Working Paper No. 61. Hortlund, Per (2005) Is the Law of Reflux Valid? Evidence from Sweden 1878–1913

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 1878–1901 with those of the regime in 1904–1914, 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.