2 Central Banking and Monetary Policy in Sweden during the Long Nineteenth Century Anders Ogren The working of the gold standard is surrounded by interpretations and explanations based on theory. The most fundamental of these is the idea of central banks and their monetary policy as summarized in the expression 'the rules of the game'. The 'rules of the game' means that the monetary policy of the central banks should aim to facilitate the effects of capital inflows or outflows on domestic markets - i.e. central banks' monetary policy should work in a pro-cyclical manner. It is even said that a central bank should amplify the effects of the capital flows to ensure a quicker and more efficient adjustment of the current account. Regardless of this theoretical explanation for the working of the gold standard, empirical research points in one direction - that central banks used sterilization; i.e. that they ran a monetary policy that was meant to counteract the effects of the international capital flows. 1 But on the other hand, we know that admitting long-term imbalances by steriliz- ing effects of international capital flows should make it impossible to maintain the fixed exchange rate. So, clearly, there were disciplinary forces within the gold standard regime - they were just not as direct or working along the same channels as is proposed by the idea of the 'rules of the game'. There was, in fact, flexibility in the system - which is one of the explanations as to how the gold standard regime has managed to stay in place for such a long time. 2 The gold standard, as with any fixed exchange rate, was a stable regime in terms of external relations - i.e. prices on foreign currencies were stable. However, such external stability was met by internal, domestic adjustment in prices. So, the general public stability in consumer prices was not a result of the gold standard. As can be seen in Figure 2.1, periods of increasing prices were met with period of falling prices - so, in this 17 anders.ogren@gmail.com