Where Is Private Note Issue Legal?

September 12, 2012

During the 18th, 19th and early 20th centuries, the United States had free banking. One characteristic of free banking was the competition to issue notes. Over time, it became accepted that the issuance of notes and coins should be provided by the government, thus creating a government monopoly, say William McBride, an economist at the Tax Foundation, and Kurt Schuler, a senior fellow in financial history at the Center for Financial Stability in New York.

Four places still have local issuer of notes: Scotland, Northern Ireland, Hong Kong and Macao. These places benefit from not having a government monopoly on issuing notes.

  • Since the notes are not counted as being issued, they do not require reserves to back them, until they are out of the banks' hands and in circulation.
  • In addition, banks that issue notes can advertise on them to try and attract new customers.

Government issued notes need to meet two demands: the first being people want notes to make hand-to-hand transactions and the second being that banks can use them as a reserve. These demands create supply shortages during seasonal peaks in demand for currency, such as Christmas, or during times of natural disaster. The supply shortages of notes make interest rates and economic activity more volatile. Allowing private entities to issue their own notes would mean that banks would not have to hold extra reserves during times of peak demand for currency.

In the United States, it is legal for federally chartered banks and some state-chartered banks to issue notes. Many argue that allowing banks to issue notes may undermine the central bank. However, the central bank can still exercise control over a monetary base that constitutes the final settlement of debt in a national monetary system.

Source: William McBride and Kurt Schuler, "Where Is Private Note Issue Legal?" Cato Journal, Spring/Summer 2012.

 

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