It was a
by-now familiar scheme. All three recognized each others' gold coinage
as well as token coins as legal tender. The daring innovation was to
accept the members' banknotes (1900) as well.
As Scandinavian schemes go, this one worked too perfectly. No one
wanted to convert one currency to another. Between 1905 and 1924, no
exchange rates among the three currencies were available. When Norway
became independent, the irate Swedes dismantled the moribund Union in
an act of monetary tit-for-tat.
The SMU had an unofficial central bank with pooled reserves. It
extended credit lines to each of the three member countries. As long as
gold supply was limited, the Scandinavian Kronor held its ground. Then
governments started to finance their deficits by dumping gold during
World War I (and thus erode their debts by fostering inflation through
a string of inane devaluations). In an unparalleled act of arbitrage,
central banks then turned around and used the depreciated currencies to
scoop up gold at official (cheap) rates.
When Sweden refused to continue to sell its gold at the officially
fixed price - the other members declared effective economic war. They
forced Sweden to purchase enormous quantities of their token coins. The
proceeds were used to buy the much stronger Swedish currency at an ever
cheaper price (as the price of gold collapsed).
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