Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 61: Is the Law of Reflux Valid? Evidence from Sweden 1878–1913

Per Hortlund
Additional contact information
Per Hortlund: The Ratio Institute, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden, and, The Section for Historical Economics and Entrepreneurship, Stockholm School of Economics, P.O. Box 5095, SE-102 42 Stockholm, Sweden

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 Swed-ish note banking system in 1878–1901 with those of the regime in 1904–1914, when the Bank of Sweden held a note monopoly. Evi-dence suggests that notes did not become less elastic after monopoli-sation, thus lending support to the views of the Banking School.

Keywords: Banking School; Free Banking School; Elastic currency; Clearing mechanism; Note competition; Needs of trade; Law of Reflux; Speed of redemption; Real bills doctrine

JEL-codes: B12; E42; E51; E58; N13; N23

22 pages, January 3, 2005

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