Clearing and settlement at Norges Bank--a historical review.

• Author: Haare, Harald
• Position: Norway. Central Bank of Norway

The Norwegian payment system processes more than three million payment transactions every day. On some days the number of transactions can be far higher. The transactions are cleared and settled in the Norwegian payment system. In the clearing process, a number of transactions are offset against each other. In the settlement process, the results of the clearing are entered in banks' accounts in a settlement bank. Norges Bank is the settlement bank for all the large Norwegian banks. The total value of the transactions is approximately NOK 300 billion on an average day. This means that in less than one week an amount equivalent to mainland GDP passes through the Norwegian payment system.

A clearing and settlement system that resembles the present system did not exist in Norway until 82 years after the establishment of Norges Bank. Norges Bank was assigned a key role as settlement bank and this role is firmly established today (1). However, the current system is very different from Norges Bank's activities in this field just after it was established in 1816. Norges Bank's responsibility then was to provide a means of payment in Norway, i.e. notes and coins, in which the public had confidence. At an early stage, however, the Bank offered to transfer cash between the Bank's branches.

This article primarily describes some important events in the Norwegian clearing and settlement system in the period from 1816 up to World War II.

Norges Bank is established

In the early 19th century, transactions were normally settled directly between parties. They could take the form of barter, but precious metals and notes and coins were also used as means of settlement. When large amounts were involved, a "bankier" (2) might act as intermediary, particularly in connection with exports and imports. Clearing and settlement as we define it today was not relevant, partly because it was practical to settle accounts directly and partly because there was no banking system in Norway for clearing and settling reciprocal receivables and claims. To the extent that banks were involved, these were located abroad, usually in Copenhagen, Hamburg and London.

In the 1700s, a number of attempts were made to establish a joint Danish-Norwegian bank of issue (3). One important reason why no lasting success was achieved was that banks of issue tended to be used to finance the Treasury. If the issue of notes and coins was not commensurate with the underlying values, confidence in the bank and its money diminished. Hence the value of the money was reduced and the bank had to terminate its operations.

After the dissolution of the union with Denmark in 1814, there were soon calls for a separate Norwegian banking system. This was partly based on real needs on the part of the business sector, but a separate banking system also had a symbolic value in nation-building. The first step towards a Norwegian banking system was the establishment of Norges Bank in 1816. (4) The bank was established as a private joint-stock bank. Capital was procured through mandatory deposits (5), the so-called silver tax. The collection of mandatory deposits was difficult and met considerable resistance. In the History of Norges Bank, Part I Nicolai Rygg (6) writes:

"Opposition was greatest in inland Eastern Norway. In September 1818 a group of farmers, many of whom had come from Hallingdal and Valdres, marched on Kristiania. The authorities grew nervous, and the march was stopped at Baerums Verk, just north of Oslo, although the aim had been to submit a complaint to the Government and the Storting in the capital. Although a number were arrested and some put in prison, the sentences were reduced by King Karl Johan. This was the last open protest against the compulsory deposits."

The head office was not initially located in Kristiania (then the name of Norway's capital city; the name of Oslo was not restored until 1925), as stipulated by the Act in the event that the capital was procured through voluntary subscription, but in Trondheim instead. One of the arguments put forward was that with mandatory deposits the Bank would not have the same authority to maintain independent status and a long-term approach as it would if it was established through voluntary deposits. It was therefore concluded that a distance to the Storting and the Government would be advantageous for a "mandatory bank". Moreover, there were already branch offices in the major towns of Bergen, Kristiania and Kristiansand in 1816.

The Bank had three main responsibilities: It was to have the sole right to issue notes; it was to carry out banking services for the government, and it was to provide general banking services and operate credit and deposit facilities.

Instruments that were used in the first 75 years (7)

Lending and discounting of bills of exchange

The Bank commenced its lending activities in 1818. On 28 September that year, Norges Bank's Board of Directors announced that the silver fund was large enough to allow the Bank to offer loans and to discount bills of exchange and negotiable debt instruments.

Norges Bank's lending policy was initially somewhat unusual for a bank of issue. Its responsibility was to be to provide short-term loans, preferably to the business sector. Instead, the Bank largely provided long-term loans secured on real property. Although these mortgage loans had a maturity of 6 months, which was the stipulated maximum maturity, in practice they were constantly renewed. As late as 1830, loans secured on real property accounted for 90 per cent of total lending.

At the time of its founding, Norges Bank was the only bank in Norway, but in the 1820s some savings banks were established. They were small, and primarily covered local needs for operating capital and funding for agriculture and craft enterprises. When manufacturing became an industry in Norway, they were not capable of financing increased trade with other countries and increased production. Short-term credit was therefore in very short supply.

In order to meet some of this need, Norges Bank established Den anekterte laaneindraetning in 1818. With this loan facility it was possible to deposit a sum of silver and to receive twice the amount in banknotes. At the most, 735 000 speciedaler was on loan at any one time under this arrangement, which terminated in 1835. It had already been partly replaced in 1828 by a borrowing and discount facility, whereby 100 000 speciedaler in silver coins and 150 000 speciedaler in banknotes the debitor, in this context were made available for discounting bills of exchange.

Transfers

In 1825 it was already possible to transfer money between towns where Norges Bank had regional branches through a simple money order arrangement. (8) These transfers proved to be a flexible payment system. At the time, commercial banks had not yet been established in Norway, and Norges Bank was the only bank that could undertake such transfers. A party needing to send banknotes between towns in which Norges Bank was represented could have the settlement effected by paying the amount to the branch from which the money was to be sent. The sender had to pay a small charge for this, and the beneficiary received a money order (claim) payable at the branch in the town to which the money was to be sent. This reduced both the costs and the risk associated with money transport. The arrangement was practical, and was developed further as Norges Bank's branch network expanded. Initially, Norges Bank's role in payment transfers was primarily confined to settlements between its various regional branches.

By current standards, bank services were not readily accessible in the first few decades, as evidenced by the following announcement: (9)

"In the bank, which one reaches by way of the stair on the right-hand side, the following take place:

From 9 to 10 on weekdays in the Morning Banknotes are exchanged; and during the same Period every Tuesday and Friday also Dividends on Share Certificates; from 11 until 1 the Bank is open for those who have Applications to submit, Loans to raise, Interest to pay, or in some other Respect any Business to discharge with the Bank.

Outside of these Hours, other Bank Businesses do not allow Access to any Persons other than Employees.

Any persons living out of town who have any business with the Bank must arrange to have this carried out by a Commissioner present here, as one cannot correspond with Everyone and Anyone on his personal Affairs.

The Banking Administration in Christiania, the 31st of August, 1825".

Money transfer activities developed from the mid-1800s and up to after World War II. Norges Bank played an important role in the transfer of money to all parts of Norway, avoiding the need to send cash. This permitted a reduction in the circulation of physical banknotes. Banks in towns where Norges Bank was not represented could use the nearest branch or office to execute similar transactions. This was an important service and made payments and transfers easier and more secure.

Until the mid-1880s, giro transfers from one account to another only applied to government and Hypotekbanken's accounts. Private individuals had to buy money orders and pay a small fee. In 1886, the Board of Directors took...