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A private currency is a currency issued by a private institution. It is often contrasted with fiat currency issued by governments.
In many countries, the issue of private paper currencies is severely restricted by law. However, in Scotland and Northern Ireland private sector banks are licensed by the government to print their own paper money.
Today there are several privately issued electronic currencies in circulation, such as digital gold currency, that function as money. Transactions in these currencies represent an annual turnover value in billions of US dollars.
History
In the United States, the Free Banking Era lasted between 1837 and 1866, during which almost anyone could issue their own paper money. States, municipalities, private banks, railroad and construction companies, stores, restaurants, churches and individuals printed an estimated 8,000 different monies by 1860. If the issuer went bankrupt, closed, left town, or otherwise went out of business the note would be worthless. Such organizations earned the nickname of "wildcat banks" for a reputation of unreliability and that they were often situated in far-off, unpopulated locales that were said to be more apt to wildcats than people. On the other hand, according to Lawrence H. White's article in * "it turns out that “wildcat” banking is largely a myth. Although stories about crooked banking practices are entertaining—and for that reason have been repeated endlessly by textbooks—modern economic historians have found that there were in fact very few banks that fit any reasonable definition of wildcat bank." The National Bank Act of 1863 ended the "wildcat bank" period.
In Australia, the Bank Notes Tax Act of 1910 basically shut down the circulation of private currencies by imposing a prohibitive tax on the practice. Many other nations have similar such policies that eliminate private sector competition.
One example of a currency that lost government support but retained use amongst a community is the Swiss dinar.
Ithaca hours
The city of Ithaca in Western New York State has experimented with barter [http://www.ithacahours.com/ in which participating workers exhange services for Ithaca Hours which are used to buy goods and services forming a subprivate currency for a small locality. The legality of this scheme may hinge on it being tax evasion.
Currency backing
Today many private currencies are backed by a commodity to increase asset security and nullify inflation, which can be caused by an issuer increasing money supply. Some use established and historic forms of money, such as silver or gold, as in the case of digital gold currencies or the Liberty Dollar.
It is possible for privately issued money to be backed by any commodity, although some people argue that perishable goods can never be used as currency, other than in bartering. One criterion that is regarded as critical for any currency backing material is its fungibility. Alternative views suggest paper money backed by energy (measured for example in "joules of electricity" or "joules of oil"), transport (measured in kg·km/h), or food for instance, may be used in the future.
It is important to note that as long as money is an agreement to use something as a medium of exchange and store of value, its up to the greater community (or government) to decide whether money should be or needs to be backed, and if so, by what materials.
See also
"Private currency"