Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 67: Clearing vs. Leakage: Does Note Monopoly Increase Money and Credit Cycles?

Per Hortlund
Additional contact information
Per Hortlund: The Ratio Institute, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: The effects of note monopolisation on the amplitude of money and credit cycles are studied. Note monopolisation trades clearing for leakage. If the central bank's reserve ratio is larger than that of the commercial banks, and if the currency-deposit ratio is sufficiently large, the leakage effect could domi-nate the loss-of-clearing effect (base expansion), such that the credit capacity of the banking system decreases. This was the case when the Bank of Sweden gained a note monopoly in 1904. Money and credit cycles should therefore have become smaller. Swedish bank data for 1871–1938 reveal that money cycles became smaller, but credit cycles larger. The latter is attributed to an increasing time-demand deposit ratio, which increases the credit capacity of the banking system.

Keywords: Clearing mechanism; Credit expansion; Currency-deposit ratio; Fiduciary money; Free banking; Leakage; Money multiplier

JEL-codes: E32; E42; E51

25 pages, February 16, 2005

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