Expansion of the Money Supply with a Fixed Exchange Rate: “Free Banking” in Sweden under the Silver and Gold Standards, 1834 – 1913

This paper studies the role of bank notes issued by the private Enskilda banks in the expansion of the Swedish monetary stock under the classic specie standard maintained during the period 1834-1913. The use of balance sheets has made possible the estimation of more accurate and continuous series of the Swedish money stock and bank reserves. The conclusion of the paper is that the Enskilda banks contributed to Swedish economic expansion and integration, through the provision both of credit and of generally accepted means of payment, beyond what would have been possible for the central bank, constrained as the latter was by specie convertibility requirements. But, the Enskilda banks did not operate according to free banking theory. The re-establishment of the silver standard guaranteed by the central bank was crucial for this process, since it allowed the Enskilda banks to hold central bank notes instead of specie as reserves. The notes issued by the Enskilda banks were accepted as deposits in the banking system but not as reserves. The fact that more Enskilda than Riksbank notes circulated among the public was a result of the law of adverse monetary selection: Gresham’s Law.