Economic Development of Iceland Through World War II 9780231881272

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STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW Edited by the F A C U L T Y OF P O L I T I C A L S C I E N C E OF COLUMBIA U N I V E R S I T Y

Number 531

ECONOMIC DEVELOPMENT OF ICELAND THROUGH WORLD WAR II BY

WILLIAM CHARLES CHAMBERLIN

ARCTIC

CIRCLE

ECONOMIC DEVELOPMENT OF ICELAND THROUGH WORLD WAR D

BY

WILLIAM CHARLES CHAMBERLIN, Ph.D.

NEW

YORK

COLUMBIA UNIVERSITY

1947

PRESS

COPTBIOHT, 1947 BT Columbia University

Press

PRINTED IN THB UNITED STAUB OP AMERICA

Published in Great Britain and India by Gboffhet

Cumbeblbce

OXFORD UNIVERSITY PRESS London and Bombay

TABLE OF CONTENTS PAGE

CHAPTER I The Historical Background

7 C H A P T E R II

The Economic Organization

23

1. The Government 2. Population Trends and Occupations 3. The Fisheries

23 24 26

4. Agriculture 5. Commerce and Industry

29 35

6. The Banks

39

7. The Development and Importance of Foreign Trade

49

8. The Seasonality of Foreign Trade 9. The Government and Business

52 54

C H A P T E R III Economic Development Up to World War II

58

1. Late Nineteenth and Early Twentieth Centuries

58

2. World War I

62

3. The Twenties and Thirties

67

C H A P T E R IV Dtbts and the Balance of Payment

80

CHAPTER V World War II and Iceland

85

1. The Changed Picture

85

2. Depreciation

86

3. Foreign Trade

87

4. Foreign Military Forces

96

5. Prices

101

6. Money and Credit

109

7. Considerations Concerning the Rising Price Level

117

APPENDIX

125

SELECTED BIBLIOGRAPHY

137

IJIDEX

139

5

CHAPTER I THE HISTORICAL BACKGROUND I C E L A N D , land of frost and fire, home of the saga, birthplace of the "world's oldest parliament", hangs like an apple suspended from the Arctic Circle. With Newfoundland, Greenland and the Faroe Islands, it is part of a geological ridge, most of which lies beneath the surface of the sea. So snug up against the Arctic Circle does it lie that at the winter solstice the sun will not rise for a week in the northern part of the island and in the south it will be above the horizon for three scant hours a day. In the summer the opposite holds true. In the "Battle of the North Atlantic" in World W a r II the island was of the greatest strategic importance. It lies close to the "Great Circle" sailing route between America and England, and, in the hands of the enemy, it would have afforded an excellent base of operations against allied convoys. The military possibilities of its strategic location led the British to land troops there in May, 1940. U . S. Marines reinforced the British troops in July, 1941, five months before the American entry into the war. Reykjavik, the capital, is 2,602 air miles distant from New Y o r k City, 910 miles from Bergen, Norway, and 825 miles from Glascow, Scotland. From mountains in the Northwest Peninsula, it is said that a mountain range in Greenland, 180 miles distant, may be seen. From the nearest point on the island, the Faroe Islands lie 300, and the Shetlands 530 miles distant. It is said that northern European weather is "Made in Iceland," and there is a little ditty in English which urges the Icelanders to export fewer storms and more eider down. In the recent war, in which air power played such an important part, not the least of the advantages gained by the landing of allied military forces was the ability to forecast the weather more accurately. That Germany desired this information is attested by the fact that German meteorological parties were captured

7

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ICELAND

on the coast of Greenland, and in a ship which operated to the north of Iceland. The name "Iceland" was bestowed upon the land by a viking farmer who settled in the north of the island where the climate is most rigorous and who "through incompetence and neglect, had lost his livestock during the winter of 865-866." 1 Except in the northern portion which is occasionally washed by polar currents, the climate of the island is much milder than might be expected. This is because Iceland is situated on the outer edge of the Gulf Stream whose currents generally encircle the entire island. The summers are cool, the mean temperature in July being about 50 degrees F . The winters are fairly mild, being comparable to those of New York City. In the vicinity of Reykjavik the mean January temperature is about 30 degrees F . It is often not cold enough in the winter to keep the pond of the capital frozen for skating. Though not cold, the weather is very changeable and high winds frequently occur. Iceland is called "Land of frost and fire" because it is at once one of the most volcanic portions of the earth and because vast areas of its surface are covered by perpetual snow fields. These snow fields or "jokulls" cover more than 1 3 percent of the entire island. It is an extremely rugged and mountainous land with practically no trees. Great stretches of lava field exist, and the island consists almost entirely of volcanic rock. There are many volcanoes, both active and extinct. In the 1000 odd years for which there are historical records more than 20 volcanoes have erupted over 100 times,2 frequently causing considerable damage. The latest eruptions occurred in 1934. This land of the vikings has an area of somewhat less than 40,000 square miles—about the same size as the state of Kentucky. Fully four-fifths of this area, the great central portion, 1 Iceland by Vilhjalmur Stefansson, Doubleday, Doran and Company, Inc., 1939, P- 2 2 Iceland, 1936, edited by Thorsteinn Thorsteinsson, Rikisprentsmidjan Gutenberg, Reykjavik, 1936, p. 2.

THE

HISTORICAL

BACKGROUND

9

is not suited to human habitation, consisting of great desert wastes, mountains, and snow fields. It is here that most of the volcanic eruptions have taken place and have, therefore, caused less damage than might otherwise have been expected, since the population is confined to the coast. The island is extremely poor in natural resources. There are practically no trees, and while some maintain that birch forests once existed more extensively and were despoiled by the settlers still, even the early sagas recount the importation of lumber. There is no coal, no oil, no metal. Even cement must be imported. The numerous waterfalls and swift rivers of the island provide the source of large potential hydro-electric power. "It is reckoned that Icelandic water power capable of being exploited is four million H.P., or 40 H.P. per head of population, or, so far as present knowledge goes, comparatively greater than in any other country." 3 Only a small portion of this potential power has been harnessed. Hot volcanic springs are also numerous. Our English word "geyser" comes from Icelandic place name of "Geysir". Since 1942 this energy has been put to use to heat Reykjavik; water just below the boiling point being piped from hot springs some ten or twleve miles north of the city. Iceland may have been discovered by Pytheas, a Greek sea captain of Massila (Marseilles) who sailed to a land called "Ultima Thule" about 330 or 325 B.C. Though this may have been Iceland, it might also have been Norway. The first settlers of whom we have record were Irish religious hermits who were in the island in the 8th century. The date selected for the start of the colonization of the island by the Norse is 874 A . D . It was in this year that Ingolf Arnarson, who had set out with his comrade Hjorleif, found the pillars of the high seat on his Viking ship washed ashore at the site of the present city of Reykjavik. He had thrown them into the sea, vowing to settle 3 Iceland,

1936, op. cit., p. 11.

IO

ECONOMIC

DEVELOPMENT

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wherever the currents should wash them. Today, the statue of Ingolf stands on a hill in the city overlooking the harbor. The exodus of many Norwegians to Iceland was stimulated by King Harald the Fair Haired's successful attempt to bring Norway under a single government. Many of the defeated barons preferred to seek a new home rather than remain under his rule. Many of these early settlers first went to Ireland and Scotland, and later moved to Iceland taking with them their retinues of Celtic slaves. Thus the Icelander has Celtic, as well as Norse blood flowing through his veins. The Irish religious hermits, apparently not wishing to associate with the heathen, left shortly after the Norse colonization. By the end of the eleventh century the country is estimated to have attained a population of 70-80,000,4 though later this number was to be greatly reduced. The first sixty years of settlement saw no political organization for the island as a whole. In 930 A.D., however, the Althing, the "world's oldest parliament" was established, and the Icelandic Republic came into being. Although the Althing had legislative and judicial functions, there was no executive branch, and consequently no power to control adequately the jealous feuds of the local chieftains. These feuds finally led to the loss of Icelandic independence in 1262. In this year, after a period of internal dissension and external intrigue, the Icelanders became the subjects of the king of Norway. In the year 1000 Christianity was declared to be the official religion. Public worship of the old Norse gods was banned by the Althing. This was done to forestall an invasion by Olaf Trygvasson, the Norwegian King, who was intent on converting the population to Christianity. Thus Christianity was thrust upon Iceland from the outside without any sincere conversion of the population at the time. The golden age of Icelandic history was the century 9301030. This was the period when the Vikings were carrying on 4 Iceland,

1936, op. ext., p. 14.

THE

HISTORICAL

BACKGROUND

II

raids and commerce in all parts of Europe, even as far away as the Mediterranean Sea. In 986, Eirik the Red colonized Greenland. In 1000, his son Leif discovered "Wineland the Good". Seven years later, Thorfinn Karlsefne established a colony somewhere along the New England coast, but was driven out by the hostility of the Indians. This was the period of the Sagas and the Eddas. Had the Eddas not been written, we would have no clear idea of Norse Mythology. The words "Thor", "Odin", or "Valhalla" would bring no picture to our mind, and Wagner would have had little material with which to write some of his greatest operas. The Sagas, the great historical novels, were Iceland's great gift to world literature. During the early period of Icelandic colonization, fishing was the primary industry, and was greatly relied upon until agriculture got started. Sheep, which have always been an important part of Icelandic husbandry, were raised extensively at a very early date. The falcons of Iceland were much sought after during the first few centuries. This variety of falcon was considered a magnificent gift for the nobles and kings of Europe. Because the ships used by the early viking settlers could not carry any great amount of goods, and because of certain restrictive laws existing in Norway, the colonists sold many of their possessions before leaving Norway and brought with them large amounts of gold and silver. During the Viking Age, silver was replacing gold generally as a standard of value. A t first the value of silver was low in Iceland, but because of the expensiveness of transportation, the cost of imported goods was high, and there was soon a large net drain on the silver stocks of the island. Between 874 and 1000 the value of silver increased about four times.5 Mercantilist laws were passed to prevent the silver drain and to keep prices on the same level as those of other countries. Other units of account came into prominence, the most important of which was vadmal, a type of woolen cloth 5 The History of the Development by Haraldur Hannesson, 1937.

of the National

Bank

(Manuscript),

12

ECONOMIC DEVELOPMENT

OF

ICELAND

which was an important product of export and was known in foreign trade as early as the ioth century. Cows, silver, and vadmal were given fixed values in terms of each other. A s silver became more scarce, a barter system was developed and relied upon more extensively. A t the first meeting of the Althing in 930, laws were passed to give the barter system a recognized legal basis. An early system of credit also arose which included installment payments on purchases made. The godi, the local political leaders of these early times, supervised foreign trade. From this source they derived an income which, however, did not repay them for the expenses of their office. Even in this early period there were few Icelandic traders, and most trade was in the hands of the Norwegians. The godi would meet the trader, inspect his goods, and set prices upon them. The trader would usually ask the godi to select for himself that which he desired, and the godi would reciprocate by taking the trader to his home and showing him his hospitality as long as he remained in Iceland. During these early years the chief articles of import included timber, cloth, iron and iron ware, tar, wine, beer, wax and honey. In return, Iceland exported chiefly wool and woolen cloth, hides, whale oil, falcons, fish and sulphur. Adverse balances were settled by the export of silver. In 1262, after a period of family feuds and internal dissension, Iceland came under Norwegian rule. In 1302 the Norwegian king forbade all trade with Iceland except by Norwegian merchants. This Norwegian trade monopoly, however, was not rigorously enforced. During the fourteenth century fishing assumed greater importance at the expense of the vadmal export. During this period the Hanseatic League was providing a market in Europe for all sorts of fish, but especially for the dried variety. During the fifteenth century the English not only entered this trade, but attempted to secure exclusive control of it. There were several battles and much lawlessness on the part of the English traders.

THE

HISTORICAL

BACKGROUND

13

T h i s trade was carried on despite the attempts to curb it by both the English and Danish governments, Iceland having come under the Danish crown in 1380 when N o r w a y was united with Denmark. During the fourteenth century fish was the staple product of export, and the fisheries continued to develop throughout the fifteenth century. A f t e r the sixteenth century, however, a serious decline in this industry set in, and it did not show any signs of recovery until the last fifty years of Icelandic history. A l t h o u g h the English trade during the fifteenth century was an outlaw trade carried on by lawless sea captains, it proved of great benefit. T h e Germans also commenced trading with Iceland about 1430 or 1440. There were very few native Icelandic traders, and, during the fifteenth century Denmark was engaged in several wars which interrupted her trade with the island. D u r i n g this century, trade with the colonists in Greenland ceased entirely. W h e n a trading ship once again went there, it w a s found that the colonists, who had relied upon this trade, had been wiped out, apparently by hostile Esquimoes. Had Iceland been forced to rely exclusively on Danish trade, it is not at all inconceivable that the inhabitants of this island might also have failed to survive. D u r i n g the fifteenth century, the exports of Iceland were of considerable importance in world trade—of much greater importance than at a later date when the same articles were to be obtained elsewhere. During this period, before the discovery of the Newfoundland banks, Iceland and N o r w a y were the chief producers of fish—a product which had grown in importance with the spread of Christianity. Sulphur, also, was obtained chiefly in Iceland. Other items of export included falcons, eider down, wool and woolen cloth. T h e chief imports of this time consisted of grain, flour, timber, iron, linen, pitch and tar. Silver became increasingly scarce, and while it was present in domestic commerce, it was not used in foreign trade. Danish

14

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coins were in circulation, and these, with other foreign monies, were employed in making foreign payments. Not unlike the policies of other countries towards their colonists, Danish policy towards Iceland was dictated almost entirely by the desire for profit, and with little regard for the desires or well being of the Icelandic people. Denmark forced the Reformation upon the Icelandic people who accepted it with little enthusiasm. By 1550 the Lutheran Church was more or less firmly established. Heretofore the Catholic clergy had misruled the local economic and political life of the island, but it had at least been a local misrule. A f t e r the Reformation, the King of Denmark assumed more power and increased the Danish hold over Icelandic affairs. This was to prove an evil thing for Iceland. The seventeenth and early eighteenth centuries were years of black disaster for Iceland—this was a period of calamity from which Iceland hardly started to recover before the twentieth century. It was the period o l buccaneering when pirates raided the coasts and picked off the trading ships upon which Iceland relied. Algerian pirates sacked the town of Keflavik in 1727 and took slaves from the Westmann Islands, herding those that they did not take into a building where they were burned. During these years the Icelanders were forbidden to carry weapons by a Danish government that did not protect them. It was a period when numerous wars interrupted the trade so vital to Iceland, and when volcanic activity caused much damage, the most devastating eruption occurring in 1783. After a century of catastrophe the first census was taken in 1703. It showed the island to have a population of 50,000.® In 1707 small pox killed 18,000,7 reducing the population by over one third. During these long years most of the land was held as estates of the crown. The peasants who tilled it were tenants who owed many services to their landlords—such as 6 Iceland, 1936, op. cit., p. 15. 7 K n u t Gjerset, The History of Iceland, Macmillan 1924, p. 321.

THE

HISTORICAL

BACKGROUND

15

fishing for his profit, etc. The peasantry was reduced to a state of abject poverty, living in hovels of stone and sod in the most unsanitary conditions imaginable. But all these hardships and calamities were as nothing compared to the Danish Trade Monopoly. It will be recalled that during this period of world history, great trading companies were chartered and given monopolies to carry on trade in certain sections of the world. The most famous of these, perhaps, was the great East India Company of England, but there were many others, the Hudson's Bay Company being organized to exploit the trade of North America. The famous Dutch companies were also products of this period. Christian I V of Denmark was simply pursuing the policies of his times when charters were issued to the Danish trading companies. The trade with Iceland was carried on in accordance with the accepted policies of this period. In 1602 a company with headquarters in Copenhagen was chartered and given the exclusive right of trade with Iceland. Although the policy of trade monopolies was in keepihg with the spirit of the times, the need of Iceland for commerce with the rest of the world then, as always, was most pressing. The system of trade restriction was so faulty that it was to prove the greatest of catastrophies. Restrictions and corruption brought the greatest hardship upon the people. In 1613 the King of Denmark established a price schedule for goods traded, and during the rest of the 17th century the prices of goods were fixed by law. Successive changes in the price schedules worked greater and greater hardships upon the island. In 1662 a new company was organized and Iceland was divided into four commercial districts. People living in one district were forbidden to carry on trade with any one outside their own district as this was the exclusive privilege of the trading monopoly. Severe punishments were meted out to those who dared trade with an English or Dutch fishing smack which occasionally touched the coast of Iceland. This was done despite

l6

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the fact that the trading monopoly often failed to supply the goods that the people needed, or refused to buy the products that the people had to sell. If, as happened, a fisherman dared to buy some fishing lines from a foreign vessel, lines which he needed in order to gain his livelihood and which could not be obtained from the trading monopoly, he might expect to sustain heavy fines and have much of his property confiscated. During the period of the monopoly, imports became more and more costly and essentials of life on this comparatively barren island, such as timber, tar and iron, were imported in insufficient quantities. T h e division of the country into four sections which could not trade directly with each other, worked great hardship. In an endeavor to force the trading company to carry goods to all parts of the island and relieve this evil, the Danish government in 1689, increased the number of these economically isolated districts from four to twelve. T h e remedy was to be a threefold dose of the drug that had worked the harm. T h e result, of course, was the working of increased hardship. Export prices fell very low while import prices rose contintinually. Between the years 1702 and 1800 it is estimated that the price of flour rose some ten times while the prices obtained for Icelandic exports remained practically unchanged. N o t only did export prices not rise, but the Icelander might have grea,t difficulty in disposing of his products to the trading monopoly, despite the fact that he could sell them to no one else. Products were often brought to a designated port for sale and were refused by the trading monopoly. Goods which were imported were often of a sub-standard variety. O n occasion, flour which had been condemned in Denmark was brought to Iceland and sold. T h e type of goods imported often worked to the economic disadvantage of the island. Thus, finished articles would be imported although they might easily have been processed in Iceland had they been imported in a semi-finished state. A n example of this was the importation of flour, but of practically no grain. That this was a deliberate policy is attested by the

THE HISTORICAL BACKGROUND

17

fact that the traders violently opposed any attempt to create Icelandic industries. The greatest potential source of Icelandic wealth, the fisheries, fell into almost complete decay. There were no sailing vessels, and the only fishing was done by the peasants from rowboats. This was done largely for the profit of the landlords who required it as one of the services owed by the peasantry. Large scale fishing has passed completely to the hands of foreigners. The standard of living had sunk exceedingly low, people lived crowded together in sod and stone houses which had little light or ventilation. In these extremely unsanitary conditions leprosy found a fertile field and has only recently been wiped out. So bad were the economic conditions of the island that a joint Icelo-Danish commission was appointed in 1770 to see what improvements could be made. Among those which were started were the construction of flour mills and the improvement of roads. In 1771 the charter of the Trade Monopoly was revoked and trade carried on by the Danish government until 1786 when it was made free to all Danish-Norwegian merchants. This, however, was not at all a satisfactory solution of the problem, as the Icelanders had been reduced to such a degree of poverty that they were unable to engage in commerce, and the exclusion of foreigners prevented any competition in the trade. Although the monopoly had been abolished, the merchants entered into agreements to maintain the old price systems, and little improvement was noted. During the seventeenth and early eighteenth centuries there was a marked insufficiency of small coins and currency to serve as an efficient medium of exchange. The use of coins or currency in the making of small purchases was almost unknown. Trade was based on a barter system in which bees, cows, etc., served as units of account. Tobacco is even mentioned as a unit of account in a report of 1723 which urged that its import be banned from the island. To remedy in part the extreme short-

l8

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age of currency, 61,000 dalur were imported between the years 1756 and 1763, and another 170,000 dalur between the years 1764-1776.® When the Danish financial system collapsed during the Napoleonic wars, this money became almost valueless and foreign goods could be obtained only on extremely disadvantageous terms. During the Napoleonic wars, Danish trade with Iceland was almost wholly interrupted, and English merchants under the protection of English guns gained control of this trade despite the opposition of local Danish officials. During this period, also, several voyages were made by American merchants to the island. In 1809, Jorgen Jorgensen, a Danish adventurer who was in the employ of English merchants, declared Iceland to be independent and made himself king. His reign lasted only six weeks, at the end of which time he was removed by an English naval captain and brought to England. During his brief reign Jorgensen attempted to establish a credit bank. Previous attempts to establish a bank in Iceland during the 18th century had been without success, largely because of the Danish king's lack of knowledge concerning the Icelandic situation. When Denmark became involved in war, the value of her bank notes which circulated in Iceland declined in 1808 to 8 3 % of their pre-war value. By 1810, they had dropped to 30%, and by 1812 to 7 % of their pre-war value.9 In 1813 the Reichsbank was founded in Denmark to reorganize the monetary situation. A tax of 6 % of the value of all property was imposed to aid in the redemption of the inflated currency which was paid off at i / i 2 t h of its face value. Inflation continued, however, until 1835, despite the fact that the Danish National Bank was founded in 1818 and took over control of 8 The History

of the Development

of the National

Bank, by H a r a l d u r

of the National

Bank, by H a r a l d u r

Hannesson, op. cit. 9 The History

of the Development

Hannesson, op. cit.

THE HISTORICAL BACKGROUND

19

the monetary system. From 1835 until World War I, the value of the bank notes was maintained. The clarification of the Danish monetary situation, however, was not as important to Iceland as might be imagined, for monetary transactions were practically unknown until after the establishment of the Icelandic National Bank in 1885. Most domestic trade continued to be carried out on a barter basis. During the last part of the eighteenth and early nineteenth century the political independence of Iceland, even in local affairs, reached its all time low. In 1798, the Althing, which had been meeting at Thingvellir for well over 800 years, met there for the last time. In 1800 it was permanently dissolved, a true indication of the state of Icelandic affairs, both political and economic. In 1811 the scholar, statesman and patriot, Jon Sigurdson was born. His historical stature is perhaps the greatest of any Icelander's since the time Iceland lost its independence to Norway. It was due in great part to his untiring efforts and leadership that Iceland was started on the road to political independence and economic recovery. The first marked indication of the upswing in Icelandic history came in 1843 when the Althing was reestablished. In the political organization of Denmark, Iceland was given an equivalent rank with the duchies of Schleswig-Holstein. The Althing was now to have the same powers over the internal affairs of Iceland as the Rigsdag had over the internal affairs of Denmark. But this was only the beginning of the battle. The Icelandic dislike of Danish tyranny was intense, and the country had found a great leader. Foreign traders were still excluded from the island, and the exclusive right to this commerce was reserved for the subjects of Denmark. The fight went on, and a great battle was won when Icelandic trade was made free to all nations in 1854. Although the introduction of free trade did not by any means solve all of Iceland's economic problems, yet its benefits were

20

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great. During the last half of the nineteenth century a much more favorable ratio between import and export prices was established. Whereas, in 1849 ^ t o ° k 8 9 6 Kilograms of dried codfish or 39.5 pounds of wool to purchase a barrel of rye flour, in 1872 the same flour could be purchased with 44 kilograms of dried codfish, or 15.2 pounds of wool, more than doubling the ratio of export to import prices.10 A s a result, imports increased much faster in volume than did exports. Although Denmark maintained a dominant position in Iceland's foreign trade, commercial intercourse with other nations increased. The far more favorable terms of trade which Iceland enjoyed after the introduction of free trade laid the foundation of Iceland's gradual economic progress. A t this period there were certain strong political factions in Denmark who hoped to increase the powers of the central government, and there was much friction as to the status of the duchies of Schleswig-Holstein. In 1864, however, Denmark suffered defeat at the hands of Prussia, and lost these provinces. After this time, the Danes were more interested in consolidating what was left of their nation, and were more willing to listen to the case which Iceland presented. In 1871, the finances of Iceland were separated from those of Denmark, and finally in 1874, just 1000 years after Ingolf Arnarson found the pillars of his high seat washed ashore at the site of Reykjavik, Iceland received its first constitution. The Althing was granted complete control over the finances of the island. The constitution, however, was granted by the Danish Rigsdag without consulting the Icelandic Althing, and though a forward step, was by no means a complete solution of the problem. The Althing was not an independent governing body, but wielded power over local affairs jointly with the king. Iceland was declared an integral part of Denmark, but had no voice in the "common affairs" of the realm. Little by little an Icelandic merchant class began to develop, though most trade remained in the hands of the Danes for a 10 Knut Gjerset, op. cit., p. 415.

THE

HISTORICAL BACKGROUND

21

considerable period after 1874. Horses and sheep were exported to England in greater quantity. Cash payments for these exports brought money into the country, but these funds were either hoarded or used to buy Danish bonds. The savings banks, which had only been recently established, were not trusted. Monetary transactions were little known, and domestic trade was largely a matter of barter. 11 Though domestic debts were measured in monetary terms, they were paid off in goods. The Danish merchants were the chief lenders, and though debts were supposed to be cleared yearly, this was not always the case. Sometimes the customers would have a balance with the trader on which they were allowed interest. In 1875 Denmark had adopted the gold standard, and gold pieces had become legal tender, but this meant little to Iceland, which was short of currency and coin and carried on a large amount of trade without the aid of currency as a medium of exchange. The need for an adequate monetary and banking system in the island was great, but there were several difficulties in the way. Most plans for the establishment of a bank required that the government subscribe to a large amount of the bank stock, but the government was not rich enough to do this. The Danish merchants were actively opposed to the establishment of a bank, as they were the chief lenders of the time and found this business profitable. The Icelandic public was in debt to the merchants by considerable amounts, but the merchants underwent very little risk in connection with these debts, and force was often used to collect them. In 1885, however, the foundation of Iceland's monetary and banking system was created with the establishment of the National Bank of Iceland. By 1890 it may be said, some ground had been cleared and some foundations laid, but in the next half century great advances were to be made in the economic life of the country. In 1890 the population of the island was just under 71,00a 1 2 11 The History

of the Development

Hannesson, op. cit.

of the National Bank, by H a r a l d u r

22

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This was a decrease of about 1500 1 2 from 1880 as a result of the emigration to America. Almost 90% of the people lived in rural districts. Farming was the main occupation and was based on hay for stock. This hay was obtained from uncultivated or badly cultivated fields. Harvesting was carried on with the primitive scythe and rake. The fisheries were undeveloped. Most fishing was done by farmers in their spare hours from open boats. There were only fifty or sixty decked sailing vessels of small size in the island. Herring was not caught. It was only after the introduction of larger decked vessels that this industry began to attain its importance. In 1890 there were few bridges crossing the many rapid rivers, and roads between the towns were mere travelled trails. All land transportation was by horseback. The houses were of sod and stone with wooden rafters. In 1890, after centuries of economic exploitation and political misrule at the hands of a foreign nation which spoke a different language, Iceland was an impoverished and backward land, but the way had been cleared, and a new era was about to dawn. 1 2 Iceland,

1936, op. cit., p. 15.

CHAPTER II THE ECONOMIC ORGANIZATION i. а. 3. 4. 5. б. 7. 8. 0.

The Government Population Trends and Occupations The Fisheries Agriculture Commerce and Industry The Banks The Development and Importance of Foreign Trade The Seasonality of Foreign Trade The Government and Business I. T H E

GOVERNMENT

A s pointed out, the Constitution of 1874 was not satisfactory, and agitation for independence—for this was what Iceland wanted—continued. The separation of Norway from Sweden in 1905 gave a new impetus to the struggle. In 1907 a joint Icelo-Danish commission undertook to reach a solution of the question, but nothing came of its work. In 1918 another commission was formed. Its recommendations were passed by the parliaments of both nations, and on November 30, 1918, the Danish-Icelandic Act of Union became law. A s has been pointed out by several writers, this would be more aptly described as an Act of Separation than an Act of Union. Under its terms, Iceland received its own national flag, and the rights of a sovereign nation. Although the foreign service of Denmark was to continue to represent Iceland, the island was hereafter to make its own treaties. The only thing now that bound these two nations together was their common King. There were certain other provisions of the act which guaranteed equal rights in both countries to both Danish and Icelandic citizens, and free access by each country to the fisheries of the other. Denmark, which in accordance with the constitution of 1874 had been making yearly grants to the Icelandic treasury of sixty thousand Kronur, now ceased these grants, and set up two funds, each of a million Kronur. One

23

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OF

ICELAND

of these was at the University of Iceland, the other at the University of Copenhagen- The purpose of these funds was to encourage the exchange of students between the two nations. It was also provided that the monetary system of both nations was to remain the same as long as the Scandinavian monetary system continued to exist. In 1941 the people of Iceland were to have held a plebiscite in which they were to have decided whether or not they wished to sever the last small connection which they had with Denmark. In April of 1940, however, Germany invaded Denmark, and the Althing declared the severance of the last political ties, and established a "Regent" to perform the functions of the king. Diplomatic representatives were sent to foreign countries. Although the resolution passed by the Icelandic parliament was a severance of ties "for the time being", the Althing declared Iceland to be an entirely independent Republic in May, 1941. In May, 1944, a plebiscite was held. Voting from May 2023, 9 8 % of the 74,000 eligible voters cast their ballots. O f these 9 7 % voted in favor of abrogating the Danish-Icelandic Union Act. On the second question of establishing a Republic, 9 5 % voted in favor. 1 On June 17, 1944, the Althing elected a president to serve for one term, after which the president was to be elected every four years by popular vote. The president assumed the functions heretofore fulfilled by the king, but the system of government remained of the parliamentary type. 2 . P O P U L A T I O N TRENDS AND O C C U P A T I O N S

In 1890, Iceland, an impoverished country, had a population of 70,927. The population in 1940 was 121,168. O f far greater interest than the mere increase in population is its shifting within the island. This movement was a trend to the city and to the sea; to the city as a dwelling place, to the sea for a livelihood. 1 Figures from Icelandic Legation, Washington, D. C.

THE ECONOMIC ORGANIZATION

25

Since 1890 the population of Reykjavik has increased ten times, and the percentage of the population living in this city jumped from about 5 % to about one-third of the nation's total inhabitants. The seven other towns of Iceland had a somewhat similar, though less striking, increase in population. The number of people who dwelt in rural districts not only suffered a relative, but also an absolute decrease. The following tables set forth the extent of the "urbanization" of Iceland:

Reykjavik Seven other towns» Coastal villages of over 300 population Rural Districts Total

Population • 1890 1940

Percentage 1890 1940

3,886 1,841 2,525 62,675

37,897 20,305 15,003 47,963

5-5 2.6 3.5 88-4

31-3 16.7 12.4 39-6

70,927

121,168

100.0

100.0

* Data from the Statistical Bureau of Iceland. » For seven other towns, see appendix. PERCENTAGE OF POPULATION LIVING I N •

Reykjavik 1890 1900 1910 1920 1930 1940

5-5 8.5 13.6 18.7 26.0 31-3

Reykjavik and 7 other towns 81 12.9 21.i 30.7 42.3 48.0

Increases over Previous decade 4.8 8.2 9.6 11.6 5-7

•Data for 1890 and 1940 from Statistical Bureau of Iceland; for 19001930 from Iceland, 1936, op cit., p. 19. This change in the place of habitation of the Icelander is indicative of another extremely important trend—a change in his economic pursuits. This trend is away from farming as an occupation, the absolute number of those engaged in this pursuit having been reduced as well as the percentage. The great

26

ECONOMIC

DEVELOPMENT

OF

ICELAND

mass of the people have been supported by the activities listed as follows: PERCENTAGE OF POPULATION DERIVING CHIEF MEANS OF SUPPORT F R O M *

Fanning Fisheries H a n d i c r a f t and Industries Commerce £

• •

1880*

IÇ20 b

1930 h

73¿ 12.0

42.9

30.6

2.1

11-3

35-8 21.5 14-4 7-5

3-6

12.2 7-5

8.7

... ...

18.9

Communication J

1940 e

— — —

* T h e figures for 1880 slightly overstate the percentage engaged in the above listed activities as compared with the later years. T h i s is because certain occupations were included in the figures for 1880 which were later placed in separate categories—such as domestic servants. F o r no occupations, however, would this make a difference as much as 1%. • Data from Iceland, 1936, op. ext., p. 20. b

Data from the Statistical Bureau of Iceland. c 1940 data Fisheries, commerce, and Handicraft and industries not comparable to earlier figures for these industries.

That portion of the population which is not listed above find their support in other occupations such as domestic servants and public and professional services, which in 1930 supported 6.2 and 4.4 percent of the population respectively.2 3. T H E

FISHERIES.

Although the figures here given clearly indicate the growth of the fisheries, industries, commerce and communication at the expense of farming, they may be somewhat misleading as to the magnitude of the increased importance of the fisheries. In viewing these figures it must be remembered that before 1890 fishing was done largely from small open boats. The development of industries has been based upon the fisheries, for example the fish canning and herring meal and oil plants. 2 Data from Iceland, 1936, op. cit., p. 20.

THE

ECONOMIC

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27

Some idea of the development of the fisheries may be gained from the number and type of vessels employed in this trade over the course of the years. In 1876 there were 3208 8 open boats; in 1934 this number had shrunk to 134. In 1876 there were only 38 8 small docked vessels, but their number increased constantly, especially after 1890. In 1895 there were seventy such vessels; seven years later there were 144. A s the years went on, motor and steam vessels replaced sail. By 1927 the last sailing vessel had gone. In 1905 there was but one trawler; 3 in 1934 there were 38.® In 1905 there were but three other steamers; 3 in 1934 there were 31.® In 1915 there were but forty motor boats of over twelve tons; 3 in 1934 there were 254 with 736 motor boats of less than twelve tons.8 In 1940 the fishing fleet was as shown in the table below :4 FISHING FLEET, 1940

Steam Trawlers

Other fishing vessels Totals

Motor

35

Total

Tonnage

35

12,091

29

339

368

12,966

64

339

4»3

35,©57

In 1940 there were no sailing vessels, and the open boat had practically disappeared. The quantity of fish caught has increased at a faster rate than the number of persons employed in the fisheries. This reflects the use of better equipment as the years passed. The average annual catch of cod and codlike varieties for the years 1897-1900 was 14.9 million fish, for the years 1926-30 it was 62.8 million fish.6 Although the principal fishing has always been for cod and cod-like varieties, since 1920 the herring fisheries have taken on increased importance, as is illustrated by the table of herring caught. 3 Iceland, 1936, op. cit., p. 73. 4 Data from bulletin of the Statistical Bureau of Iceland. 5 Iceland, 1936, op. cit., p. 75. Figures rounded to first decimal place.

28

ECONOMIC

DEVELOPMENT

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ICELAND

Hectolitkes of Hexking C a u g h t * 1920

160,900

192s

341.054

1935

549,741

1930 1940

686,801

2,566,705

* The yearly catch is subject to considerable fluctuations, that of 1936 was twice that of 1935. That of 1941 was half that of 1940. Figures 1920 through 1930 from Iceland, 1936, op. cit., p. 78. Figures for 1935 and 1940 from the Statistical Bureau of Iceland.

Prior to 1927, almost all the herring was salted, but in that year such a large amount was caught that part of the catch was turned over to make herring meal and oil, which became an increasingly important product of these fisheries in subsequent years. By 1935 there were twelve herring meal and oil factories, the five most important being state-owned. In 1940 there were nineteen in operation, nine of which were owned by the state.8 Since 1935 the amount of herring delivered to the factories has increased tremendously. In the five years prior to 1936, the amount of herring delivered to the factories had never been as much as 8,000 hectolitres. In 1936, however, this figure jumped to more than 100,000, and in 1937 to more than 200,000 hectolitres. In 1938 and 1939 this figure was reduced by not quite half, but in 1940 was more than 240,000 hectolitres." By far the greatest part of the herring is caught to the north of Iceland between mid-June and mid-September. The cod season is earlier running from February to June or July, although some cod is caught all year round. Much has been done to develop the industries connected with the fisheries. Prior to 1930 all the cod liver oil had been handled by Norwegian fish oil merchants, but in that year, an association of fish oil producers was formed and a factory established in Reykjavik. Direct sales of cod liver oil to the 6 Data from the Statistical Bureau of Iceland.

THE ECONOMIC

ORGANIZATION

29

United States were made for the first time. A similar association was established in the Westmann Islands just to the south of Iceland. In mid-July of 1932, when Iceland was feeling the brunt of the great depression and experiencing serious difficulties in trade, the Union of Icelandic Fish Producers was formed. Originally it was planned to last only until the year's catch was sold, but it became a permanent organization. The avowed intention of the association was to secure good prices for the products of its members, and to prevent fluctuations in these prices. Most fish producers are members of the Union, and consequently it is the chief exporter of cod products. In December, 1934, the government set up a "Fish Industries Board" with representatives from the various different economic interests in Iceland including the trade unions, the trawler owners, the banks, the co-operatives, and the fisheries association. The activities of this board cover a wide field, including the finding of markets, the stimulation of sales, etc. This board is under the Ministry of Industry and Communication and only those licensed by the minister may export. A similar board was set up in the same month for the herring industry. 4.

AGRICULTURE

Farming has always provided the chief source of income for the largest single group of Icelanders. In the last half century, however, the trend has been away from it and the number directly supported by it has declined both relatively and absolutely. Like American farms, those in Iceland are widely separated. Rarely, two or more farm houses will be found built in fairly close proximity, but the agricultural village does not exist. The richer agricultural lands lie in a belt along the southern coast. Real productive summer heat is lacking, however, and agriculture is based on the growing of grasses to make hay for livestock. From the earliest times the raising of sheep has

30

ECONOMIC

DEVELOPMENT

OF

ICELAND

been the leading branch of animal husbandry. The number of sheep per capita is the largest of any European country. In 1935, Iceland has six sheep per capita whereas the next European country in this respect, Bulgaria, had 1.5 sheep per capita.7 The number of sheep relative to the population is not, however, as large as in Australia or New Zealand. In 1935 there were 656,113 8 sheep in Iceland. LIVESTOCK IN ICELAND, 1 9 3 9 *

Sheep Cattle Horses

593,785 37,412 53,545

Goats Poultry Furred animals

1,604 79j6i 5,827

* Data from the Statistical Bureau of Iceland.

The exportation of the hardy Icelandic pony was at one time of considerable importance. The greatest exportation occurred in 1899 when 5,700 head were shipped.9 The average annual export was over 3,000 9 during the first decade of the twentieth century, after which it gradually declined in importance. The exportation of live sheep likewise was of great importance during the last two decades of the nineteenth century. During the last decade of that century an average of over 30,000 10 sheep were exported annually. These went almost exclusively to England and when the British prohibited the importation of live sheep at the end of this decade, this trade fell rapidly away. After World W a r I products associated with sheep provided the great bulk of the agricultural exports. These consisted largely of mutton, wool and green salted sheep skins. During the thirties frozen mutton began to be of increasing importance in relation to salted mutton as an article of export. 7 Iceland, 1936, op. cit., p. 60. 8 Data from bulletins of the Statistical Bureau of Iceland. 9 Iceland, 1936, op. cit., p. 63. 10 Ibid., p. 64.

THE ECONOMIC ORGANIZATION

3I

A s previously stated, the principal Icelandic farm crop is hay grown for the livestock. This is grown in cultivated "homefields" and in "meadows". With the drainage and leveling of fields, the crop grown in the homefields has more than doubled since the start of the century while that grown in the meadows has remained approximately the same. The average annual production of hay in the years 1901-05 from the meadows was 100.2 million kilograms, while that from the homefields was 52.4 million kilograms. 11 In 1939 the production of hay from meadows was i o i . o million kilograms while that of the homefields had risen to 132.4 million kilograms. 12 Most farms, in southern Iceland especially, have gardens where potatoes and Swedish turnips are grown. In the coastal villages in southern Iceland where the soil is sandy, potatoes and turnips are raised in gardens. The average annual potato crop for the years 1931-35 was 4.3 million kilograms 1 1 or about two-thirds of the number required by Iceland during this period. In 1936, in an effort to increase the potato crop, the government granted subsidies, fixed minimum prices for potatoes and established a state monopoly on potato imports. These measures led to a considerable increase in the production of Icelandic potatoes in subsequent years. Hay, potatoes and turnips made up the vast bulk of Icelandic farm crops. FABM CROPS, 1939* (In Millions of Kilograms) Hay Potatoes Turnips

23343 11.96 2.57

* Data from Statistical Bureau of Iceland. 11 Iceland, 1936, op. cit., p. 59. 12 Data from bulletins of the Statistical Bureau of Iceland—rounded to first decimal place.

32

ECONOMIC

DEVELOPMENT

OF ICELAND

Some rhubarb is also grown in gardens, and other garden products, such as tomatoes and cucumbers, are raised in hot houses. PRODUCTION OF C H I E F ITEMS OF AGRICULTURAL PRODUCE *

Other Mutton

Year.

Meats

.... ....

1937

7.42 7.09 6.96 6.88

Wool

1.30 1.35 I-40 140

* Iceland,

&

Turnips

Eggs

Kilograms)

of

(Millions 1934 1935 1936

Potatoes Milk

59.90 61.61

64a 6.14 10.89

.87 .82 .82 .82

6545 66.48

(Millions) 844 9-23 9-79 9.68

7.90

Vilhjalmur Stefansson, op. cit., p. 270.

1934 1937 1940 «Iceland, b

22,147 24,307 29,257

98,469 97,625 117,706

Percentage Population Supported I Agriculture

1930

W

*

Estimated1 National Income (10

0

X

/-s

Value of » Agriculturi Produce (/

W *

Value of Produce Expressed as % of National Income

The value of Icelandic agricultural production during these years in comparison to the estimate of the National Income is of some interest. The value of Icelandic farm produce was not sufficient to give that portion of the population supported by agriculture their proportionate share in the National Income.

22.5

35-8

V

.

24.9 24.9 30.6

Vilhjalmur Stefansson, op. cit., p. 270.

See Table in Appendix.

«Data from the Statistical Bureau of Iceland.

During the middle of the eighteenth century, approximately one-half of the farm land was owned by the state or the church.

THE ECONOMIC

ORGANIZATION

33

Towards the end of the century, however, the church lands were sold. In 1936 about four-fifths of the farms were privately owned. The remainder of the farm land was government owned. About half of the farmers, however, were tenants; 60% of the tenants farming privately owned land while the rest worked land owned by the government. 13 In 1890 the farms and farm houses were very poor. Poorly lighted and ventilated houses of stone and sod were the rule. Very little had been done in regard to leveling fields in this volcanic and rugged country. After 1887 societies for the promotion of agriculture began to receive government aid. These were created to level, drain, and irrigate fields. The support granted by the government is in proportion to the amount of work each society has accomplished during the preceding year. There were ninety such societies in 1893 and 220 in 1935. The Improvement of Estates Act of 1923 gave a considerable impetus to this work. From 1887 to 1921 the annual government grants rose from 6,000 to 30,000 Kronur. 14 The year after the act they jumped to 143,000 Kronur. 14 O f these funds 9 5 % went directly to the farmers entitled to the aid, while the remaining 5 % went to the society to which they belonged. 14 Expenditure by the government on agricultural affairs has been continually increasing, as shown by the following table: GOVERNMENT EXPENDITURES FOB THE IMPROVEMENT OF AGRICULTURE *

(1000 of Kronur) 1880 1890

10 18.5

1920 1930

346 1,533

1900 1910

42-3 228.0

1940

1,703

• D a t a 1880-1930 from Iceland, 1936, op. cit., p. 72. Data for 1940 from the Statistical Bureau of Iceland. 13 Iceland, 1936, op. cit., p. 58. 14 Ibid., p. 69.

34

ECONOMIC

DEVELOPMENT

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ICELAND

Agricultural cooperatives also developed after 1880. These are interested both in the purchase and sale of goods. The development of these cooperatives was stimulated by a political as well as an economic motive, as it must be remembered that the merchants were almost entirely Danish and that Iceland was eager to be free of Danish rule. A s almost all the exported products of agriculture are connected with sheep, the war time increase in the price of wool during 1 9 1 5 and 1 9 1 6 benefitted the farmer greatly. During the last two years of World W a r I, however, the prices gained from farm exports did not keep pace with the price of imported goods which the farmers required. A volcanic eruption in 1 9 1 8 did not help matters any, and agriculture was depressed after the war until 1924 and 1925 when good prices for the products on the foreign market were again obtained. The great depression, and the restriction of world markets during the thirties afflicted Icelandic agriculture along with the rest of the island's economy. In 1935 the government took positive steps to relieve the serious economic plight in which the farmers found themselves. B y act of law of June 19, 1935, a crisis fund was established. This fund was of 1 1 ^ 2 million Kronur. T w o and one-half million of this was an appropriation from the treasury while the remaining nine million was raised by a bond issue floated by the fund and guaranteed by the treasury. The purpose of the fund was to make loans to farmers to pay off older debts provided their creditors would reduce their claims to such an extent as to permit the farmers to reestablish their affairs on a sound basis. Of this fund, 10 million Kronur had been lent to 2,844 farmers when the fund ceased operation at the end of 193 5. 1 5 Unsecured debts amounting to 1 4 million Kronur were settled for six million Kronur. The remaining four million Kronur of the amount lent by the fund was used to pay secured debts and the interest on them. Although the trend has been away from agriculture, 15 Iceland, 1936, op. ctt., p. 107.

THE ECONOMIC ORGANIZATION

35

it is important to note that considerable government funds, considering the small size of the population, have been poured into agriculture to improve its economic situation since 1890, especially during the latter part of this period. 5. C O M M E R C E A N D I N D U S T R Y

W i t h the economic development of Iceland since 1890, the number of business houses increased tremendously. T h e A c t of Union of 1918 gave Danes equal rights with Icelandic citizens in the pursuit of trade in Iceland, but all other foreigners are prohibited from establishing a business in the island unless they are residents. NUMBER OF BUSINESS CONCERNS IN ICELAND •

Year

Number

1855

58

1870 1880 1890 1900 1910 igao 1930

62 78 137 208 422 803 1,043

1939

1.118

* Data 1855 through 1930 from Iceland, 1936, op. cit., p. 87. Data for 1939 from the Statistical Bureau of Iceland.

Icelandic merchants have, during the course of the years, assumed almost complete control of domestic commerce. By 1934 there were but four concerns whose owners lived in Denmark, and in 1940 there were but three retail shops owned by foreigners resident in Iceland. T h e co-operative movement carries on a great deal of business, both rural and urban. In 1935, 39 co-operatives embraced some 8,600 members, imported over six million Kronur worth of goods and exported a like amount. B y 1940 the membership had almost doubled, being 15,300 on January first

36

ECONOMIC

DEVELOPMENT

OF

ICELAND

1

of that year. * It will be noted that the use of the co-operatives is not limited to its membership, especially as only one member of a family may be a member, but the entire family make use of his membership. The following tables may give some idea of the increasing importance of the co-operative movement in Iceland: COMPARATIVE V A L U E OF IMPORTS OF

16

A. HOUSEHOLD UTENSILS

1936 Private firms Co-operative Union . Co-ops not in Union .

71.2% 25.0% 3-8%

mo 58.2% 38.5% 3-3%

B. TEXTILES

1936 73-7%

Private firms Co-operative Union . Co-ops not in Union .

1940

3-9%

64-9% 32.8% 2.3%

1936 84.8% 15-3%

75-5% 21.5%

23-4%

C. FOOTWEAR

Private firms All Co-operatives . . .

1940

Because of the almost total lack of basic raw materials for production, Iceland has not developed industrially to any great extent. As a consequence, unlike similar movements elsewhere, the consumer co-operative movement in Iceland has not become engaged in production. Industry in Iceland is of two types; that intimately connected with the fisheries, and that producing goods for the domestic market. The former type is typified by the herring meal and oil factories which have been built and expanded of recent years, fish-freezing plants, and canneries. In the latter type, that of industry manufacturing for the domestic market, there are some manufacturers, such as the manufacturers of barrels, whose product is sold largely to the 16 From opinions of the majority of the interparliamentary committee on currency affairs, 1941.

THE ECONOMIC

ORGANIZATION

37

fisheries. In general the finished commodities produced are either those made to specifications which are not easily obtainable elsewhere or which can compete against imported products because of high cost of shipping the imported finished products. In certain instances, such as the manufacture of chocolates, domestic production has been encouraged by the prohibition against the importation of foreign competing articles. Other than a number of small ship-building and repair works, Iceland has no heavy industry. A great deal of her production consists of the processing of imported materials. Her industrial production for the domestic market is largely confined to flour, biscuits, coffee substitutes, chocolates, beer and soft drinks, jams and juices, margarine, dairy products, meat packing, woolens and knitted goods, clothing, shoes and leather products, furniture, tins, wooden and steel barrels, wooden and cardboard boxes, fishing gear, oxygen and acetylene gas, radiators, electrical appliances, and paint. In a great many cases, of course, in order to satisfy the demand, articles similar to the domestically manufactured goods must be imported from abroad. The production of some of the leading industrial articles for the year 1939 is as follows : PRODUCTION OF SOME INDUSTRIAL ARTICLES, 1 9 3 9 •

Metric Tons Biscuits Margarine Soap Washing Powder Cleaning and Polishing Materials Candles Paints and Varnishes Shoes Gloves Wooden Cases Wooden Barrels Steel Barrels

1000 Pairs

(1000)

352 MU 535 237 60

23 444 132.0 21.7

* Data from bulletins of the Statistical Bureau of Iceland

176.0 83.8

30-9

38

ECONOMIC

DEVELOPMENT

OF

ICELAND

B e t w e e n 1922 and 1937 forty-three million K r o n u r invested in industrial and power developments.

17

were

In 1944 there

were forty electric power production plants in the country, nineteen being hydro-electric plants and twenty-one using diesel electric generators.

These plants ranged in size f r o m 20,150

horsepower plant on the S o g R i v e r to 10 horsepower. 1 8 H o m e industry has had a considerable decline, while the handicraft trades such as carpentry, tailoring, masonry, etc., have increased to a great extent during the twentieth century. P r i o r to W o r l d W a r II the amount of domestic bonds held in Iceland w a s small, being less than 50 million K r o n u r in 1939. 1 7 T h e portfolios of the banks had only a small percentage of this type of security, and the public preferred to hold their savings in the form of bank deposits.

Prior to 1933

there w a s no organized securities exchange, but in that year one w a s established.

A f t e r its establishment the prices of a

g i v e n issue of bonds tended to become more uniform, depending less on the honesty and knowledge of the buyers and sellers w h o heretofore had dealt directly with each other. Prior to W o r l d W a r I I , however, there was hardly a sufficient market f o r a securities exchange to function efficiently. D u r i n g the w a r the Icelandic public showed itself to be more and more willing to purchase bonds, and a greater number of domestic bond issues were floated. O v e r the course of the last half century there has been a tremendous improvement in the housing of Icelanders.

The

unsanitary houses of sod and stone in which the Icelandic farmers once lived have gradually disappeared.

R e y k j a v i k , which

has increased many times in size, is partly of wooden buildings covered w i t h corrugated iron, but the buildings of recent years have almost all been of reinforced concrete.

A

considerable

amount of capital has been expended in the construction of buildings.

In the years 1 9 1 4 - 1 9 1 6 the value of site and build-

17 Data from Statistical Bureau of Iceland. 18 U. S. Consular Report

T H E ECONOMIC ORGANIZATION

39

ings in Iceland was slightly more than 102 million Kronur. 1 9 In 1930 this figure had more than doubled, being over 206 million Kronur, 1 9 with the value of the buildings alone being over 140 million Kronur. 1 9 In 1921 the appraised value of taxable house property, which is lower than market value, was approximately 58 million Kronur. In 1936 this figure was over 150 million Kronur, an increase of 93 million Kronur in fifteen years. 1 9 During this period prices had declined. Prior to 1 9 1 4 there was no domestic steamship line, but in that year twelve hundred thousand Kronur 19 was subscribed to to establish the Icelandic Steamship Company. U p to 1934 all life insurance was written by six foreign companies, with the exception of some annuities in native pension funds. In December of that year the Icelandic Maritime Insurance Company began writing general life insurance. The Icelandic business of the two Swedish companies previously doing business in the island was assumed by the Icelandic company in 1937 and in 1938. A t the end of 1936 less than 8 % of the value of all policies were written by the Icelandic company, but by the end of 1938 it handled over 5 5 % of the value of all policies. 20 This was another important step in the financial emancipation of Iceland. 6. T H E BANKS

T h e development of a financial system in Iceland was necessary to facilitate the development of the nation's economic structure. In 1868 the first savings bank was founded in the town of Seydisfjordur but was unsuccessful and closed its doors in 1870. For the next two years Iceland was again without a bank of any description. In 1872 a successful savings bank was founded in Reykjavik. This, and subsequently organized savings banks remained the only financial institutions until 1885. 19 Data from the History of the Development of the National op.

cit.

20 Data from Statistical Bureau of Iceland.

Bank,

40

ECONOMIC

DEVELOPMENT

OF

ICELAND

In 1885 Landsbanki Islands, or the National Bank of Iceland, was founded. Because of the great need for foreign capital, the largely foreign owned Islandsbanki, or Bank of Iceland, was established by an act of the Althing in 1903 and given the right of note issue. These remained the only commercial banks until 1929 when Bundarsbanki Islands, or the Agricultural Bank of Iceland, was established. In the following year, 1930, the assets and liabilities of the then insolvent Bank of Iceland were assumed by Utvegsbanki or Fisheries Bank. From that date on, these three have been the only commercial banks serving Iceland. In 1940 these banks had offices in the various Icelandic towns as indicated in the table below: The National Bank of Iceland

The Fisheries Bank

The Agricultural Bank

Reykjavik Akureyri Isafjordur Eskifjordur Selfoss

Reykjavik Akureyri Isafjordur Siglufjordur Seydisfjordur Vestmannaey j ar

Reykjavik Akureyri

The comparative importance of the three commercial banks is indicated by their balance sheets. T O T A L A S S E T S OF T H E THREE

COMMERCIAL

BANKS

(Millions of Kronur)

National Bank Fisheries Bank Agricultural Bank

¡935 *

1940 b

95.8 44.3 17.3

169.9 65.6 13.0

«Iceland, 1936, op. cit., pp. 103 et seq. b

Statements of Respective Banks.

In keeping with the general economic development of Iceland prior to World W a r II, the activity of the commercial banks increased greatly.

THE ECONOMIC ORGANIZATION THE

41

COMMERCIAI. B A N K S *

(Thousands of Kronur) End of Year

Loans & Discounts

Deposits (Savings and Current Accounts)

1890 1900 1910 1920 1930 1940

679 1,325 11, lis 72,075 81,102 97,224

566 1.392 6,139 34,934 52,929 130,407

* Data 1890-1930, Iceland, 1936, op. cit., p. 99. Data 1940 from bulletins of the Statistical Bureau of Iceland. The savings banks have played a less important part in the financial development of the country than the commercial banks. In 1935 the combined assets of the savings banks were 13.5 million Kronur, 2 1 or less than one eleventh of the assets of the commercial banks during the same year. In 1934 the total deposits in the 56 savings banks then existing amounted to 10.6 million Kronur as compared to 38.9 million Kronur savings deposits in the three commercial banks. 22 Although playing a small part in the country's finance in comparison to the commercial banks, the savings banks have grown greatly in number and size since the founding of the first successful bank of this character in 1872. SAVINGS B A N K S IN ICELAND

Year

1911 • 1920 s 1930* 1940 b

Number of Banks

Deposits in Saznngs Banks (Millions of Kronur)

34 49 50 58

1-36 791 8.98 19.00

« Iceland, 1936, op. cit., p. 109.

•»Data from Statistical Bureau of Iceland. Exact figures not available but deposits were slightly greater than nineteen million Kronur. 21 History oj the Development of the National Bank, op. cit. 22 Iceland, 1936, op. cit., p. 108.

42

ECONOMIC

DEVELOPMENT

OF

ICELAND

Of the savings banks in 1940, only four had deposits of over a million Kronur, while nineteen had deposits of less than 100,000 Kronur. 23 The smallest of these had deposits of 7,262 Kronur 2 3 —or only a little more than one thousand dollars. A s indicated in the table, however, deposits have increased at a faster rate than the number of banks. The early laws and customs of the savings banks are of some interest. The cashier was paid very little in these early banks and usually had some other occupation. Large depositors had a vote in regard to the investment of the bank's funds, and interest was paid only on a minimum amount of the deposit. The law required notice of withdrawal of any large amount. Prior to World War II the portfolios of the savings banks were made up chiefly of mortgages, bills and unsecured loans. Of these, mortgages were the most important, fluctuating between a third and a half of the total investments. Loans made with no other security than the borrower's signature, were limited to one year by the law of 1915. These loans were nearly half of the bank's portfolio in 1911, but steadily shrank in importance. A t the end of 1934 they had dropped to 1 4 % of the total.24 Savings banks have been of service in extending credit in small places. They could borrow funds from the National Bank providing they repaid these borrowings in six months. Just prior to World War II, approximately one out of every five persons had a savings-bank book in Iceland. Clearance of payments between different parts of the island are made largely by bank drafts, a much smaller part of the clearances being made by post-office money orders which are generally of small amounts. Especially in respect to the smaller communities, the savings banks play a useful part in the clearance of payments. Unlike the United States where it is estimated that 85 to 90 per cent of all commercial transactions are 23 Data from the Statistical Bureau of Iceland. 24 The History of the Development

of the National Bank, op. cit.

THE

ECONOMIC

ORGANIZATION

43

made by check, the checking account plays a small part in Icelandic business, although there are no good estimates of the part it does play. A rather specialized type of savings bank is "Sofnunarsjodur Islands" which was established in 1885, the same year as the National Bank. T h i s organization is part savings bank and part insurance company. Of its Board of three Directors, one, the manager, is appointed jointly by both houses of the Althing, while each house of parliament appoints one of the other two. It has four departments: 1. The Head Department receives deposits which may never be withdrawn. The ownership of these deposits and consequently the right to receive interest payments, may change hands. 2. The Equipment Department is designed to aid minors to get a financial start in life. It receives deposits from persons under twenty years of age and pays, the capital and interest back to them upon reaching their twentyfifth birthday. 3. The Paying-Out Department received deposits which, together with interest upon them, may not be withdrawn until they have remained in the bank for fifteen years. 4. The Old-Age Pension Department receives deposits from persons under sixty years of age. These deposits and interest upon them may not be withdrawn until the depositor reaches his sixty-fifth year. During its first few years this bank was not greatly used, but by law of 1888 the government guaranteed its obligations which led to its greater use by the public. In 1935 it had deposits of 3.7 million Kronur. 2 8 Of the three commercial banks, the National Bank of Iceland, founded in 1885 is the oldest and most important. The National Bank, like the Bank of England, was organized as two financially separate departments; the Issue Department and 25 Iceland, 1936, op. cit., p. 109.

44

ECONOMIC

DEVELOPMENT

OF

ICELAND

the Savings Bank Department. A s set forth in the original act, the purpose of the bank was to aid the monetary exchange in the island and to encourage Icelandic industry. The bank was empowered to accept foreign drafts, currencies, bonds etc., to make loans to communities, and to make commercial loans and loans on personal mortgages. The Issue Department was given the exclusive privilege of note issue, and was authorized to conduct a commercial banking business. The Savings Bank Department was established to conduct a purely savings bank business. In 1887 the National Bank absorbed the first successful savings bank which had been established in 1872. In 1900 a third, financially separate department of the bank, the Hypothec-Mortgage Department, was established. With the establishment of this department the bank assumed its present organization. The bank is owned by the state and final authority is vested in a committee of fifteen, together with the minister in charge of banking matters. The committee is elected by the Althing, and its members serve for a period of six years. The actual management of the bank is vested in a board of governors of five members appointed to serve a term of four years. Four of these are chosen by the committee of fifteen. The fifth member is appointed by the minister in charge of banking affairs and serves as chairman of the board. The board of governors, in turn, appoints three managing directors who serve as the bank's executive officers. The administrative organization of the bank may be grasped from the diagram on page 45. In its first twenty-five years of existence, from 1885 until 1910, the National Bank principally did a savings bank business. Commercial accounts were minuscule in relation to savings deposits. While savings deposits have always exceeded current account deposits in the commercial banks, and while the National Bank today does the biggest savings bank busi-

THE ECONOMIC ORGANIZATION

45

A D M I N I S T R A T I V E O R G A N I Z A T I O N OP T H E N A T I O N A L B A N K o r

ICELAND

ness in Iceland, the increased importance of the commercial accounts may be grasped from the table below : DEPOSITS OF THE COMMERCIAL B A N K S *

(Thousands of Kronur) End of Year

Current Account Deposits

Savings Account Interest Deposits

1890 1900 1910 1920

4 183 1,013 14,815»

563 1,209 5,126 30.119

9,625»

33.304

1930 I93S

".602

44,449

* Iceland, 1936, op. cit., p. 99. » The high figures in 1920 may be explained by the post-war inflation which reached its peak in Iceland in this year.

The Hypothec-Mortgage Department, founded in 1900, has always been of great importance. This department raised

46

ECONOMIC

DEVELOPMENT

OF

ICELAND

most of its capital by the issuance of bonds and uses these funds to make first mortgages on lands and improvements. By 1902 its capital was 1.3 million Kronur, by 1905 it had increased to three million and by 1909 to six million Kronur. The capital of this department was increased by another five million Kronur in 1913. A large part of the capital has been provided by bonds issued by this department. In 1926 the bond issue of this department was 10 million Kronur. In 1927 this figure had been increased to fourteen million, and stood at over 24 million in 1933. 28 After this year the amount of bonds issued rose slowly but at a fairly constant rate, reaching a figure of over 30.5 million Kronur in 1940.27 The mortgages granted by this department of the National Bank are its principal assets. They have always been of an amount slightly less than the bonds which this department issued. Thus, in 1940 the Hypothec-Mortgage Department had assets of 33.6 million Kronur of which 28.7 million were mortgages. In this year it carried among its liabilities 30.5 million Kronur of bonds it had issued.27 The importance of the mortgage department may be judged when it is realized that in 1934 mortgages were one-third of all credits given in Iceland, and that the great majority of mortgages were granted by this department.28 This division of the National Bank, however, deals almost entirely in mortgages on town buildings. Mortgages on rural land and improvements have been handled by the Agricultural Bank of Iceland since its founding. The Agricultural Bank was established by law in June 1929 as an entirely state-owned institution. The bank opened its doors for business in 1930. The three-man board of directors is appointed by the minister in charge of agricultural affairs, 26 The History of the Development of the National Bank, op. cit. 27 Abstract of statement, National Bank of Iceland, 1940. 28 The History of the Development of the National Bank, op. cit.

THE

ECONOMIC

ORGANIZATION

47

one of the three members of the board of directors being designated as the manager of the bank. The Bank's affairs are conducted by four financially separate departments. These a r e : 1. The Savings Bank and Loan Office, which does a general banking and savings bank business. 2. The Hypothec-Mortgage Department, which chiefly makes mortgage loans to be used for productive farming operations. Capital for this department is raised by the issuance of bonds which are backed by mortgages on property. 3. The Agricultural Fund, which directs its attention largely to the improvement of rural housing, and which also raises its capital by the issuance of bonds. This fund was originally established in 1925 and was taken over by the bank. 4. The Building and Colonization Fund, which was also established prior to the creation of the bank and later taken over. Created in 1928 the fund receives yearly grants from the government which is also empowered to guarantee a loan for the purpose of raising capital for the fund. This fund directs its attention to the erection and improvement of rural buildings and to the establishment of new farms. In 1930 the Fisheries Bank was established and took over all the assets and liabilities of the Bank of Iceland, this bank having encountered financial difficulties.

Although considered a

"private bank" the majority of the Fisheries Bank stock is owned by the government which may therefore exert direct control over it.

It is certainly a different type of "private

bank" than the old Bank of Iceland almost 9 5 % of whose stock was owned by foreigners.

The five members of the Fisheries

Bank's board of governors are elected at the general meeting of the shareholders.

T h e board of governors appoints the

managing director of the bank.

T h e Fisheries Bank, estab-

lished to aid "fishing industry, and commerce", is entrusted with the management of various government funds which have been established to aid the fishing industry or boat owners.

48

E C O N O M I C D E V E L O P M E N T OF

ICELAND

The Bank of Iceland, which the Fisheries Bank succeeded, had become soon after its founding in 1903, the premier financial institution of Iceland and retained this position until 1921 when it got into financial difficulties. From this date forward the National Bank was the most important commercial bank in the island. In return for government aid which it received in 1921, the Bank of Iceland was required gradually to surrender the privilege of note issue which it had been granted upon its founding. In 1924 the National Bank began increasing its note issue to take the place of retired Bank of Iceland notes. On May 31, 1927, and act of the Althing provided that the National Bank was gradually to take over the remaining note issue of the Bank of Iceland, and was to become the sole bank of issue in the country. On April 15, 1928, another act was passed, again stating that the National Bank was gradually to assume the exclusive right of note issue, and establishing the legal requirements for the backing of the note issue. This law gave permission to the Issue Department of the bank to issue notes to the extent necessary to meet the needs of the country for a medium of exchange. It required, however, that the bank hold gold to the amount of 3/8 of the bank notes in circulation,29 and that this gold reserve should never be less than two million Kronur. It further provided that that portion of the bank note circulation not backed by gold should be backed by specified securities to the extent of 125% of the value of the notes. The value of the gold reserve did not reach the required two million Kronur mark until 1939, and only at the end of that year was the value of the gold reserve sufficient to back 3/8 of the notes issued. By 1929 the gold holdings of the issue department of the National Bank had been increased to about 1.1 million Kronur. They remained at this figure until April 30, 1939 when the value of the same quantity of gold was "written up" to 2.8 million Kronur to conform to its worth in Kronur at that time. 20 An issue of 750,000 Kronur of treasury notes was never backed by gold.

THE

ECONOMIC

ORGANIZATION

49

This increased value of gold was a result of the depreciation of the Kronur. The Kronur was tied to the pound in 1925, and so its gold value declined when the English depreciated sterling. A further depreciation of the Kronur occurred in 1939. The gold holdings of the bank jumped to 5.7 million Kronur at the end of 1939 when the issue department took over the gold reserve of the Fisheries Bank. In 1920, when the Bank of Iceland first got into difficulties, it had a note circulation at the end of the year of 8,586,000 Kronur. This amount was gradually reduced until at the end of 1929, the last full year of the bank's operation, it stood at 3,348,000. Meanwhile, since 1924, the National Bank had been increasing its note circulation. Between the years 1921 and 1927 the total note circulation in Iceland averaged below eight million Kronur, with considerable yearly fluctuation, but no marked trend in either direction. In 1928, however, the note circulation began to rise and between the years 1929 and 1936 averaged close to the ten million Kronur mark at the end of each year, dropping markedly below this figure only in 1932. In 1937 the note circulation increased and stood at about the twelve million mark, at which level it stayed for the three years 1937-1939. In 1939 the bank note issue which the Fisheries Bank had assumed upon taking over the affairs of the Bank of Iceland was retired almost completely. This issue had remained at the constant figure of four million Kronur since 1933. A t the end of 1939 the gold reserve of the Fisheries Bank which had been used to partially back these notes was acquired by the National Bank. The National Bank has held all of Iceland's monetary gold stock since that time. 7 . T H E D E V E L O P M E N T AND I M P O R T A N C E OF FOREIGN T R A D E

The development of the fisheries in modern Iceland was discussed previously. A s the nation turned to the sea for its livelihood, its exports began to reflect its economic effort. Ordinarily, over 80% of Icelandic exports are fish or fish

50

ECONOMIC

DEVELOPMENT

OF

ICELAND

products. Farming products, mostly from sheep, make up most of the balance with a very small amount of such products as eider down and f o x furs. Iceland, being without any of the basic raw materials of industry, is compelled to import them all. In the late 1930's, fuel, lighting, building and other similar materials for production made up roughly 6 0 % of the nation's imports. T h e other 4 0 % was made up of food stuffs, coffee, sugar, tobacco, textiles, clothes and other consumables. T h e trade of Iceland, both foreign and domestic, has increased tremendously since 1890. One indication of this is the increase in the number of business firms in the nation. Another is the volume of foreign trade which has increased many fold since 1890, as the Table below indicates. AVERAGE A N N U A L IMPORTS AND EXPORTS *

(Millions of Kronur) Year 1896-00 1901-05 1906-10 1911-15 1916-20 1921-25 1926-30

Imports

Exports

6.0 8.5 11.5 18.1 53.7 56.6 64.9

* Iceland, 1936, op. cit., p. 91. place.

7.0 104 13.7 22.4 48.5 64^ 66.1

Total 13.0 18.9 25.2 40.5 102.2 120.8 131.0

Export

Surplus

1.0 1.9 2.2 4.3 -5.3 7.6 1.3

Figures are rounded to the first decimal

Iceland's foreign trade plays a role of the greatest importance in the nation's economy. A very large portion of the wealth she produces is sold abroad. A very large portion of the goods she uses is imported. T h e figures on foreign trade do, of course, reflect the monetary value of imports and exports and are, therefore, likely to give an erroneous impression. For instance, the great increase in the half decade, 1916-1920, was largely the result of a rising

THE ECONOUIC

51

ORGANIZATION

Foreign T r a d e a n d N a t i o n a l Inoome (Millions of Kronur) Year»

Imports»

1929 1930

77-0 72 0

74-2 60.1

96.7 98.5

1931 1932 1933 1934 1935 1936

42 0 34-1 44-4 4» S 42-6 41.6

88.9 87.4 93-9 97-6 — 108.0

1938 1939

49-1 61.6

45-4 44.0 46.8 44-8 43-9 48.2 58.9 57-8 69.7

1937

51-8

* See Table in Appendix.

Exports»

National

Income*

117.7

1198 128.5

Figures rounded to first decimal place.

price level rather than any real increase in the amount of the goods traded. However, the Statistical Bureau of Iceland, has compiled indexes showing both the price and the physical volume of imports and exports. A s previously stated, exports of the fisheries increased in importance and now comprise a dominant part of the exports of the island. Exclusive of herring, the years 1911-15 saw an average annual exportation of slightly more than 27 thousand metric tons of fish.30 T w o decades later, 1931-35, the average annual exportation had increased to 86 thousand odd metric tons.30 By the same token that Iceland turned her greatest attention from farming to the fisheries, so the exportation of live stock fell off after the turn of the century. In 1896 the exportation of livestock reached its peak when over 60,000 sheep were exported. 31 In 1900 Great Britain, to whom most had been exported, prohibited the importation of live sheep, and this trade fell rapidly away. It must be remembered, however, that sheep products still make up the bulk of Icelandic agricultural exports. 30 Iceland, 1936, of. cit., p. 80. 31 Ibid., p. 64.

52

ECONOUIC

DEVELOPMENT

OF

ICELAND

PRICE AND VOLUME INDEXES OF IMPOSTS AND EXPORTS * Prices Year

Imports

I9I3-I4 1923 1923 1924 1925 1926 1927 1938 1929 1930

100 226 242

Volume Exports

an 175 165 154 149 135 "9 "3 109 106 107 109

I93I

1932 1933 1934 1935

1936 1937 1938 1939 1940 1941 1942

116 135 198 223 296

Imports

Exports

100 126 "5 143 181 177 179 232 290 299 222 181 256 264 237 220 245 242 265 209 327 465

100 133 163 172 173 161 238 217 225 209 240 257 252 219 194 207 217 231 215 246 246 246

100 198 176 249 236 164 132 18a 164 143 99 93 102 109 122

119 134 125 162 267 378 403

•From Bulletins of the Statistical Bureau of Iceland.

Likewise the exportation of the relatively small and sturdy Icelandic horse declined. 8.

THE

SEASONALITY

OF F O R E I G N

TRADE

Generally speaking, prior to World W a r II Iceland imported the largest amount of goods in the spring. It was at this season that the Nation's fishing and agricultural industries required the greatest amount of goods for their production process. In the fall, these industries typically exported their produce. This seasonality of foreign trade, did, of course, have an effect on the foreign balances that the Icelandic Banks held abroad. In describing the seasonality of trade, it may be said that the nation reduced her foreign balances in the spring

T H E ECONOMIC ORGANIZATION

53

SEASONAL MOVEMENT o r LOANS, DEPOSITS, NOTE ISSUE, AND FOREIGN TBADB

(Monthly Avenge 1931-1936) (Million Kronur) 80 79

/

/

78 77

!

76

/

/

. 1. Domestic UXMS and Discounts ü the Three Commercio Banks

r

\

\

Deposits in the Three Commercial Bonks

/ \

/

Jf

!

y

•eign R ilance >rawn Downj

M

\

Note Issue

»reign Bolances ilt Up

Exports Imports

M

and built them up in the fall. Such a statement, however, might give an erroneous impression of Iceland's financial condition during the thirties. During these years Iceland did not typically have balances abroad. It was rather a question of Iceland securing short-term foreign credits during the spring

54

ECONOMIC

DEVELOPMENT

OF

ICELAND

to finance her imports and reducing these credits during the fall of the year. The seasonality of Iceland's trade had a definite effect on other financial statistical series. The loans and discounts made by the three commercial banks typically increased in the spring to finance the increased imports as well as to finance the domestic needs of Icelandic industry. Bank deposits moved roughly with the seasonal fluctuation in the loans of the banks. Likewise the amount of currency in circulation commenced to increase in the spring at the season bank loans and imports rose, and reached its peak in the fall in the season when exports were greatest. During the seasons of greater commercial activity, there was naturally a need for a greater amount of circulating currency. 9 . T H E G O V E R N M E N T AND B U S I N E S S

The government of Iceland has been more extensively connected with the business life of the country than has been true in the United States. The government has established monopolies for the sale of several important imported articles including tobacco, radios, liquor, etc. The government has established these monopolies for various reasons. The reasons behind the monopoly controlling the importation of potatoes was previously discussed. The government monopolizes the importation and sale of automobiles. In 1940 there were 1 , 1 2 5 trucks and 955 cars and busses in Iceland, mostly American makes. In 1944 there were 1,991 trucks and 2 , 1 1 5 c ^ s a n d buses.32 The radio broadcasting station and the telephone and telegraph systems are government monopolies, and considerable investments have been made in them. The Government has also spent considerable sums in the construction and improvement of roads. The main roads were gravel before the arrival of foreign military forces. Between the years 1923 and 1936, 32 Figures from bulletins of the Statistical Bureau of Iceland.

THE ECONOMIC

ORGANIZATION

55

thirteen million Kronur was invested in this capital asset alone. 1 Any consideration of the revenues and expenditures of the Icelandic government may give an erroneous picture if it is not realized that the State Accounts are divided into two parts, current revenue and expenditure on the one hand, and the capital accounts on the other. 83 In the latter the various foreign loans are placed. Many of these loans have been used by agencies other than the government. Thus the government has floated a foreign loan and lent large sums of this money to the banks which have used these funds to finance Icelandic enterprises. The principal items of revenue on the Capital Account are loans which the government has borrowed, repayment to the government of loans which it has extended, and the value of capital assets sold. The principal items of expenditures on the Capital Account consist of reductions of the National debt, loans to the banks made by the government, and various governmental investments. It will be noted that interest payments on the national debt are carried as current expenditures whereas reductions of the national debt are capital expenditures. The development of Iceland has caused the per capita cost of government to rise greatly, just as it has in other nations of the world. Before World W a r I, revenue and expenditures had been steadily increasing. In 1913 current expenditures reached the two million Kronur mark. In 1916 they reached three million Kronur, in 1925 they were 11 million, although part of this increase must be attributed to the changed price level after the post-war inflation. In 1931 current expenditures were over 15 million Kronur. Until 1937 expenditures fluctuated in the vicinity of this figure, but in this year they again commenced to rise, being over 17 million Kronur in 1937 and 1938, over 19 million Kronur in 1939, and over 21 million in 194o. 34 33 See table in appendix. 34 Data from the Statistical Bureau of Iceland.

56

ECONOMIC

DEVELOPMENT

OF

ICELAND

Current revenues have also increased. During the first half of the thirties there was usually a deficit on current accounts in the Treasury, but during the second half of the decade there was always a surplus. In 1940 this surplus amounted to the considerable figure of almost five million Kronur. 34 The great increase in revenues and expenditures which took place during World War II is to be associated with the inflation during this period. Customs duties have provided by far the largest single source of revenue for the state prior to World War II. In 1895 they provided almost two-thirds of the government's current revenue, while during the thirties they provided about half the state's income. Until the second decade of this century, they were levied exclusively on articles which were deemed to be luxuries such as liquor, tobacco, coffee, sugar and various other types of sweets. In 1912, however, prohibition came into effect and a very lucrative source of the state's income was dried up. T o make good this loss, customs duties were levied after this year on almost all kinds of imports. Prior to 1924 the sole motive affecting the fixing of tariff rates was that of producing revenue for the state. All customs duties were specific and all of them were assessed on the basis of the weight of the article imported, the kilogram being the basic unit of measure. From 1924 on additional motives to that of procuring revenue affected the establishment of tariff rates. High customs duties were fixed in an effort to reduce the amount of imports. In an effort to improve Iceland's foreign trade position, import restrictions previously had been imposed and the Krona depreciated, and it was only logical that the tariff should be seized upon as an additional implement to aid in the achievement of this purpose. In 1924 import duties on all articles except grain were raised by a flat 2 5 % . In this year, also, an ad valorem duty of 20 °/o was levied on a large number of articles. This ad valorem duty was later changed on numerous occasions. Under the Customs Act of December, 1939, the ad valorem

THE

ECONOMIC

ORGANIZATION

57

duty is as low as 2 % on certain grains and as high as 90°/o on balms, perfume, etc. A t the present time, in almost all cases, both a specific and an ad valorem duty is levied on articles of import. In addition to her tariff on imports, Iceland levies a tax of i Y* °/o on the value of exported articles which arise from the fishing industry. Products from the herring fisheries are not subject to this ad valorem tax, but are subjected to a specific tax in its place. This export tariff provides the source of revenue for the special funds administered by the Fisheries Bank for the benefit of the fishing industry. O f recent years, Iceland has attempted to develop certain industries. Some of these ventures, which are as yet of small consequence, are protected. T h e protection, however, is of a more direct nature than higher tariff rates. Iceland has a highly regulated and controlled economy for a democracy. A l l importers are licensed and receive permission to import certain articles or types of articles in which they wish to deal. In order to protect industries manufacturing products in Iceland, licenses to import certain articles which are manufactured by concerns on the island are not given. Thus, for example, neither candy bars nor overalls can be imported as it is desired to give protection to domestic industry. Prior to W o r l d W a r II income taxes provided approximately one-quarter of the total revenue. Somewhat less than onequarter of the revenue was provided by profits from the postal and telegraph services and the government monopolies in thé sale of liquor, tobacco, radios, etc. T h e government liquor monopoly was closed and the sale of liquor stopped in the late summer of 1941 because of objection to a supposed deterioration of moral standards following the arrival of foreign troops. T h i s stopped what had been a lucrative source of income. T h e balance of the state revenue came from property taxes, special fees, etc. During W o r l d W a r II the income tax provided a larger portion of the revenue than it did in the preceding years.

CHAPTER III ECONOMIC DEVELOPMENT UP TO WORLD WAR II 1. Late Nineteenth and Early 20th Century 2. World War I 3. The Twenties and Thirties I . L A T E N I N E T E E N T H AND E A R L Y T W E N T I E T H C E N T U R I E S

PRIOR to 1885 there was no bank of issue in Iceland. T h e unit of account was the Danish Rikisdalur. T h i s currency did not serve as a general medium of exchange. Currency and coin were not present in sufficient quantities to be carried in the pockets of the general public and used in the making of small purchases. In the sense that there was not sufficient currency in circulation to permit its general use as a medium of exchange, there was a shortage of currency. There was also a shortage of capital, not in the sense that interest rates were high, but in the sense that funds were unavailable for the soundest types of loans. Iceland was not a modern credit currency economy, but was desirous of becoming one. F r o m 1870 onwards there were several proposals for the establishment of credit institutions. There was one suggestion that a loan society be established; there was another that a state bank be established with the power of note issue. T h e public in general was desirous of the establishment of more savings banks, but the merchants were opposed to all such proposals which they thought might disadvantageously affect the profit they made by the extension of credit. There was also a proposal that a bank, guaranteed by the state, be established which would issue notes backed by real estate. A l l of these proposals came to naught in 1883 when the two houses of the Althing failed to agree as to what kind of a credit institution should be established in Iceland. T h e lower house wished a loan society while the upper house desired to see a bank of issue established. In 1885, however, action was finally

58

ECONOMIC DEVELOPMENT

U P TO WORLD W A R II

59

taken and the National Bank of Iceland was established as a state owned institution opening its doors for business the following year on July i , 1886. In 1885 the Rikisdalur was replaced by the Krona as the monetary unit in both Denmark and Iceland. The Icelandic state treasury advanced one half million Kronur to the Bank of Iceland in treasury notes. This was the first issue of Icelandic notes. These notes were not convertible into gold or silver, but were made legal tender. T h e government guaranteed their equivalence to the Danish Krona, and the post office was instructed to receive them for foreign money orders. By this means the holder of the notes could, in fact, cash them in. T h e entire amount of the original half-million Kronur did not immediately get into circulation. This may be attributed in part to the fact that Icelanders were not generally familiar with the practice of carrying currency and using it in their ordinary transaction as a medium of exchange. In part it may be attributed to the length of time required to develop familiarity with the extension of commercial bank credit, as it was by means of such loans that the notes got into circulation. B y 1900, however, despite a depressed period in the intervening years, the need was felt for a larger note issue, and an additional 250,000 Kronur of treasury notes was advanced to the National Bank. Serious financial difficulties were encountered in 1896 when a reduction in the amount of cattle which Iceland was exporting to England during this period caused a serious drain on the nation's gold reserves. This gold reserve dropped from 22,000 K r o n u r to a little more than 3,000 Kronur during the course of 1896, and in 1898 completely disappeared. 1 During the early years of the twentieth century capital was difficult to raise for even the soundest enterprises. In 1904, for example, a group of farmers in Northern Iceland received a loan of 50,000 K r o n u r to establish a spinning factory. This 1 The History of the Development

of the National Bank, op. cit.

60

ECONOMIC

DEVELOPMENT

OF

ICELAND

loan was extended on the condition that a similar amount be raised by a stock issue. It was not until 1907 that the group succeeded in complying with this condition. In 1900, the government, in an attempt to remedy the paucity of credit established the Hypothec-Mortgage Department as a third financially separate department of the National Bank. This department received an outright grant of 200,000 Kronur from the government and grants of an additional 5,000 Kronur a year for a period of five years. The establishment of the Hypothec-Mortgage Department and the increase in the amount of treasury notes in 1900 by no means solved the financial difficulties of the nation. The lack of loan capital had greatly handicapped the development of the fishing fleet despite the good prices that had been received for fish products. It was believed that the only remedy for this shortage of funds was through the aid of foreign capital. Several attempts were made to interest foreign capital in the establishment of a second bank in Iceland, but these attempts were wrecked on the rock of the note issue privilege. Those interested in the establishment of another bank always required privileges of note issue which the Icelandic government was not prepared to grant. Finally an agreement was reached, and by a law of September 25, 1903, the Islandsbanki, or Bank of Iceland, was established. This bank opened its doors on July 7 of the following year. It was almost entirely a foreign owned bank, only 55,000 of its 2 million Kronur capital having been subscribed in Iceland. The board of governors consisted of seven members. The premier was one of these, ex-officio, three were selected by the Althing, and the other three were chosen by the stockholders of the bank. Thus despite the fact that the bank was owned by foreigners, the state selected a majority of the board of directors. The board of directors, in turn, appointed the directors who served as executives in conducting the bank's affairs.

ECONOMIC DEVELOPMENT

U P TO WORLD W A R II

6l

From 1850 until the time of the founding of the Bank of Iceland, Danish bank notes had been legal tender in Iceland. One of the conditions upon which the Bank of Iceland was founded, however, was that these notes cease to be legal tender. From 1904 onwards the only legal tender w a s — ( a ) Small coins ( b ) Notes issued through the National Bank ( c ) Bank of Iceland Notes The Bank of Iceland, upon its founding, was granted the privilege of issuing up to two and one half million Kronur in notes. It was further stipulated that these Bank of Iceland notes should be redeemed in gold upon demand. The notes of the Bank of Iceland were to be backed by at least of their value in gold. Thirty percent of this % gold requirement had to be held in Iceland. That part of the note issue which was not fully backed by gold had to be backed by twice its value in specified securities. From this time until 1924 the paper currency of the nation consisted largely of Bank of Iceland notes plus the smaller amount of Treasury notes issued through the National Bank. For the privilege of note issue the bank gave the government 1 0 % of the profits remaining after 4 % interest had been paid on the bank's capital. Not only was the Bank of Iceland the most important organ of note issue, but it soon became the most important bank in the country in every other respect. The laws under which it operated were somewhat more liberal than those under which the National Bank operated, and for this and other reasons, it did a greater volume of business than the National Bank until 1921. 2 The international crisis of 1907 was not reflected in Iceland until 1908 and 1909. During these years the National Bank underwent some rather heavy losses through bad loans on mortgages and to the fishing industry. These losses totalled 2 The History of the Development of the National Bank, op. cit.

62

ECONOMIC

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some 400,000 Kronur. A government investigation of the conduct of the bank's affairs was made in 1909 and the Premier removed the Cashier and two directors. Although one of the directors appealed to the courts and won a vindication of his conduct, none of them were reinstated. There was much discussion and a good deal of indignation by some who considered that the Premier had acted in a highly arbitrary manner. T h e net result of the affair was, however, a considerable loss of confidence in the National Bank and a sharp drop in its deposits. During this same period, however, the Bank of Iceland was constantly increasing its business and strengthening its position as the country's foremost bank. T h e financial difficulties were by no means completely eliminated by the chartering of a foreign owned bank. Hannes Hapstein, who was Premier in 1912, said, in part, " Money is wanting, credit is lacking, Icelandic bonds cannot be sold in foreign markets . . . " 8 During the first days of the W o r l d W a r I there were considerable withdrawals from the banks. Notes were presented for redemption in such quantity that the Althing felt it necessary to free the Bank of Iceland from the obligation of redeeming them. The gold which was in the possession of the Bank of Iceland was transferred to the Treasury. Although legal limitations placed upon the amount of money which could be withdrawn were removed in 1917, the act freeing the bank of the obligation of redeeming notes was renewed. Further, a prohibition was placed on gold exports in 1919 in order to prevent a drain of gold from the country. 2. WORLD W A R I.

The first world war drastically affected the nation's economy. T h e value of all Scandinavian money was increased relatively to that of the warring nations, and the Icelandic K r o n a remained equal to the Danish Krona until after the 3 History of Iceland, Gjerset, op. cit., p. 440.

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Armistice. T h e war created a greater demand for Icelandic exports and brought about conditions that made the securing of imports more difficult. In order to facilitate trade at higher price levels, the government, in 1914, authorized the Bank of Iceland to issue an additional half million Kronur worth of notes. Later, the limitation on the note issue by the Bank of Iceland was raised to four and one half million Kronur, and finally on the sixteenth of May, 1916, all limitations on the maximum amount of the note issue by the Bank of Iceland were removed. F r o m this date forward the government was authorized to allow increases in the note issue in conformity with " the needs of the country " . T h e amount of the note issue increased from 2.4 million K r o n u r 4 at the end of 1 9 1 4 to a peak of 11.8 million K r o n u r 4 at the end of September, 1919. T h e cost of living index for the city of R e y k j a v i k had a similar large increase, and may be used to illustrate the great increase in the Icelandic price level. Because of the control of certain price elements which enter into it, such as rents, the cost of living index probably did not increase as greatly as an index for retail or wholesale prices would have done. INDEX OF L I V I N G I N R E Y K J A V I K *

October 1 of Each Year July 1914 — 100 1914 1915 1916 1917

108 123 155 248

1918 1919 1930 1921

333 348 446 331

* The Statistical Bureau of Iceland. This index was based on the consumption of a family of five with an income of 1,800 Kronur in 1914. Making the assumption of an unchanged living standard the index was compiled from the following groups: 1. Food stuffs, 2. Light and fuel, 3. Clothing, 4. Rent, 5. Taxes, 6. Sundries. Group 6 was assumed to move proportionately with the average of groups 1, 2 and 3. 4 The Statistical Bureau of Iceland.

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The extent of the increased cost of living in Iceland is striking when compared to the increase which took place in the United States during the same period. Whereas the cost of living in the United States approximately doubled, the cost of living in Iceland increased more than four times. INDEX OP COST OF L I V I N G I N T H E U N I T E D STATES •

December of Each Year Average for 1913 = 100 191 4 1915 191 6

1917

103 105 116

142

1918 I9I9 1920

174 199 200

• U. S. Bureau of Labor Statistics, Bulletin No. 369, May 1925, p. 480.

Wage rates for common labor in Reykjavik tended to rise somewhat less rapidly than the cost of living index in the early years of the war. A t the end of the year, hourly wage rates for unskilled workmen were .35 Kronur in 1914, .40 Kronur in 1915, and .45 Kronur in 1916.® In the following years hourly wage rates for common labor increased at a more rapid rate and at the end of 1920 were 1.48 Kronur. 6 The extent of the increase was closely comparable to the rise in the cost of living subsequent to the start of the war, wage rates having advanced 4 2 3 % between the end of 1914 and the end of 1920 while the cost of living advanced 440% between October 1, 1914 and October 1, 1920. Though wage rates may have lagged somewhat behind rises in the cost of living in the early years of the war, there was no lack of employment and incomes could be supplemented by working overtime. During 1915 and 1916 a rise in the prices of the fish which Iceland exported led to increased profits in the fishing industry. These profits led to an expansion of the fishing fleet. The number of motor boats increased five fold from 23 in 1914 to 117 5 The Statistical Bureau of Iceland.

E C O N O M I C D E V E L O P M E N T U P TO W O R L D W A R II

65

in 1947.* The year 1917, however, saw Iceland unable to obtain sufficient fuel oil for its ships or sufficient salt with which to cure the catch. Some of the motor boats were forced to cease operations. The import prices of coal, tackle, and other articles necessary to the fishing industry had risen sharply, increasing operating costs and cutting into profits. A n agreement with England concerning fish prices in 1917 had also limited the profits which might be made. In addition, in this year the cod and herring catches were small. A s a consequence of this, when France offered to buy trawlers in 1918, ten of them, or half the nation's fleet, were sold. In 1916 Iceland imported heavily, fearing that she would not be able to secure imports in sufficient quantities in the future. The increased value of Icelandic imports during the early part of the war were a result of increases in both prices and volume. The increased value of exports in the early war years were largely a result of price increases, as the volume was not increased appreciably. V A L U E OP ICELANDIC IMPOSTS AND EXPOBTS

8 The Statistical Bureau of Iceland.

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Of the import prices, those of food rose most rapidly in the first part of the war, but were soon overtaken by the price rise in fuel and lighting materials. T h e price of coal rose between two and three times in 1916 and increased tremendously during 1917. A f t e r the war coal prices declined, but rose again during the English strike of 1920. Building materials also rose greatly in price. Although in 1914 and 1915 there was only a 1 3 % rise in building costs, in 1916 costs rose more rapidly, and in 1917 were double what they had been at the start of the war. O n l y one half the amount of construction was done that had been done prior to the war, and there was a great housing shortage. In 1916 homeless families in R e y k j a v i k were housed in schools. Building did not catch up with the need for houses in R e y k j a v i k until 1927. The capital was most severely hit as its population was rapidly increasing. In 1 9 1 7 the Althing passed legislation to keep rents from skyrocketing. T h e right of landlords to give notice to tenants was restricted and a rent committee to which landlord and tenant might appeal for rent fixation was set up. Rents, however, rose steadily, but did not overtake the rise in building costs until 1926. During the years 1 9 1 4 to 1920 building costs rose about five times while rents tripled. Rents continued to rise, however, after building costs fell, thus encouraging construction. Because of the great difficulty of importing goods, government stores were established which took over an increasing part of the foreign trade. F r o m the beginning of the war until 1 9 1 7 these stores sold 3.1 million Kronur worth of goods. In 1918 their sales jumped to 16.3 million and in 1 9 1 9 to 20.8 million Kronur. A t the start of 1917 the government had only six hundred thousand Kronur invested in these stores. During 1917 and 1918, 8.5 million K r o n u r was invested. 7 In addition to its investment in the stores, the government invested some 3.5 million Kronur in shipping. These heavy in7 Statistical Bureau of Iceland.

E C O N O M I C D E V E L O P M E N T U P TO W O R L D W A R I I

67

vestments were one of the principal reasons the national debt jumped from 3 million Kronur in 1916 to 20 million in 1918. A f t e r 1 9 1 9 the government stores ceased activity for the most part although they continued to sell petroleum and tobacco which later became government monopolies. A s the capital invested in these stores was withdrawn, the national debt was reduced, and had fallen to 11.7 million Kronur in 1925. 8 A price regulation committee was created in 1 9 1 4 with authority to fix maximum prices. N o effort was made to fix prices in R e y k j a v i k , until December, 1915. In the autumn of 1916 the committee resigned because of a disagreement with the government and the effort to fix prices was abandoned. A second committee was established as a result of the unrestricted submarine warfare of 1917. T h i s committee directed its attention to domestic prices as imports were very hard to control. A third committee was established in September, 1920, and dissolved in April, 1921. T h e efforts of these committees were not very effective. 3 . T H E T W E N T I E S AND THIRTIES.

Prior to the first world war, Denmark was by far the most important nation in Icelandic foreign trade. During the war, trade with Great Britain and the United States increased greatly. A f t e r the armistice, trade with the United States fell off. Britain, however, maintained an important place, especially as a source of imports. Denmark, although ranking second to England as a source of imports, was never able to regain her previous position of importance. During the t w o decades after the war, dried salt fish was by far the most important single item of export. U p until 1933 Spain was the greatest customer for this product. Spain, as Iceland's best customer, was able to bring pressure on Iceland and wring concessions from her. Iceland had introduced prohibition in 1912. The Spaniards raised no objection to this until 8 The Statistical Bureau of Iceland.

68

ECONOMIC

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Finland and N o r w a y also became " dry " nations. W i t h her markets for wine shut off in these countries as well as in the United States, Spain denounced her commercial treaty with Denmark-Iceland in 1921, demanding that these countries allow imports of her wine containing 2 1 % alcohol by volume. In 1922 the Althing passed legislation acceding to this demand. T h e years immediately following the war were ones of considerable monetary and economic difficulties. T h e trawler fleet, reduced by the sale of ten vessels to France in 1918, doubled in size, increasing from 13 ships in 1919 to 28 in 1920. 9 During 1920 there was a considerable demand for foreign exchange, especially Danish, t o pay for these ships. Cancelled orders for ships not yet delivered caused considerable losses. In 1919 export prices had been high, but declined during 1920. T h e market for exports was severely hit. Icelandic goods on consignment were left in foreign warehouses. While export prices declined, import prices were not reduced to a comparable extent. In this situation increased imports after the war created an even greater demand for foreign exchange. During the war Iceland owned considerable short term balances with foreign banks. A t the end of 1919 these funds amounted to 4.5 million Kronur. A t the end of 1920, not only were these funds wiped out, but Iceland owed 22 million Kronur. 1 0 Throughout the war, the Icelandic currency was held equal to, and fluctuated with, the Danish Krona. After 1918, however, the situation in these nations having the same monarch differed; in 1920 the reduction of prices in Denmark eased the demand for foreign exchange by that country, but this was not true of Iceland. In 1919 foreign banks presented notes for redemption in gold in considerable quantities. In order to prevent the gold drain from the country the Althing passed a law which has remained permanently in effect. This prohibited the exporta9 The Statistical Bureau of Iceland. 10 Ibid.

ECONOMIC DEVELOPMENT

U P TO W O R L D W A R II

69

tion of gold and removed the requirement of redeeming bank notes. The Icelandic government was unwilling to depreciate the Krona in an effort to encourage exports and discourage imports. Since Icelandic money had been on a par with Danish money throughout the war, pride prevented the government from doing anything to indicate that Icelandic money wasn't " just as good " as Danish. T h e foreign payment situation was, however, becoming critical. If Iceland was to avoid depreciation of the Krona, it would have to ration foreign exchange. This latter course was taken on March 8, 1920 when a board was established to restrict imports. Importers were required to apply to the board for licenses. Later the authority of the board was extended to cover all dealings in foreign exchange. Exporters were required to inform the board as to the way they used foreign funds in their possession. Sales of foreign exchange by the bank came under the board's control and it was authorized to forbid any foreign remittance that it felt unnecessary. Meanwhile, the Bank of Iceland, which until this time was the largest bank of the island, was seriously affected by the situation and experienced great difficulty in transferring funds to foreign countries. There was always a considerable amount of hostility toward this bank arising from the fact that it was almost entirely foreign owned. T h e bitter struggle of Iceland for complete independence will be recalled. This struggle left its unmistakable imprint on the character of Iceland. A n y foreign concern, especially one so important, was bound to be looked upon with a certain amount of antipathy if not open hostility. When the Bank of Iceland experienced difficulties in transferring funds, it was aided by the government, which negotiated a loan of half a million pounds in England, half of which went t o aid the bank. In return for this aid, however, the bank was forced to surrender its right of note issue. B y an act of law in 1921 the note issue of this bank was reduced by fixed

70

ECONOMIC

DEVELOPMENT

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ICELAND

amounts yearly and was to lapse altogether in 1933. The Bank of Iceland, however, was destined to pass out of existence before this date. Import restrictions, the rationing of exchange, and the British loan were not sufficient, however, to keep Icelandic money at par. In 1922 the prohibition against charging a premium on Scandinavian money was abolished and in June foreign funds were quoted by the banks at a " f r e e " market price. With the depreciation of the Krona, it was felt that there was no need for the import control board, and it was abolished. The Krona which had been quoted at 25.60 to the pound in early 1922 commenced to fall in value. The import surplus which Iceland had been experiencing for several years had been financed by short term credits. In 1924 both banks converted these short term credits into long term loans. It is important to note that these long term credits did not give rise to imports, but that there was simply a refinancing of importations that had already occurred. Thus what might appear to be heavy borrowing at this time was simply a refinancing operation which had little effect on Icelandic trade. In 1924 a three-man board was appointed to attempt a stabilization of foreign exchange rates which had fluctuated rather wildly since the Krona was allowed to depreciate. The government, the National Bank, and the Bank of Iceland, each appointed a member to this board. After the first quarter of 1924, Iceland's position was materially improved. The index of prices received for her exports in 1924 was some 4 0 % higher than in 1923, The index of import prices in 1924, however was less than 2 % higher than 1923. The nation experienced a large favorable balance of trade. This amounted to some 22.5 million Kronur. The short term obligations of the banks were completely paid off, and foreign balances were owed Iceland. The Krona, whose rate was 33.93 to sterling in March, 1924, advanced rapidly in value, and, at the end of the year, 28

ECONOMIC DEVELOPMENT

U P T O W O R L D W A R XI

Jl

Kronur would purchase a pound. 1925 was also a good year; although both export and import prices declined, the latter fell to a greater degree. The pound sterling fell considerably in the autumn and the Krona was tied to it at the rate of 22.15. This relationship remained constant until April, 1939. The rapid appreciation of the Krona, and its attachment to the pound were not unmixed blessings. 1926 was a bad year. Export prices fell off sharply. Foreign credits were rapidly used up. Domestic prices had declined much more slowly than the Krona had appreciated in value. Production costs remained high in Iceland, while foreign markets were turning bad. In 1926 there was considerable pressure on the government to depreciate the Krona, but the Althing would not do so. The years 1927 and 1928 was a considerable improvement in Iceland's position, with a large volume of exports in 1927 and export prices rising in 1928. During these years Iceland's short term foreign balances were built up to five million Kronur. VALUE OF ICELANDIC IMPOSTS AND EXPORTS

A t the end of the third decade of the twentieth century two new commercial banks were established and one of the old ones failed. A not illogical development of the increased government

72

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DEVELOPMENT

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ICELAND

aid to agriculture, was the establishment of a bank which was to concern itself largely with agricultural finance. Bundarsbanki Islands, or the Agricultural Bank of Iceland, was founded by law in June, 1929 and opened its doors for business in 1930. In 1930, there was an unfavorable balance of trade of 11.9 million Kronur. This wiped out the credits which had been previously established. A loan of 12 million Kronur was negotiated in England and a part was advanced to the National Bank. T h e Bank of Iceland found itself in serious financial difficulties, particularly in regard to its short term foreign obligations, and could not meet the demands made upon it without help. A s a solution to the problem a new bank was formed in March, 1930. This, Utvegsbanki, or the Fisheries Bank of Iceland, commenced activities immediately and took over all the assets and liabilities of the Bank of Iceland. In the year 1931 the full force of the depression struck Iceland. Export prices fell sharply, striking their nadir in 1932. There was a chronic shortage of foreign exchange throughout the decade of the thirties. If the twenties had brought difficulties, t,he thirties, with a general restriction of trade throughout the world increased them. In 1929 and 1930 Iceland had an unfavorabble balance of trade. In 1929, export prices had already fallen some. T h e index stood at 164 as compared with 182 the year previous, and fell to a low of 93 in 1932. In 1929 there was an unfavorable trade balance of 2.8 million Kronur largely because of a large increase in the volume of imports. It was the nation's policy during the great part of the thirties to keep the K r o n a tied to the pound at a constant rate. N o depreciation of the exchange rate, then, was available to reduce the volume of imports. In 1931 the banks had no more foreign exchange available, and it was considered that strong measures were required.

ECONOMIC DEVELOPMENT

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73

T h e National Bank and the Fisheries Bank were given the exclusive privilege of dealing in foreign exchange in this year, and the Import and Currency Exchange Board was established. This Board has been in continuous existence and of great importance since its establishment. Its history may be logically divided into three periods, the first up until 1935 when the board was reorganized and assumed greater powers, the second, up until the arrival of British military forces and the third period when the British exercised a large measure of control over the board and its decisions to grant import licenses. The board was established in October, 1931. During 1932 there was a favorable balance of trade of about 9.8 million Kronur despite the fact that export prices had reached their lowest point. Some credit is due to the board for reducing imports during this year, but the reduction may be attributed in larger measure t o the stagnation of business conditions than to the efforts of the board. There was little construction during this year, and the importation of durable goods reached its lowest point in many years though the board made no attempt to limit this type of goods. Stocks of consumers' goods were fairly high at the beginning of the year, and the reduction of their importation must be attributed as much to this as to the efforts of the board. During 1933 there was a slight excess of exports, but during 1934 there was an excess of imports. During these years the board probably reduced importation as much as it had during 1932, but not nearly as much as it was to do later. During this period it was found difficult to limit the importation of many types of luxuries, as Iceland had an agreement with Spain not to limit imports coming from that country. About 1932 Iceland began to be adversely affected by the system of bi-lateral trade agreements which were arising in many parts of the world. The detrimental effects of this type of trade will be realized when it is understood that the best customers of the nation were those countries from which Iceland

74

ECONOMIC

DEVELOPMENT

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imported very little. In 1933 Spain, Portugal and Italy were the best markets for the products of Iceland, largely dried salt fish. As

sources of Icelandic

imports, however, these

countries

ranked, in the same year sixth, ninth and fifth, respectively. V A L U E o r ICELANDIC IMPOSTS AND EXPOBTS

(Milion KronurJ

D u r i n g the years 1933, 1934 and 1935, Iceland was rapidly losing her best m a r k e t — S p a i n . Spain was having considerable monetary difficulties and w a s restricting her imports. Iceland, being a poor market for Spanish products, was unable to offer any great trade concessions, although an attempt was made to take more Spanish wine, fruit and textiles. In 1936 exports to Spain were almost completely shut off by the Spanish Civil W a r . D u r i n g the same years Portugal was being lost as a market although to a lesser extent. In 1933 Iceland had exported to Spain and Italy about 21 million K r o n u r in salt fish while importing only some t w o and one-half million K r o n u r of those countries' goods. 1 1 B y 1937 the export of salt fish to these t w o countries had been reduced six-sevenths to less than three million K r o n u r , 1 1 while exports of this product to other countries had increased by only some three and a half million K r o n u r . 1 1 T h e salt fish market, both 11 Progress in Modern Iceland, by Eysteinn Jonsson in Le Nord, 1939,

No. 1.

E C O N O M I C D E V E L O P M E N T UP TO WORLD WAR I I

75

cured and uncured, declined throughout the thirties as indicated by the following table: VALUE OF SALT F I S H EXPORTS •

(Both aired and uncured) Millions of Kronur Year

Kronur

1924-1927 (average) 1928-1931 (average) 1932-1933 (average)

39-0 37-9 26.9

1934 1935 1936 1937

2

1939

'7-1

1938

3- 2 >9-5 14-4 16.0 17-2

• The Statistical Bureau of Iceland.

The loss of the salt fish market, however, was a strong stimulus to the development of other industries, especially those connected with the herring fisheries. After 1935 large sums were invested in the development of this industry. Considerable sums were also invested in electric power plants and other such real capital construction. With the loss of the Spanish market, the nation was in a precarious economic situation and was having extreme difficulty in making foreign payments. The government resorted to rigid economy, and the Import and Currency Exchange Board was reorganized by law on the last day of 1934. It was now to consist of a board of five, rather than three, members, and its powers were enlarged. A much larger number of goods were now subject to restriction. The reorganized board drastically restricted many types of consumer goods imports, especially those which might be classed as " luxury goods ". It did not, however, limit the im-

j6

ECONOMIC

DEVELOPMENT

OF

ICELAND

portation of durable producer goods. Heavy capital investment was encouraged. The state itself was investing heavily in its own herring factories. This increased Iceland's difficulties in making foreign payments, as a larger export surplus was required than heretofore in order to maintain interest and amortization payments on the loans which had been negotiated to pay for the imported capital equipment. The object of the Import board was not to limit capital goods, but to reduce the import of " non-essentials ". After 1934, as a result of this policy, durable and non-durable producer goods occupied a relatively more important place in total imports than they had previously, while consumer goods occupied a less important place. CLASSES OF IMPORTS, 1928-1939* (Millions of

c

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