The fractional reserve system benefits the banks immensely, according to the documentaries I’ve been watching recently. However, I began wondering why they don’t get into the paper business too.

If you take the banks that are rated A+, such as Barclays, Natwest, HSBC, then as a shopkeeper, bar owner, baker, etc., I would have no problem accepting a HSBC promise note for 10 pounds. Eventually redemption would lower as confidence in the value of the promise note itself would hold (a là our fiat currency). Are there legal reasons the banks don’t move in on this?

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    Are you talking about banks printing up the same money as the government, or different money (a competing currency)? That changes the scope of your question. – mbhunter Jun 26 '11 at 5:20
  • They do. It's called "Stock Options". – Philipp May 15 '16 at 9:28

In the US, this was the case during the 19th century. There was a system of "subscriptions" between banks, where larger banks backed the smaller banks to some extent. In trade, notes from distant banks were not accepted or discounted relative to known local banks, or silver/gold coinage.

There were a number of problems with this system which came to a head during the Panic of 1907. During this crisis, a cascading series of banking failures was only stopped by the personal intervention of JP Morgan. Even when Morgan intervened, it was very difficult to make capital available in a way that avoided the panic. The subsequent creation of the Federal Reserve was a response to that crisis.

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Who says they don't?

In the United Kingdom the Bank of England and the Bank of Scotland print the money.

In some other countries (like Hong Kong, Israel, and the US) commercial banks were issuing the currency at some point of time, but now the governments do that.

The problem with commercial banks issuing currency is the control. If a bank is allowed to print money - how can the amount of currency be controlled? If it is controlled by the government then the bank will be just a printing press, so what's the point? And since governments now want to control the monetary policy, banks have no reason to just be printing presses for the government, the governments have their own.


Apparently in Hong Kong it is still the case, as I'm sure it is in some other places in the world as well.

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  • FWIW, some specific commercial banks in Hong Kong still issue currency. See en.wikipedia.org/wiki/Banknotes_of_the_Hong_Kong_dollar .. "Under licence from the HKMA, three commercial banks issue their own banknotes for general circulation in the region. Notes are also issued by the HKMA itself." and under the section "Note-issuing banks". – Chris W. Rea Jun 25 '11 at 21:52
  • @Chris - wasn't sure about it, remember it was in the past, didn't bother to check if it's still so in the present, thanks for the correction:-) – littleadv Jun 26 '11 at 5:08
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    No problem. I only knew myself because I just got back from a vacation that included time in Hong Kong, and I had noticed the HSBC vs. Standard Chartered versions of the 100 HKD bill. :-) – Chris W. Rea Jun 26 '11 at 13:11
  • +1 for an very interesting response. I had no idea such a thing existed. – gef05 Jun 29 '11 at 13:39
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    Since you specifically said United Kingdom, I'll point out that several Northern Irish banks also print their own money. Plus, it's not only the Bank of Scotland that prints them in Scotland. – Vicky Jul 4 '11 at 9:42

In Scotland, each bank issues its own separate notes. It's not uncommon to see identical-valued £10 notes, for example, from three different banks in one's wallet.

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Are you talking about printing up more of the same kind of bill, or printing up a different kind of bill? You'll have different answers based on which one you mean.

If it's a different kind of bill:

Governments don't like competition in this matter.

In US history there are examples of the government shutting alternative currencies down. A recent run at an alternative currency is the Liberty Dollar. The similarity is not lost on BitCoin or even Chuck E. Cheese (last one is a satire, but I did worry for a second as I still have a bunch of those tokens!).

If it's the same kind of bill:

The currency is a tool of the government (in the US) and it does the sourcing for its production. There isn't a whole lot of reason for others to get involved, really. It's special paper, special plates, special presses, special everything, and doing it in one place ensures some consistency of product. There aren't any compelling reason to open up another manufacturing channel to produce exactly the same product.

There's no real economic benefit for banks to print their own money. The larger ones play a key role in shaping how much is printed, but actually printing the bills is an offshoot of this.

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  • It's not matter of competition, but rather matter of controlling inflation. Uncontrollable amount of currency makes it less valuable. Otherwise why allow banks, but not anyone with a printer at home to print money? – littleadv Jun 26 '11 at 5:12
  • OP's question can be taken a couple of ways. I didn't choose the way the other answerers did. I'm assuming that the currency competes with the prevalent one. Others are saying it's more of the same type of bill. That changes the scope. – mbhunter Jun 26 '11 at 5:22
  • if taking your direction - then every bank prints their own paper/bank notes which are called "cashiers checks" or "money orders" or "traveller's checks" or many other kinds of bank notes which can be traded for cash equivalent, thus if that was what the OP meant - the question would not exist. – littleadv Jun 26 '11 at 5:30
  • Edited my answer. BTW, your money order analogy doesn't work because you don't trade the money orders themselves. Money orders by themselves are essentially worthless; they only have value because they can be cashed in. You don't see traveller's cheque markets or money order markets or cashier's check markets. You take them to a bank and deposit them, for dollars. – mbhunter Jun 26 '11 at 5:39
  • That's not true at all. A draft of any kind is an order to pay on demand. I can write a bunch of $1 personal checks written to cash and they are worth $1 to any bearer, assuming my account has funds. Modern US currency is backed by the individual Federal Reserve Banks. Whenever you have multiple forms of one currency, people tend to hoard the form with the highest perceived value. A "US Treasury Note", "Silver Certificate" or "Gold Certificate" were perceived to be more valuable than a Federal Reserve Note. – duffbeer703 Jun 29 '11 at 16:37

There is absolutely no logical reason why each nation does not own and control banking and thus the supply of money.

Any system including the financial system works exactly the same way, regardless of ownership.

Banking depends solely on the confidence of the customers/investors.

Therefore when a sovereign nation/state has ownership of the banks, the profits are kept in-house, within the nation, which is actually a bonus, and taxes can be off-set by profits, which is another benefit.

Any improvement or benefit by the private ownership of banking is a total myth.

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Any person at any time may produce their own currency, one can even do so on the back of a paper napkin, ripped beer coaster or whatever. This is NOT a banking privilege, it is within the lawful ability of anyone capable of engaging in commerce.

It is called a 'negotiable instrument' ... it gives the holder rights to a sum of money. Notice that I say 'holder' ... this is what distinguishes it from a non-negotiable instrument, the fact that you don't need to redeem it from source, you can pass it to another who then becomes the 'holder in due course' and thus obtains the rights conferred.

The conferable rights over a sum of money (or, indeed, other asset) are themselves 'value'

Do banks do this ? Yes, all the time! ... one of the simplest examples are cheques drawn against the bank, which are considered 'as good as cash'. Usually they will be drawn out to the order of the person you wish to pay ... but can equally be drawn out to bearer. The only reasons they resist making out to bearer is :

  1. Out of some piffling concern over your security (blah)
  2. Because the bank (and the Taxman) likes to know all things

But you can write your own at 'any time' on 'any thing' ... See the apocryphal, yet deliciously entertaining, tale of the 'negotiable cow'

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  • Then why did Boggs get into trouble? en.wikipedia.org/wiki/J._S._G._Boggs – JTP - Apologise to Monica Nov 3 '14 at 1:39
  • If you approach the boundaries of the law, it's not unusual to be investigated to verify that you stayed inside those boundaries. Boggs appears to be acquitted, so the investigation found no transgressions, but it's understandable why he was investigated. – MSalters Nov 4 '14 at 14:49
  • @JoeTaxpayer. Copyright law. That's a different thing altogether. There's an amusing account of the case in Geoffrey Robertson's excellent book The Justice Game. – TRiG Jun 15 '15 at 19:55

Actually, banks do issue their own money, it's just not embodied as a piece of paper, it's called checkbook money and in the US, it's backed by 3$ per every 100$ promised, that's the magic of "fractional reserve banking."

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