Commodities are impossible to print.  Inflating the money supply is much more difficult.  A large state can institute paper as a medium of exchange.  A small state would have a difficult time.  Particularly, when there’s a multitude of small states.  There will be a tendency to use a commodity money the more states there are.  A multitude of paper notes would essentially place them back in a state of barter or partial barter.

Issuance and acceptance are two different things.  Of course, a small state can issue paper notes, but that doesn’t mean they’ll be accepted.  Even if it’s fiat money, the fiat only exists in that area.  The other states don’t have to accept it.  That state won’t be able to trade beyond its borders.  So, they’ll have to adopt a commodity standard to purchase goods.  This will be the tendency until the entire world uses commodities.

There is not an exchange rate if a state forces people to use paper.  Say Ruritania issues paper notes.  What are a million Rurs equal to?  What about two million?  Another state doesn’t have to accept Rurs for payment.  They can keep adding zeros, but it’s still worthless.  The paper money would only be accepted in the state that has the fiat.  If one state uses gold and another silver, the exchange rate is the ratio between the two.

It’ll be much more difficult to expand credit.  I don’t doubt it would be tried, but neighboring states would notice.  Each small state would be held in check by other states.  The fewer paper currencies, the easier it’s to expand.  They can print money or add it digitally.  It’ll be even easier if we are cashless.  A multitude of paper currencies is a barrier.  They can make a giant union, and have them all use the same paper.

Nobody can be trusted with a monopoly of money.  Paper money is dysfunctional to the very purpose of money.  The purpose of money is to be a medium of exchange.  Paper can’t serve this purpose.  Any use of paper as money must come with a fiat.  It’ll never be accepted on the market.  We are more likely to use a commodity money the more states there are.  Even if a ruler is extremely stubborn, he must adopt a commodity money eventually.

Reference

Hans-Hermann Hoppe; Democracy—The God That Failed