formulation and implementation from 1945-1954. The examination uncovers complex and partly conflicting responses from the central bank to the new expectations in its environment, shifting between opposition and compromise towards the political authorities, whereas the political authorities, for their part, also took a partly contradictory approach by, on the one hand, seeking to downgrade the central bank and, on the other, allowing it to influence policy-making. Contrasting the conventional view on the role of the BoN, this thesis suggests that the Bank obtained a more active and influential role than usually assumed and that the main elements of the its new autonomy and authority were clarified already during the first post-war decade. Rather than being reduced to a “cashier’s office” or directorate under the Ministry of Finance or replaced by the Banking Inspectorate as co-executor of monetary policy, the BoN survived as an autonomous legal entity and was reestablished as the main co-executor of monetary policy. Moreover, through a process of trial and error, the central bank governor, Gunnar Jahn, and his officials helped define the future policy instruments, both in terms of their nature (voluntary cooperation rather than statutory provisions) and the limitations of the BoN’s influence (the cheap money policy as an underlying precondition). The two main explanatory factors in this development appear to have been the ability of the BoN to participate in practical policy-making and the international context, which indirectly and directly influenced the Norwegian process