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Is the Law of Reflux Valid? Evidence from Sweden 1878–1913

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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.

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  • Hortlund, Per, 2005. "Is the Law of Reflux Valid? Evidence from Sweden 1878–1913," Ratio Working Papers 61, The Ratio Institute.
  • Handle: RePEc:hhs:ratioi:0061
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    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 classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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