Unregulated and regulated free banking: Evidence from the case of Switzerland (1826-1907)

Herger, Nils (2022). Unregulated and regulated free banking: Evidence from the case of Switzerland (1826-1907). Explorations in economic history, 83, p. 101423. Elsevier 10.1016/j.eeh.2021.101423

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This paper provides a reassessment of the free-banking history of Switzerland, which included both a period of unfettered competition (1826–1881) and one of strong banknote regulation (1881–1907). Unfettered competition between note-issuing banks gave rise to a fragmented paper-money system, with limited liquidity banknotes. To increase confidence in these notes, the federal government introduced a minimum-reserve requirement and a mutual-conversion rule in 1881. Based on a theoretical model and new empirical evidence, this paper shows that this enhanced regulation came at a cost, as it led to the overissuing of banknotes and an inelastic paper-money supply.

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