Seigniorage

Seigniorage /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage (from the Old French seigneuriage, "right of the lord (seigneur) to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways:

  • Seigniorage derived from specie (metal coins) is a tax added to the total cost of a coin (metal content and production costs) that a customer of the mint had to pay, and which was sent to the sovereign of the political region.[1]
  • Seigniorage derived from notes is more indirect; it is the difference between interest earned on securities acquired in exchange for banknotes and the cost of producing and distributing the notes.[2]

"Monetary seigniorage" is where sovereign-issued securities are exchanged for newly-printed banknotes by a central bank, allowing the sovereign to "borrow" without needing to repay.[3] Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the money supply during GDP growth and meeting yearly inflation targets.[3]

Seigniorage can be a convenient source of revenue for a government. By providing the government with increased purchasing power at the expense of public purchasing power, it imposes what is metaphorically known as an inflation tax on the public.

Examples

Seigniorage is the positive return, or carry, on issued notes and coins (money in circulation). Demurrage, the opposite, is the cost of holding currency.

An example of an exchange of gold for "paper" where no seigniorage occurs is when a person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and redeems it in gold. That person began with and ends up with exactly one ounce of gold.

In another scenario, instead of issuing gold certificates a government converts gold into non-gold standard based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency, keeps the currency for one year, and exchanges it for an amount of gold at the new market value. If the value of the currency relative to gold has changed in the interim, the second exchange will yield more (or less) than one ounce of gold (assuming that the value, or purchasing power, of one ounce of gold remains constant through the year). If the value of the currency relative to gold has decreased, the person receives less than one ounce of gold and seigniorage occurred. If the value of the currency relative to gold has increased, the person receives more than one ounce of gold; seigniorage did not occur.

Ordinary seigniorage

Ordinarily, seigniorage is an interest-free loan (of gold, for example) to the issuer of the coin or banknote. When the currency is worn out the issuer buys it back at face value, balancing the revenue received when it was put into circulation without any additional amount for the interest value of what the issuer received.

Historically, seigniorage was the profit resulting from producing coins. Silver and gold were mixed with base metals to make durable coins. The British pound sterling was 92.5 percent silver; the base metal added (and the pure silver retained by the government mint) was, less costs, the profit – the seigniorage. Before 1933, United States gold coins were 90 percent gold and 10 percent copper. To make up for the lack of gold, the coins were over-weighted. A one-ounce Gold American Eagle will have as much of the alloy as needed to contain a total of one ounce of gold (which will be over one ounce). Seigniorage is earned by selling the coins above the melt value in exchange for guaranteeing the weight of the coin.

Under the rules governing the monetary operations of major central banks (including the Federal Reserve), seigniorage on banknotes is the interest payments received by central banks on the total amount of currency issued. This usually takes the form of interest payments on treasury bonds purchased by central banks, putting more dollars into circulation. If the currency is collected, or is otherwise taken permanently out of circulation, the currency is never returned to the central bank; the issuer of the currency keeps the seigniorage profit by not having to buy back worn-out currency at face value.

Solvency constraints of central banks

The solvency constraint of a standard central bank requires that the present discounted value of its net non-monetary liabilities (separate from monetary liabilities accrued through seigniorage attempts) be zero or negative in the long run. Its monetary liabilities are liabilities in name only, since they are irredeemable. The holder of base money cannot insist on the redemption of a given amount into anything other than the same amount of itself, unless the holder of the base money is another central bank reclaiming the value of its original interest-free loan.

Seigniorage as a tax

Economists regard seigniorage as a form of inflation tax, returning resources to the currency issuer. Issuing new currency, rather than collecting taxes paid with existing money, is considered a tax on holders of existing currency.[4] Inflation of the money supply causes a general rise in prices, due to the currency's reduced purchasing power.

This is a reason offered in support of free banking, a gold or silver standard, or (at a minimum) the reduction of political control of central banks, which could then ensure currency stability by controlling monetary expansion (limiting inflation). Hard-money advocates argue that central banks have failed to attain a stable currency. Orthodox economists counter that deflation is difficult to control once it sets in, and its effects are more damaging than modest, consistent inflation.

Banks (or governments) relying heavily on seigniorage and fractional reserve sources of revenue may find them counterproductive.[5] Rational expectations of inflation take into account a bank's seigniorage strategy, and inflationary expectations can maintain high inflation. Instead of accruing seigniorage from fiat money and credit, most governments opt to raise revenue primarily through formal taxation and other means

Contemporary use

The 50 State Quarters series of quarters (25-cent coins) began in 1999. The U.S. government thought that many people, collecting each new quarter as it rolled out of the United States Mint, would remove the coins from circulation.[6] Each complete set of quarters (the 50 states, the five inhabited U.S. territories, and the District of Columbia) is worth $14.00. Since it costs the mint about five cents to produce one quarter, the government made a profit when someone collected a coin.[7] The Treasury Department estimates that it earned about $6.3 billion in seigniorage from the quarters during the program.[8]

Some countries' national mints report the amount of seigniorage provided to their governments; the Royal Canadian Mint reported that in 2006 it generated $93 million in seigniorage for the government of Canada.[9] The U.S. government, the largest beneficiary of seignorage, earned about $25 billion in 2000.[10] For coins only, the U.S. Treasury received 45 cents per dollar issued in seigniorage for the 2011 fiscal year.[11]

Occasionally, central banks have issued limited quantities of higher-value banknotes in unusual denominations for collecting; the denomination will usually coincide with an anniversary of national significance. The potential seigniorage from such printings has been limited, since the unusual denomination makes the notes more difficult to circulate and only a relatively-small number of people collect higher-value notes.

Over half of Zimbabwe's government revenue in 2008 was reportedly seigniorage.[12] The country has experienced hyperinflation, with an annualized rate of about 24,000 percent in July 2008 (prices doubling every 46 days).[13]

International circulation

The international circulation of banknotes is a profitable form of seignorage. Although the cost of printing banknotes is minimal, the foreign entity must provide goods and services at the note's face value. The banknote is retained as a store of value, since the entity values it more than the local currency. Foreign circulation generally involves large-value banknotes, and can be used for private transactions (some of which are illegal).

American currency has been circulating globally for most of the 20th century, and the amount of currency in circulation increased several-fold during World War II. Large-scale printing of the United States one hundred-dollar bill began when the Soviet Union dissolved in 1991; production quadrupled, with the first trillion-dollar printing of the bill. At the end of 2008, U.S. currency in public circulation amounted to $824 billion and 76 percent of the currency supply was in the form of $100 bills (twenty $100 bills per U.S. citizen).[14] The amount of U.S. currency circulating abroad is controversial. According to Porter and Judson,[15] 53 to 67 percent was overseas during the mid-1990s. Feige[16] estimates that about 40 percent is abroad. In a New York Federal Reserve publication, Goldberg[17] writes that "about 65 percent ($580 billion) of all banknotes are in circulation outside of the country". These figures are largely contradicted by Federal Reserve Board of Governors Flow of Funds statistics,[18][19] which indicate that $313 billion (36.7 percent) of U.S. currency was held abroad at the end of March 2009. Feige calculates that since 1964, "the cumulative seigniorage earnings accruing to the U.S. by virtue of the currency held by foreigners amounted to $167–$185 billion and over the past two decades seigniorage revenues from foreigners have averaged $6–$7 billion dollars per year".

The American $100 bill has competition from the €500 note, which facilitates the transport of larger amounts of money. One million dollars in $100 bills weighs 22 pounds, and is difficult to carry this much money without a briefcase and physical security. The same amount in €500 notes would weigh less than three pounds, which could be dispersed in clothing and luggage without attracting attention or alerting security devices. In illegal operations, transporting currency is logistically more difficult than transporting cocaine because of its size and weight, and the ease of transporting its banknotes makes the euro attractive to Latin American drug cartels.[20]

The Swiss 1,000-franc note, worth slightly more than $1,000, is probably the only other banknote in circulation outside its home country. However, it does not have a significant advantage over the €500 note to the non-Swiss; there are 20 times as many €500 notes in circulation, and they are more widely recognized. As a reserve currency, it makes up about 0.1% of the currency composition of official foreign-exchange reserves.

Governments vary in their issuance of large banknotes; in August 2009, the number of Fr. 1,000 notes in circulation was over three times the population of Switzerland. For comparison, the number of circulating £50 banknotes is slightly less than three times the population of the United Kingdom; the Fr. 1,000 franc note is worth about £600. The British government has been wary of large banknotes since the counterfeiting Operation Bernhard during World War II, which caused the Bank of England to withdraw all notes larger than £5 from circulation. The bank did not reintroduce other denominations until the early 1960s (£10), 1970 (£20) and March 20, 1981 (£50).

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See also

References
  1. "Quarterly Review" (PDF). Minneapolisfed.org. 1997. Retrieved 14 January 2019.
  2. Bank of Canada (March 2012). "Backgrounders: Seigniorage" (PDF). Retrieved 2 January 2013.
  3. Neumann, Manfred J.M. "Seigniorage in the United How Much Does the U.S. Government Make from Money Production?" (PDF). Federal Reserve Bank of St. Louis. Retrieved 17 June 2014.
  4. Snowdon, Brian; Vane, Howard R. (11 April 2018). An Encyclopedia of Macroeconomics. Edward Elgar. ISBN 9781840643879. Retrieved 11 April 2018 – via Google Books.
  5. Tara McIndoe-Calder, Hyperinflation in Zimbabwe: Money Demand, Seigniorage and Aid shocks, Central Bank of Ireland; University of Dublin - Institute for International Integration Studies, May 1, 2009
  6. United States Mint 50 State Quarters® Design Use Policy, Usmint.gov, Retrieved December 5, 2013
  7. "Frequently Asked Questions". The 50 State Quarters Program of the United States Mint. United States Mint. Archived from the original on 2007-07-13. Retrieved 2009-10-18.
  8. "50 State Quarters Program Earned $6.3 Billion in Seigniorage - Coin Update". news.coinupdate.com. Retrieved 11 April 2018.
  9. "Canadian Coins - Circulation, Collecting Coins & Coin Sets - the Royal Canadian Mint" (PDF). Mint.ca. Retrieved 11 April 2018.
  10. "Archived copy". Archived from the original on 2009-11-04. Retrieved 2009-10-31.CS1 maint: archived copy as title (link)
  11. United States Mint FY 2013 President’s Budget Submission United States Treasury
  12. Gerson, Michael (2008-02-20). "Dying Silently In Zimbabwe". The Washington Post. Retrieved 2009-05-29.
  13. "Archived copy". Archived from the original on 2014-06-17. Retrieved 2010-01-10.CS1 maint: archived copy as title (link)
  14. Edgar L. Feige. ""New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap" Forthcoming in Crime, Law and Social Change". Ideas.repec.org.
  15. Porter and Judson, 1996, R. D. Porter and R. A. Judson, The location of U.S. currency: How much is abroad? Federal Reserve Bulletin 82 (1996), pp. 883–903
  16. E. L. Feige (1997). Revised estimates of the underground economy: Implications of U.S. currency held abroad, in O. Lippert and M. Walker (ed.) The Underground economy: Global evidence of its size and impact. pp. 151–208.
  17. Goldberg, 2010, L. S. Goldberg, Is the International Role of the Dollar Changing? Federal Reserve Bank Of New York, Current Issues in Economics and Finance, 16(1) (2010) pp. 1–7.
  18. "The Fed - Financial Accounts of the United States - Z.1 - Current Release". Federalreserve.gov. Retrieved 14 January 2019.
  19. Edgar L. Feige. ""New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"". Ideas.repec.org.
  20. "Latin American drug cartels find home in West Africa". CNN. September 21, 2009.
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