THE NATIONAL BANK OF ICELAND”: DEMOCRACY AND CENTRAL BANK INDEPENDENCEAFTER THE GREAT WAR

The origins of central banking in Iceland are usually traced to the establishment of the Central Bank of Iceland (Seðlabanki Íslands) in 1961. This article, by contrast, contends that Landsbanki Íslands was reorganised as the nation’s first central bank in 1927 and tasked with implementing monetary policy in line with international norms. The study situates this within the international context of the 1920s, a formative period of modern central bank management. To pave the way for the reconstruction of the international financial system after the Great War, the League of Nations, Britain and the United States promoted the creation of independent central banks according to blueprints laid out at the League of Nations financial conferences in Brussels in 1920 and Genoa in 1922. From new national banks in Greece and Bulgaria to Austria, Germany, and the Baltic states, the Icelandic central bank was one of approximately thirty such institutions estab lished in the interwar period. Like in most European states, it was tasked with a monetary policy of deflation and a return to the gold standard as well as “smoothing out the business cycle”. Great emphasis was placed on insulating the new bank from democratic forces in the political arena—freeing it from what scholars have termed “fiscal dominance”. Unlike the international blueprint, how ever, the Icelandic central bank was not confined to a role of “the bank of the banks”, and retained its commercial loans and savings functions. Icelandic officials concluded through consultations with Swedish economists and Nordic central bank directors that granting Landsbanki Íslands such “extraordinary pow ers” was necessary in order to bring Iceland’s commercial banks into alignment with its monetary policy, thus shielding the new bank from “financial domin ance” in a latecomer country with a shallow financial market. Moreover, it was deemed vital to implement “ruthless deflation”—rationing credit and reducing the money supply. By returning the Icelandic króna to the gold standard at pre war parity, it was an unorthodox means to an orthodox end. The article ends by highlighting how the new central bank arrangements fell through with the onset of the Great Depression.