Henry Thornton's Paper Credit of Great Britain (1802) established once and for all the notion that central banks have the prime responsibility for controlling the money stock and the price level. This theme and the analytical framework underlying it reappeared in the famous Bullion Report...

This chapter considers the law of reflux and its alternative interpretations: (1) as a monetary policy rule for stabilizing the price level and (2) as rule for individual banks to follow to remain liquid. The chapter argues that Adam Smith endorsed only the second interpretation, and that the...