In the past, I have written about central banks and the state monopoly over money. The main point of that previous post is that although economists tend to dislike monopoly and extol the virtues of competition, there is surprisingly little criticism of central banks among these same economists. A central bank has a monopoly over currency. Yet, as that post details, the issuance of money does not seem to have any of the characteristics traditionally used to justify a monopoly. This naturally begs the question: Why has the state’s monopoly over money persisted for so long? Why is this monopoly so durable?
One place to start is with political motivations. A common answer that people will provide is that the state’s monopoly over money is motivated by its desire for revenue. If one has a monopoly over money, one could debase the currency (e.g., turn 100 silver coins into 110 silver coins by reducing the silver content of the coins) or one could simply print more money to increase revenue. However, that argument is incomplete as it leaves several questions unanswered.