Replacing bank money with base money: Lessons for CBDCs from the ending of private banknotes in Sweden

Abstract

A number of central banks have started to investigate the possibility of issuing so-called Central Bank Digital Currencies (CBDCs). The aim may be to compete with cryptocurrencies of different kinds but also to replace digital commercial bank money with central bank issued digital money, i.e. replacing bank money with central bank-issued basemoney. In this paper we study a similar experiment when the Swedish central bank, the Riksbank, in 1903 replaced private banknotes with their own notes. The result of this policy was a massive increase in commercial bank credit due to the increase in base money, spurring the ongoing boom even further. A boom that worsened the 1907 crisis. The result is thus questioning the notion that increased monetary issuance by a monetary authority to replace other financial assets as private money or cryptoassets should lead to increased financial stability – as, in fact, it led to the opposite.