In the following, I will discuss the temptations facing issuers of notes and coins, the binding mechanisms that have been tested, and the potential gains for society associated with a central bank that keeps its word. 2. A king’s word is worth a throne – but sometimes not a krone  It has always been tempting for issuers of money to exploit this privilege. It costs less to produce a coin or a banknote than the value printed on it. The added value accruing to the issuer is called seignorage. Over-issuance of notes and coins leads to inflation and a fall in the value of money, and holders of money pay a so-called inflation tax. A sharp fall or strong rise in the value of money also impairs the functioning of the economy because it becomes more difficult to keep track of changes in the price of one good relative to another. It is important that changes in relative prices are easy for both consumers and producers to observe. Otherwise, the function of prices as conveyors of information for consumption, production and investment decisions will be impaired. The economy will operate less efficiently, resulting in lower growth and welfare. In the earliest monetary systems, the value of money corresponded to the metal value of the coin. Measured in metal, the value of money was inevitably stable. This system was not as dependent on confidence, since the metal content of the coin could in principle be verified in every transaction.
Jan F Qvigstad: On the topic of keeping promises Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at a seminar arranged by Norges Bank and Det Norske Videnskaps-Akademi (The Norwegian Academy of Science and Letters), Oslo, 11 November 2008. * 1. *  *  Why is keeping promises so difficult? This house, which now belongs to the Norwegian Academy of Science and Letters, was built by Hans Rasmus Astrup in 1886-87. Astrup was an entrepreneur. At the age of 20, he left Norway for Barcelona on a ship laden with a cargo of dried cod. He gradually built up a large trading business and later became an industrialist, not unlike businessmen of our own era. 1 For innovators and the business sector, a stable operating environment has always been important, providing a foundation for adaptation, economic growth and social progress. A stable value of money is also a component of this foundation. We were taught as children to keep our promises. If we made a promise, we had to make good on it. But we were also taught that we should not promise too much. If we do not keep our word, others lose confidence in us and our credibility takes a toll. In recent months, we have witnessed that this is of particular importance for the financial system. A proximate example is the situation in our neighbouring country Iceland.