4. Economic crisis and public regulation

Economically, the world war era as a whole was characterised by increased productivity and prosperity. Mechanisation and the introduction of new equipment meant that agriculture gradually became more efficient, both on individual farms and in co-operative associations. Industrial enterprises became larger and more efficient. As mentioned above, urban industry also grew in significance, in terms of both employment and its place in the Danish economy in general. While butter and bacon still made up most of Danish exports, industrial products amounted to 22% of Danish exports just before the outbreak of the Second World War.

However, the conditions for growth differed from those prevailing before the First World War. Recurrent serious crises threatened the stability of society and meant that progress often went unnoticed. The market no longer seemed able to solve its own problems, which created a need for greater state intervention in the economy. This was increasingly accepted and implemented, even though the Venstre government, as mentioned above, made a persistent effort to continue a liberal course throughout the 1920s.

Trade and social polarisation during the First World War

Up until the First World War, as much as 60% of Danish exports had gone to the British market, especially eggs, bacon and butter, while 30% went to the German market, especially live animals. In return, Denmark bought coal, raw materials and animal feed. Approximately a third of this came from Germany and somewhat less from Britain.

As this multilateral trade was a precondition for supplies to both countries, both Germany and Britain decided to allow trade to continue in both directions for the first years of the war. It was only with the German blockade and the unrestricted submarine war from January 1917 that trade with Britain was hampered. Numerous Danish merchant ships were sunk by German torpedoes in the spring of 1917, after which trade with the British had to take place though neutral waters.

The general shortage of goods during the war benefitted the Danish balance of payments in general and agriculture in particular, for it offered favourable sales conditions and opportunities for enterprising speculators. Particularly notorious were a particular specific group of profiteers, the so-called ‘goulash barons’ – nouveaux riches who profited from selling canned meat of dubious origin to the starving soldiers on the front line. The figure of the unscrupulous and vulgar goulash baron – in flashy clothes, with a top hat and large cigar lit with tapers of hundred-krone banknotes – soon became a regular figure in the streets and among satirists and reviewers.

These representations expressed a widespread dislike of speculators and the economic downside of hastily acquired wealth – namely the worsening shortages of basic goods such as grain and fuel, especially in the final two years of the war. At the same time, the inflation that benefitted wealthy investors eroded the income of those on fixed wages. This applied in particular to the workers, whose five-year collective agreement was concluded before the war and whose wages were now relatively low in the face of rising rents and living costs. There was never widespread hunger in Denmark, but many people lost their homes.

Dissatisfaction among the workers was reflected in, among other things, an unprecedented level of union affiliation. In 1913, unions belonging to the Federation of Unions had a total of 107,000 members. Six years later, this figure had reached 255,000, and their fighting spirit had intensified. Although support declined somewhat in the difficult years of the early 1920s, the trade union movement remained a central force in politics and economics.

Economic regulation

In response to the crisis and the distress it caused, the state began to intervene in the economy. Only a week after the outbreak of war, on 7 August 1914, a unanimous parliament passed the so-called August laws. Among other things, these laws authorised the minister of the interior to take far-reaching measures to regulate the prices of food and to control foreign trade.

The most important of these measures was the establishment of the Extraordinary Commission (Den Overordentlige Kommission), which brought together a range of experts with business and economic competence. The Commission was intended to counteract any suspicions of partisanship in the departure from decades of liberalist principles. Nevertheless, many of the commission’s initiatives gave rise to controversy, including its first significant price regulation, which set the price of rye. This regulation was met with support from consumers, such as smallholders and the urban population, but with harsh protests from Venstre and the large-scale farmers.

As shortages escalated during the last two years of the war and the first post-war years, rationing of basic food items was introduced. Rationing and price regulation had long-lasting legacies in the form of widespread economic regulation throughout the rest of the century. At first, however, the leading figures tried to adhere to the doctrine of free trade as much as possible. It is likely that the socialists and Social Liberals viewed political economic regulation during wartime as the starting point for a more equal distribution of wealth. However, throughout the 1920s, the powerful Venstre politicians in particular maintained that state regulations were simply emergency measures that needed to be rolled back as quickly as possible.

Workers’ organisations

It was not easy to re-introduce the old order into a world marked by crisis and war. The wealthy liberal farmers in particular now faced a significantly strengthened working class, which defended its living conditions and fought for economic regulation.

Through numerous strikes in 1918–1819, the labour movement had managed to triple wage levels compared to the meagre real wages of the final years of the war. This intensified the fighting spirit among some groups of workers, but it also caused employers to hit back harder. Following a month-long dispute in 1919, it was finally possible to meet workers’ demands for a reduction of the working day to eight hours, something they had been seeking for decades. The newspaper Social-Demokraten hailed this result as historic: ‘The distant ideal of our forefathers has become a reality. The free unionised worker no longer has to toil around the clock but can divide his day into work, leisure and rest’. There was no compensation in pay for the reduction in hours, however, so the workers themselves actually incurred the cost. Saturday work continued, meaning the working week consisted of forty-eight hours. Employers were also free to impose overtime, and some trades were even exempted from the eight-hour day. It was thus far from a pure victory for the labour movement.

The willingness to compromise, however, did not prevent the same labour movement from occasionally showing its strength when employers, supported by right-wing politicians, attempted to roll back some of the concessions. This occurred during the above-mentioned Easter Crisis in 1920 and once again during collective agreement negotiations in the inter-war period. The years 1922, 1925 and 1936 mark peaks in disputes in the Danish labour market.

Economic crises

Even without a growing labour movement, it would have been far from straightforward to resurrect the old pre-war liberalism. The economic effects of the First World War continued for many years.

Not only did the Danish state have to pay for the extraordinary conscription of security forces and deal with increasing problems linked to housing shortages and general social distress – in addition, the already strained economy was put under further pressure in the final months of the war by the effects of a deadly influenza pandemic. The disease, which became known as the ‘Spanish flu’, particularly affected young people of working age. In the worst-hit areas production stalled, and this contributed to the already growing level of unemployment. In Denmark, between 15,000 and 18,000 people died of influenza. This figure was low in an international context, but it was enough to spread panic and to exacerbate the general scarcity of resources. The economic downturn led the Danish state to take out large loans in the final few months of the war – in open conflict with the old, restrained approach to state finances. The warehouses were empty, and farms were staffed to a minimum. In order to get the economy back on track, it was first necessary to invest in production.

There were still pockets of wealth in certain parts of society, however; enterprising, newly rich investors bought up large stocks of goods for export. Inspired by more favourable economic conditions in 1919, they expected to be able to sell these goods at high prices in the Baltic Sea region. However, these goods were bought at increasingly high prices, while the purchasing power of customers in the Baltic Sea region was squeezed, so the investors either had to hold on to their expensive stocks or sell at unprofitable prices.

This disparity helped to turn the Danish wartime surplus rapidly into debt. The exchange value of the Danish krone fell dramatically, generating rapid inflation in Denmark. This made the country extremely vulnerable to the international recession in 1920, in particular to the collapse of the German market. In Denmark, as in other parts of Europe, liberal principles were challenged by the urgent demand for protective tariffs to safeguard domestic industry.

The collapse of Landmandsbanken

The crisis also hit those banks which had lent money to companies that could no longer meet their repayments. The worst hit was Landmandsbanken (The Farmers’ Bank), which was the largest bank in the Nordic region and which had imprudently lent vast sums of money to the large Transatlantisk Kompagni (Transatlantic Company) to finance its risky ventures on the eastern markets. The company collapsed and took Landmandsbanken with it.

True to the basic principles of liberalism, the Venstre government had let other smaller banks fall into similar difficulty. But Landmandsbanken was too big to fail. The government therefore agreed to let the state act as the bank’s guarantor. Along with Nationalbanken and a number of large, private companies, the state ploughed huge sums of money into Landmandsbanken to cover its losses.

This was bad, but it got worse, because the bank’s management had not disclosed the full extent of the losses. They had originally told politicians and the public that the bank had losses of 55 million kroner – itself a considerable amount, corresponding to about 270 million euros in the early 2020s. But it soon became clear that the figure was actually 144 million kroner. When the final figures were eventually available six years later, the total cost of the Landmandsbanken collapse was calculated at over 500 million kroner.

Workers from Nationalbanken carrying sacks of money across the road

On 17 September 1922, the government and Nationalbanken signed a reconstruction agreement, guaranteed by the state, to help save Landmandsbanken. The day after, workers from Nationalbanken carried sacks of money across the road in order to cover the gaping hole in Landmandsbanken’s cash supply. This photograph, along with other press coverage, was intended to reassure shareholders and bank customers that there were sufficient funds. This was before the full extent of the disaster was disclosed, at which point criminal proceedings were initiated against Landmandsbanken’s management. Photo: Holger Damgaard, Royal Danish Library   

This was not only disastrous for the bank and a huge drain on the public finances, for the Landmandsbanken crisis also put liberalism into question. Criticism was levelled at the Venstre government for having placed too much confidence in market forces in general, and the top people in the finance world in particular. The social democrats were furious. The bank scandal had shown capitalism’s ‘pitiful and atrocious failure’, claimed Stauning, who added that state banks should be established to replace private banks.

This vision was never realised, not even during Stauning’s long time in government. Landmandsbanken was rescued as a private financial institution and survives today under the name Danske Bank. However, in light of the Landmandsbanken case and similar cases, a new bank law was passed in 1930 which tightened requirements for banks’ equity and liquidity. Rather than overthrowing capitalism, it became the goal of the Stauning government to save capitalist finance from itself. This seemed to work, since Danish banking survived the turbulent 1930s remarkably unscathed.

This was not only disastrous for the bank and a huge drain on the public finances, for the Landmandsbanken crisis also put liberalism into question. Criticism was levelled at the Venstre government for having placed too much confidence in market forces in general, and the top people in the finance world in particular. The social democrats were furious. The bank scandal had shown capitalism’s ‘pitiful and atrocious failure’, claimed Stauning, who added that state banks should be established to replace private banks.

This vision was never realised, not even during Stauning’s long time in government. Landmandsbanken was rescued as a private financial institution and survives today under the name Danske Bank. However, in light of the Landmandsbanken case and similar cases, a new bank law was passed in 1930 which tightened requirements for banks’ equity and liquidity. Rather than overthrowing capitalism, it became the goal of the Stauning government to save capitalist finance from itself. This seemed to work, since Danish banking survived the turbulent 1930s remarkably unscathed.

The crisis of the 1930s

When share prices on the American stock market crashed suddenly in 1929 and effectively put an end to the extreme speculative growth of the ‘roaring twenties’, it initially had only a limited effect on Denmark. This was because the 1920s had not been nearly as ‘roaring’ in Europe, and because the Danish and American economies were only minimally connected. Yet other European countries were heavily dependent on trade with – and sizeable bank loans from – the USA, so when American banks collapsed one after the other and the USA fought the urgent crisis by calling in loans and imposing tariffs, it destroyed the German economy and seriously threatened the British. Thus the effects reached Denmark indirectly.

One of the first consequences of the crisis was a fall in international grain prices. In the short term, this benefitted Danish agriculture, as pigs could be bred more cheaply. In the slightly longer term, however, it became difficult to sell the most important Danish products. The crisis prompted many countries to embark on a protectionist course, and at the beginning of the 1930s the remaining open markets – such as Britain – were flooded with agricultural produce. In the space of a few months in 1930, the price of butter fell to two thirds of its previous level, and that of pork halved. Indebted Danish farmers were now unable to pay their loan instalments, numerous farms ended up in foreclosure auctions, and many lived with the fear of ending up in the same situation.

Burdened by debt, Danish farmers bought few industrial goods. The crisis thus also affected urban business, which had to cut production and lay people off. By 1932, unemployment, which was already 15% at the start of the crisis (a figure unheard of before the First World War), reached 32% of all insured workers. Hardship and desperation gave rise to protest movements among the impoverished farmers in the Agricultural Association and also among the urban unemployed. This was the decisive factor that fuelled the development of political extremism. At the same time, however, desperation and protest movements from both political wings encouraged the old parliamentary parties to collaborate in an attempt to find solutions to ease the crisis.

Crisis agreements, import control and trade agreements

The Social Democratic and Social Liberal government had its own ideas on how to alleviate the crisis. A one-sided solution would have faced resistance from the right-wing opposition, which still dominated the Landsting, and the social groups that did not regard themselves as being represented in government. For the sake of social peace, efforts were therefore made to develop a crisis policy across the political centre.

The first crisis agreement was negotiated in October 1931, between the government parties and the Conservative People’s Party. The agreement increased state support for the crisis-hit farmers and the urban unemployed. It was financed partly by an increase in income tax, which made the wealthiest classes bear the largest burden and thus showed clear social democratic influence, and partly by a series of consumer taxes, which, conversely, put the burden on the less wealthy and was the government’s concession to the Conservative People’s Party. By entering into this agreement, the Conservative People’s Party could appear as the farmers’ friend in distress and drive a wedge between Venstre’s ideological liberalism and its own social roots among the farmers, who, for obvious reasons, had begun to question the dogma of free trade. However, the agreement only treated the symptoms of the crisis and did not confront the crisis itself.

A more radical initiative was the founding of the Exchange Control Office (Valutacentralen) in January 1932. This was an office under the ministry of trade with the task of improving the balance of trade and regulating the economy through import controls. All foreign currency import purchases needed to be approved by the Exchange Control Office. Its establishment marked the most significant break with 1920s liberalism – although ironically it was the arch-liberal Madsen-Mygdal who had first proposed temporary import regulation to ward off more far-reaching proposals for tariffs from industry leaders and conservative politicians.

In order to achieve a new kind of balance in a world economy of increasingly self-protected markets behind tariffs, Denmark opted for bilateral trade agreements that required each country to buy the same amount from each other. In practice, this meant that Denmark had to re-orient its imports towards the British market in order to protect the two thirds of its exports that went to Britain.

Import controls and trade agreements evoked frustration in some circles, but they did prop up the Danish economy effectively. After the crisis year of 1932, production started to increase, and continued to do so for the rest of the decade. Urban unemployment remained high throughout the 1930s, however, and the crisis was still felt by many, largely due to the steady increase in the working population.

State and Classes

In this film, Bertel Nygaard discusses the relationship between the state and the classes. The film is in Danish with English subtitles, and lasts about eight minutes. Click 'CC' and choose 'English' or 'Danish for subtitles.

The Kanslergade Agreement, 1933

The most era-defining crisis agreement was the Kanslergade Agreement. It was concluded during the small hours of 30 January 1933 by leading politicians in Venstre, the Social Liberal Party and the Social Democratic Party after long and difficult informal negotiations in Prime Minister Stauning’s apartment in the Copenhagen district of Østerbro. The immediate background to the talks was once again the re-negotiation of collective agreements between the labour market partners. The Danish employers’ association argued that falling prices during the crisis had increased the workers’ real wages disproportionately and that a large-scale lockout was now required to implement a drastic wage cut. This approach was in line with Venstre’s traditional policy and the previous year’s commitment to maintaining the exchange rate. But as the farmers began to push for more state intervention to limit the impact of the crisis, Venstre also became a little less steadfast in its principled liberalism.

The agreement stipulated that the nominal value of wages would be maintained in monetary terms, but the krone was devalued by approximately 10%. This improved the farmers’ export opportunities and also adjusted the workers’ wages in real terms. At the same time, farmers benefitted from planned land allocation and reduced property tax, partly financed by an increase in income tax. New rules were introduced for debt management and a system was established for the state purchase of beef. This system was equally advantageous for the workers, who also benefitted from new housing construction and public sector projects.

Steincke’s social reform

In connection with the Kanslergade Agreement, Venstre also undertook not to vote against Minister of Social Affairs Steincke’s new proposal for social reform. By doing so, the party in practice accepted increasing state regulation of social affairs.

Steincke’s social reform was primarily a continuation and simplification of previous social initiatives. It merged the numerous laws on sickness insurance, unemployment insurance, pension insurance and public services into four laws. It also stipulated that public assistance should no longer be given at discretion to the deserving poor, but should instead be considered a right.

The social reform of 1933 meant that significantly fewer people had to endure the loss of their civil rights, which, since the first constitution in 1849, had been one of the implications of receiving poor relief. However, socially conditioned discrimination did not disappear entirely until almost thirty years later, with the Social Act of 1961.

Political collaboration across party lines

The immediate objective of the Kanslergade Agreement was to alleviate distress for large sections of the population. In retrospect, the agreement has been granted greater significance. First and foremost, it has often been considered a turning point for the construction of the modern welfare state. The Kanslergade Agreement, along with other crisis agreements of the 1930s, can be seen as a political confirmation of the old parties’ willingness to collaborate with each other across party lines in order to avoid social unrest and political extremes. In this respect, the agreement can be said to herald both the multi-party governments of the occupation and a broader ideal of consensus politics that extended far into the post-war era.

While the Social Democratic government emerged strongly from the Folketing elections in 1935 and even had a majority in both houses after the Landsting elections in 1936, it is striking how moderately the Social Democrats implemented their policies under Stauning’s leadership. With the Holiday Act of 1938, workers received two weeks of statutory holiday a year, but when collective agreements were due to be re-negotiated, the Social Democratic leaders of both the party and the union movement advocated restraint with regard to wage demands. The Social Democrats also accepted the 1934 law on mediation in labour disputes, which linked collective agreement votes together so that it became more difficult for individual unions to reject proposals. In 1936, the party also helped to end conflict by signing the rejected mediation proposal into law and by demanding fines from the unions whose members had gone on strike. In sum, the leading social democrats increasingly regulated capitalism, suspending their traditional aim of abolishing it. They sought to improve the workers’ living conditions through the union movement and the state, but also to tame the workers’ fighting spirit.