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In the boom days before the global financial meltdown, Iceland transformed itself into an international banking center.

David Kestenbaum of our Planet Money team recently visited the frozen island in the middle of the north Atlantic, and he got to wondering how banks or anything ended up there in the first place.

DAVID KESTENBAUM: We made a trip to Iceland because of someone who used to be our intern on Planet Money, Baldur...

Baldur, will you pronounce your name?

BALDUR HEDINSSON: Baldur Hedinsson. And I was born on this frozen rock in the middle of the ocean.

KESTENBAUM: Iceland, it turns out, is called Iceland for a reason. It's so far north that polar bears sometimes show up drifting by on a random piece of ice.

Baldour, you and I were out one day, when this strange cloud that had been drifting across the ocean hit land.

Mr. HEDINNSON: What do you think? Do you think it's just a cloud?

KESTENBAUM: No. It is crazy looking whatever it is.

(Soundbite of laughter)

Mr. HEDINNSON: I think it is rain.

KESTENBAUM: Look, here it comes again.

(Soundbite of laughter)

(Soundbite of thunder)

KESTENBAUM: That really stings. Little pieces of ice flying through the air. Why did your people stay here?

Mr. HEDINNSON: You know, I ask myself that question all the time.

KESTENBAUM: How did this place become one of the world's most advanced economies? We called up a historian.

Baldy, can you do his name?

Mr. HEDINNSON: Sigurdur Gylfi Magnusson and he wrote a book called "Wasteland with Words."

KESTENBAUM: So the early settlers, he says, were Vikings. And maybe you're thinking about guys with big round shields, throwing axes. The truth, he says, was a lot bleaker. And we know this because the people of Iceland have been keeping a gigantic national diary for a thousand years.

Dr. SIGURDUR GYLFI MAGNUSSON (Author, "Wasteland with Words"): It is basically an account of everyone who has settled down in the country.

KESTENBAUM: Your people are so well organized and documented.

(Soundbite of laughter)

Dr. MAGNUSSON: Well, that's true.

Mr. HEDINNSON: These early settlement books were written on animal skin. But today it's all online.

KESTENBAUM: And while we were talking to Sigurdur, you looked up the name of one of your ancestors who would have been alive in these early days.

Mr. HEDINNSON: How far do you want to go back?

KESTENBAUM: How far back can you go?

Mr. HEDINNSON: I'm back to 1075, Thorlaggur Elke Armson(ph).

(Soundbite of laughter)

KESTENBAUM: We asked Sigurdur what life was like for old Thorlaggur.

Mr. HEDINNSON: My great-great-with 24-greats grandfather.

KESTENBAUM: Sigurdur said that even heating the house back then was a huge problem. Everyone would just live in one room above the livestock for warmth.

Dr. MAGNUSSON: But you can just imagine the smell in these houses.

Mr. HEDINNSON: And keep in mind that the winters are long and dark, with only a few hours of sunlight. And even in the summertime it's hard to get anything to grow.

KESTENBAUM: Don't you need something green in your diet?

Dr. MAGNUSSON: No, I mean, even the potato wasn't really introduced to the Icelandic diet until very, very late - late 19th, early 20th century.

KESTENBAUM: What did they grow, just turnips or something or...

Dr. MAGNUSSON: They didn't really grow anything.

KESTENBAUM: You had to preserve food for the winter. And one technique was to ferment it.

Dr. MAGNUSSON: So you had rotten shark. It went through the stages of rotting.

KESTENBAUM: And not only is there not much to eat. There is not much to do. In the dark winters, people would hole up in their turf houses and read.

Dr. MAGNUSSON: These guys were more interested in books. It's a strange society in a sense that you have these high-quality of intellectual activity but at the same time, dirt poor society.

KESTENBAUM: So this was your great-great-great-great-great-great grandfather Thorlaggur's life - rotten shark and books in a dimly-lit room, if he was lucky. There were famines. And In 1783, a volcanic eruption killed nearly a quarter of the population. The population drops to 38,368. Yes, they documented that exactly. Seventy-five percent of the farm animals die.

Mr. HEDINNSON: Was there ever a time when people were about to give up?

Dr. MAGNUSSON: Oh, yeah. There was a time actually when the Danish king thought about moving the country down to Denmark - to the whole country.

KESTENBAUM: Evacuating the island.

Dr. MAGNUSSON: Yeah.

KESTENBAUM: And this is what life was like for a thousand years. It was as if time had stopped on the island. Then in the 1800s, something finally changes. That means geography is longer destiny.

Mr. HEDINNSON: We discover a natural resource. It wasn't in the ground. It wasn't even on the island but it was nearby. It was fish.

KESTENBAUM: Iceland had cod, something the world wanted - an export. And suddenly, these people living in turf houses with minimal contact with the outside world, their lives are transformed.

Dr. MAGNUSSON: There is a diary from a woman in Reykjavik, where she looks out of her kitchen window and she sees an airplane in the air and she just can't believe what she is looking at.

KESTENBAUM: And now the benefits start to build. Iceland finds a way to use the very things that make the island inhospitable. Volcanoes, for instance, also means geothermal springs.

Mr. HEDINNSON: And we used that to heat our homes.

KESTENBAUM: All that rain and bad weather?

Mr. HEDINNSON: We used that for hydropower. We've got some of the cheapest electricity in the world.

KESTENBAUM: Even the thing that once was a coping strategy - sitting indoors during the long winters, reading - that becomes the foundation for a knowledge-based economy - international banking. Unemployment drops to one percent. In 2007, Iceland is no longer a frozen rock in the middle of the ocean. It's looking like economic perfection.

Mr. HEDINNSON: Well, the banking thing didn't go so well.

(Soundbite of laughter)

KESTENBAUM: Yes, the banks failed. That means someone is going to have to come up with a new idea. Maybe you?

Mr. HEDINNSON: Yeah, I'll try.

KESTENBAUM: What does it say in the book of settlement next to your name?

Mr. HEDINNSON: Nothing yet. Just that I was born in Reykjavik.

KESTENBAUM: I'm David Kestenbaum

Mr. HEDINNSON: And I'm Baldur, the son of Hedin, the son of Peter, the son Gudmunder(ph), and so on and so on.

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