Because it is not realistic. In every nation that has ever existed, the supplier of money has always been a monopolist. And this is precisely because the supplier has requested taxes to be paid in that currency that they supply. If you have multiple suppliers of money, then you literally destroy the entire basis of the state. The whole thing comes crashing down.
> era of free banking in the US, banks issued their own currency
The free banking era illustrates the problem. Rates are endogenous to the money supply. That circularity promotes a hyper-volatile credit cycle. There is no natural counter-balance we’ve discovered to that tendency. (Apart from ruinous boom-and-bust cycles.)
> They still issued USD, which was the only legal currency.
As I recall, they issued the paper version of stablecoins: they were denominated in units of US dollars, but they weren’t government money, and they traded at floating values, typically (aside from many other factors influencing value) declining in value with distance from the issuing bank.
The discount on the notes was inevitably related to the probability that the issuing bank would honor the notes and redeem them with gold.
When the Fed lost all credibility with exchanging their banknotes for gold, we had the Great Depression. FDR then defaulted on the gold bonds, basically stealing from the good citizens who had trusted the government.
I mean exactly that. They issued banknotes (that's why paper money is sometimes called banknotes). The banknotes were denoted in dollars, like bank checks today.
https://en.wikipedia.org/wiki/Chartalism