Figure 5: Histograms of average (grey) and dynamic (black) multiplier with a
star network of monetary transactions.
2.5 Monetary cascades and the sandpile model: an at-
tempt at perspective
We try to suggest here an alternative but somewhat complementary interpreta-
tion of the process through which money is created in a credit economy, viewing
it as an avalanche that propagates across the economy through monetary and
credit transactions.
An interesting phenomenon that has been studied in physics is that of self-
organised criticality (SOC), where a system drives itself on the edge of a critical
state, right between stability and instability.11 The classical example is that of
the sandpile model developed by Bak et al (1987).
We think that this interpretation could provide useful insights for the ex-
planation of the process of money creation in a credit economy. If the system
operates right on the edge of a critical state, the introduction of new monetary
base could have a final effect on the monetary aggregate that is unpredictable
and can vary across a wide range of values.
Suppose that banks try to keep an average reserve∕deposit ratio in line
with legislation requirements, but take actions and extend new loans only when
their individual reserve∕deposit ratio reaches a fixed threshold; and that house-
holds try to keep an average currency∕deposit ratio according to their individual
needs∕preferences, but take actions and deposit funds into a bank only when
their ratio reaches a certain upper bound. So that when banks extend new loans
and households make new deposits, they will do it for an amount that exceeds
the marginal availability of funds beyond their own threshold.12 In this way, as
11For a review of the concept, see Turcotte (1999).
12Technically, these behaviours prevent the system from reaching a stationary state of equi-
librium, where all agents have just the desired reserve and currency ratios and simply pass
along any additional funds they receive.
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