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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 599:
Is the Law of Reflux Valid?

Per Hortlund ()

Abstract: In the classical monetary debates, the Banking School held that notes would be equally demand-elastic whether supplied by many or a single issuer. The Free Banking School held that notes would be less demand-elastic if supplied by a single issuer. These assertions have rarely, if ever, been subject to more stringent statistical testing. In this paper I compare the elastic properties of the note stock of the Swedish note banking system in 1880–1895 with those of the regime in 1904–1913, when the Bank of Sweden held a note monopoly. Evidence suggests that notes did not become less elastic after monopolisation, thus lending support to the views of the Banking School.

Keywords: Banking School; Free Banking School; Elastic currency; Clearing mechanism; Needs of trade; Law of Reflux; Real bills doctrine; (follow links to similar papers)

JEL-Codes: B12; E42; E51; E58; N13; N23; (follow links to similar papers)

24 pages, June 15, 2005

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