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Yes, but it takes a long time. Sleeping and putting money into the treasury are suggested ways of making it happen.

From thefurie at Lionhead Forums [1]:

The return of those citizens you've lost is linked to travelling around Albion. First you must visit every region that has some form of civilisation so that the game can have the people there die and show corpses to you. Then you must travel around as each region load as well as day passed brings back more and more villagers. Eventually you'll get everyone back.

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