ABSTRACT

So, while there are always increasing marginal returns to scale in reserve holding, these returns diminish rapidly and once a certain point is passed the gains from further expansion become more or less negligible. In any case, as Selgin (1988: 151) argues:

For a single bank to gain a monopoly of note [or deposit] issue it is not sufficient that banking involve substantial fixed costs, with relatively small marginal costs, from issuing additional notes [or deposits]. The bank must also take steps to improve the popularity of its notes relative to [substitutes], or it must suffer the expense of redeeming them soon after their issue. If the costs to the bank of extending the market or of redemption rise rapidly enough at the margin, its average costs per unit of outstanding currency will rise above the minimum level long before the point at which it would saturate the demand for currency. In this case the industry cannot be considered a natural monopoly ...