Monetary Stability and Backing Lessons for Public and Private Money

A key question in monetary economics is whether only states can ensure a stable value of money, or whether private issuers (such as stablecoins) can achieve the same outcome. The paper by Barthélemy et al. (2025) develops a general framework showing that monetary stability depends less on the “public” nature of money and more on the issuer’s ability to acback its value through market-making, taxation power, and control over exchange conditions.

Executive summary

The paper studies how the value of money—whether issued by a state or a private entity—depends on its dual role as legal tender and as an official medium of exchange. It shows that what really matters for price stability is not only these institutional roles, but the issuer’s willingness and capacity to actively trade money against goods and assets at scale.

A central result is that if the issuer (state or private) does not commit enough resources to support its official exchange mechanisms, parallel markets emerge where money trades at different prices. In this sense, stablecoins face the same fundamental challenge as sovereign currencies: credibility requires backing, liquidity provision, and market depth. 

Traditional theories argue that only states can stabilize money because they can impose taxes, enforce legal tender laws, and conduct monetary policy. However, the rise of stablecoins challenges this view by showing that private issuers can also attempt to peg value.

The key questions are therefore: What can governments do that private issuers cannot—and is this difference essential for monetary stability?

Public and private money follow the same logic, but the public has better control

1/ Money stability depends on two public roles

Money derives its stability not only from being a store of value or medium of exchange, but from two critical state-linked functions:

• Legal tender for taxes and public debt
• Official medium of exchange between the state and private sector 

These roles help anchor demand and influence price levels.

2/ Market-making is central to price determination

The state stabilizes money by acting as a market maker—buying and selling goods, assets, or foreign currency at targeted prices. Monetary policy is therefore not only about setting rules, but about actively shaping market exchange conditions.

3/ Official policies do not guarantee a single price

Even when money is used for taxes and official transactions, history shows that price control is imperfect. Currency pegs, black markets, and multiple exchange rates often emerge when official interventions are limited or inconsistent.

4/ Limited backing leads to parallel markets

If the issuer fixes an official price but does not supply enough liquidity, private agents create secondary markets. Money then trades at different prices depending on access to official channels, leading to:

• Arbitrage opportunities
• Rent extraction by privileged agents
• Financial repression effects

5/ “Dash for cash” and instability dynamics

When agents rush to obtain money to meet obligations (e.g., taxes or debt repayment), shortages can emerge. This “dash for cash” amplifies price distortions and can trigger debt-deflation spirals similar to those observed under metallic standards.

6/ Private issuers face the same constraints as states

Stablecoin issuers can, in principle, stabilize value if they hold sufficient real backing assets and maintain deep primary markets for redemption and issuance.

However, unlike states, they lack tax enforcement power and legal trade restrictions. This makes stable pegs harder to sustain without stronger backing or tighter market access control.

Stablecoins, free banking, and modern implications

The framework helps explain:

• Stablecoin dynamics, where primary (issuer) and secondary markets coexist
• Arbitrage behavior during peg stress events
• Historical episodes like free banking as in the US in the 19th century, where private money stability depended on redeemability in external assets

It highlights that stability is not guaranteed by public status, but by credible backing and frictionless access to redemption mechanisms.

Conclusion

Monetary stability does not strictly depend on whether money is public or private. Instead, it depends on whether the issuer—state or firm—has enough resources and commitment to actively support its value in markets.

States have unique tools such as taxation and coercive trade restrictions, but private issuers can replicate stability in principle if they can sustain strong backing and reliable market access. Without these conditions, both public and private monies risk fragmentation into multiple competing price systems.

About the authors

Jean Barthélemy is deputy head of the financial economics research department at the Banque de France. His areas of expertise include monetary policy, fiscal policy, theoretical macroeconomics and digital finance. Jean holds a PhD in Economics from the Paris School of Economics.

Eric Mengus is an associate professor of economics at HEC Paris and a research fellow at CEPR. His research focuses on monetary economics and international finance, particularly sovereign debt, fiscal–monetary interactions and money. Eric holds a PhD in Economics from the Toulouse School of Economics.

Guillaume Plantin is Professor in the Department of Economics at Sciences Po (Paris) and a CEPR Research Fellow. His recent work focuses on the interaction between monetary policy, public finance and financial stability.

Disclaimer: The opinions expressed are solely those of the authors and should not be interpreted as reflecting the views of the Banque de France or the Eurosystem.