Who should issue currency

Under capitalism incomes emerges as a result of market transactions which are indissolubly linked up with production.

An important quality dimension of a currency is the reliability of the redemption pledge—namely, the issuer's promise to exchange it for another money on demand at a specified rate.Privatizing currency means leaving it to commercial banks to issue media of exchange that are claims to the reserve asset that defines the monetary standard, and makes the enforcement of these claims a matter of commercial law rather than of public policy.

The chief weakness of central banks as currency issuers is their inability to bind themselves to their redemption promises.A central bank enjoys "sovereign immunity" from claimholder lawsuits, and legal restrictions on the public's choice in currency mean that the central bank has little fear of losing customers for bad behavior.At the same time, central bankers—especially in developing countries—face political pressure to provide the short-run benefits that surprise monetary expansion can deliver (namely extra revenue to pay the government's bills, extra stimulus to the economy, or extra liquidity for the banking system).The shareholders' incentive to avoid devaluation or default compels them to limit the volume of the bank's liabilities, and makes the bank's redemption commitments credible.

In the United States, the Free Banking Era lasted between 1837 and 1866, when almost anyone could issue paper money. If an issuer went bankrupt, closed, left town, or otherwise went out of business the note would be worthless.