Thus as a consequences (perhaps unintended) of monopolized note issue, the liabilities of the privileged bank acquire a special status in the banking system; they become a kind of reserve media, supplementing and even superseding reserves of commodity money. Unlike deposit liabilities of non-note-issuing banks and unlike any of the bank liabilities in a system with competing note-issuers, the liabilities of a monopoly bank of issue are a form of high-powered money. Issues of such liabilities add to the base money of the system. This means, in effect, that a monopoly bank of issue i, in the short in the short run at least, exempt from the principle of adverse clearings. The liabilities it issues not employed as currency in circulation become lodged in the reserves of deposit banks, where they cause a multiplicative expansion of credit. In general (assuming a closed economy) these liabilities will not be returned to their issuer for redemption even though their issue, and the multiplicative expansion of credit caused by it, is not justified by any prior excess demand for inside money. In other words, in a closed system a monopoly bank of issue can cause an inflationary increase in the money supply — without suffering any negative consequences. Unless some external short-run control is imposed on it, a monopoly bank of issue even when its issues are convertible into commodity money can for some time at least pursue any loan-pricing policy it desires, arbitrarily expanding or contracting the money supply and causing widespread changes in nominal income and prices.
— George A. Selgin, The Theory of Free Banking (Totowa: Rowman & Littlefield, 1988), pp. 48–49.