Monetization and the behavior of velocity in Sweden, 1871–1913

The income velocity of money declined sharply in Sweden between the 1870's and the outbreak of World War I. This decline is explained by a monetization process. An account of this process is given focusing on (a) the growth of commercial banking, (b) changes in wage contracts and in labor markets, and (c) changes in exchange arrangements in the markets for goods. A number of proxy measures of the spreading use of money are presented and included in regressions on velocity. The influence of the monetization variables is compared to the effects of the standard explanatory variables in money demand studies, that is, of real income and interest rates. The econometric results support the view that monetization variables significantly contributed to the fall in velocity. These results question the luxury-good hypothesis of money, suggesting that the standard approach of including real income as an explanatory variable in money demand studies covering long spans of time runs the risk of ignoring important determinants of the secular behavior of velocity.