Money Demand under Free Banking: Switzerland 1851-1906

This paper studies money demand in Switzerland under free banking before the establishment of the Swiss National Bank. We find that, in addition to income and the interest rate of savings deposits, the number of banks was an important determinant of long run money demand. It also played a role in the monetary adjustment process. We also detect a strong positive long run impact of real income and the interest rate spread on the number of banks. Moreover, positive deviation of the number of banks from long run equilibrium leads to a decrease in the money stock and leads to a fall in interest rates and an increase in real income.