CIAO DATE: 07/2012
June 2012
Privately issued money can benefit consumers in many ways, particularly in the areas of value stability and product variety. Decentralized currency production can benefit consumers by reducing inflation and increasing economic stability. Unlike a central bank, competing private banks must attract customers by providing innovative products, restricting the quantity of notes issued, and limiting the riskiness of their investing activities. Although the Federal Reserve currently has a de facto monopoly on the provision of currency in the United States, this was not always the case. Throughout most of U.S. history, private banks issued their own banknotes as currency. This practice continues today in a few countries and could be reinstituted in the United States with minimal changes to the banking system. This paper examines two ways in which banks could potentially issue private money. First, U.S. banks could issue private notes redeemable for U.S. Federal Reserve notes. Considering that banks issuing private notes in Hong Kong, Scotland, and Northern Ireland earn hundreds of millions of dollars annually, it appears that U.S. banks may be missing an opportunity to earn billions of dollars in annual profits. Second, recent turmoil in the financial sector has increased demand for a stable alternative currency. Banks may be able to capture significant portions of the domestic and international currency markets with a private, commodity-based currency. Legislation clarifying the rights of private banks to issue currency could help clear the path toward a return to private money.
Resource link: Competition in Currency: The Potential for Private Money [PDF] - 2.8M