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Seigniorage

Seigniorage

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Seigniorage can have the following two meanings:
  • Seigniorage derived from specie—metal coin
    Coin
    A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....

    s, is a tax
    Tax
    To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

    , added to the total price of a coin (metal content and production costs), that a customer of the mint
    Mint (coin)
    A mint is an industrial facility which manufactures coins for currency.The history of mints correlates closely with the history of coins. One difference is that the history of the mint is usually closely tied to the political situation of an era...

     had to pay to the mint, and that was sent to the sovereign of the political area.
  • Seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.

Seigniorage is a convenient source of revenue for some governments.

Scenario A


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 then redeems it in gold. That person ends up with exactly one ounce of gold again. No seigniorage occurs.

Scenario B


Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency. They keep the currency for one year, and then exchange it all for an amount of gold at the new market value. This second exchange may yield more or less than one ounce of gold if the value of the currency relative to gold has changed during the interim. (Assume that the value or direct purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

 of one ounce of gold remains constant through the year.)

If the value of the currency relative to gold has decreased, then the person receives less than one ounce of gold. Seigniorage occurred.

If the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold. Seigniorage did not occur.

Seigniorage, therefore, is the positive return on issuing notes and coins, or "carry
Carry (investment)
The carry of an asset is the return obtained from holding it , or the cost of holding it .For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation, but in some circumstances, appropriately hedged commodities can be positive carry...

" on money in circulation.

The opposite, "cost of carry
Cost of carry
The cost of carry is the cost of "carrying" or holding a position. If long, the cost of carry is the cost of interest paid on a margin account. Conversely, if short, the cost of carry is the cost of paying dividends, or rather the opportunity cost; the cost of purchasing a particular security...

", is not regarded as a form of seigniorage.

Ordinary seigniorage


Ordinarily seigniorage is only an interest-free loan (for instance of gold) to the issuer of the coin or paper money. When the currency is worn out, the issuer buys it back at face value, thereby balancing exactly the revenue received when it was put into circulation, without any additional amount for the interest value of what the issuer received. Currently, under the rules governing monetary operations of major central banks (including the central bank of the USA), seigniorage on bank notes is simply defined as the interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 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. However, if the currency is collected
Collecting
The hobby of collecting includes seeking, locating, acquiring, organizing, cataloging, displaying, storing, and maintaining whatever items are of interest to the individual collector. Some collectors are generalists, accumulating merchandise, or stamps from all countries of the world...

, or is otherwise taken permanently out of circulation, the back end of the deal never occurs (that is, the currency is never returned to the central bank). Thus the issuer of the currency keeps the whole seigniorage profit, by not having to buy worn out issued currency back at face value.

Historically, seigniorage was the profit resulting from producing coins. Silver and gold were mixed with base metals to make durable coins. Thus the British "sterling" was 92.5% pure silver; the base metal added (and thus the pure silver retained by the government mint) was (less costs) the profit, the seigniorage. USA gold coins were made from 90% gold, 7% silver, and 3% copper; one can easily see the seigniorage.

Solvency constraints of central banks


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

Seigniorage as a tax


Some economists regarded seigniorage as a form of inflation tax
Inflation tax
Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income , due to the effects of inflation...

, redistributing real resources to the currency issuer. Issuing new currency, rather than collecting taxes paid out of the existing money stock, is then considered in effect a tax that falls on those who hold the existing currency. The expansion of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 may cause inflation
Monetary inflation
Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services . Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it...

 in the long run.

This is one reason offered in support of free banking
Free banking
Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency...

, a gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...

, or at a minimum the reduction of political control over central banks. The latter could then take as their primary objective ensuring a stable value of currency by controlling monetary expansion and thus limiting inflation. Independence from government is required to reach this aim - indeed, it is well known in economic literature that governments face a conflict of interest in this regard. In fact, "hard money" advocates argue that central banks have utterly failed to obtain the objective of a stable currency. Under the gold standard, for example, the price level in both England and the US remained relatively stable over literally hundreds of years, though with some protracted periods of deflation
Deflation (economics)
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% . This should not be confused with disinflation, a slow-down in the inflation rate...

. Since the US Federal Reserve was formed in 1913, however, the US dollar has fallen to barely a twentieth of its former value through the consistently inflationary policies of the bank. Economists counter that deflation is hard to control once it sets in and its effects are much more damaging than modest, consistent inflation.

Banks or governments relying heavily on seigniorage and fractional reserve sources of revenue can find it counterproductive. Rational expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...

 of inflation take into account a bank's seigniorage strategy, and inflationary expectations can maintain high inflation . Instead of accruing seigniorage from fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

 and credit most governments opt to raise revenue primarily through taxation and other means.

Seigniorage today


The "50 State" series
50 State Quarters
The 50 State Quarters program is the release of a series of circulating commemorative coins by the United States Mint. Between 1999 and 2008, it featured each of the 50 U.S. states on unique designs for the reverse of the quarter....

 of quarters
Quarter (United States coin)
A quarter dollar, commonly shortened to quarter, is a coin worth ¼ of a United States dollar, or 25 cents. The quarter has been produced since 1796. The choice of 25¢ as a denomination, as opposed to 20¢ which is more common in other parts of the world, originated with the practice of dividing...

 (25-cent coins) was launched in the U.S. in 1999. The U.S. government planned on a large number of people collecting each new quarter as it rolled out of the U.S. Mint, thus taking the pieces out of circulation. Each set of quarters is worth $14.00 (a complete set includes quarters for all fifty states, the five U.S. territories, and the District of Columbia). Since it costs the Mint about five cents for each 25-cent piece it produces, the government made a profit whenever someone "bought" a coin and chose not to spend it. The U.S. Treasury estimates that it has earned about US$6.3 billion in seigniorage from the quarters over the course of the entire program.

In some cases, national mints report the amount of seigniorage provided to their respective governments; for example, the Royal Canadian Mint
Royal Canadian Mint
The Royal Canadian Mint produces all of Canada's circulation coins, and manufactures circulation coins on behalf of other nations. The Mint also designs and manufactures: precious and base metal collector coins; gold, silver, palladium, and platinum bullion coins; medals, as well as medallions and...

 reported that in 2006 it generated $C93 million in seigniorage for the Government of Canada. The US government, the largest beneficiary of seignorage, earned approximately $25 billion annually as of 2000.

According to some reports, currently over half the revenue of the government of Robert Mugabe
Robert Mugabe
Robert Gabriel Mugabe is the President of Zimbabwe. As one of the leaders of the liberation movement against white-minority rule, he was elected into power in 1980...

 in Zimbabwe
Zimbabwe
Zimbabwe is a landlocked country located in the southern part of the African continent, between the Zambezi and Limpopo rivers. It is bordered by South Africa to the south, Botswana to the southwest, Zambia and a tip of Namibia to the northwest and Mozambique to the east. Zimbabwe has three...

 is in seigniorage. Zimbabwe has experienced hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...

 (see Hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of white-owned farmland. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%...

), with the annualized rate at about 24,000% in July 2008 (prices doubling every 46 days).

2011 U.S. debt ceiling crisis


In 3 January 2011, a blogger
Blog
A blog is a type of website or part of a website supposed to be updated with new content from time to time. Blogs are usually maintained by an individual with regular entries of commentary, descriptions of events, or other material such as graphics or video. Entries are commonly displayed in...

 suggested seigniorage as a solution to the 2011 U.S. debt ceiling crisis This was covered on Slate
Slate (magazine)
Slate is a US-based English language online current affairs and culture magazine created in 1996 by former New Republic editor Michael Kinsley, initially under the ownership of Microsoft as part of MSN. On 21 December 2004 it was purchased by the Washington Post Company...

online, on 29 July 2011 when it was suggested that a US$5 trillion coin could be minted and deposited with the Federal Reserve and used to buy back debt thus making funds available.

Overseas circulation


A very profitable type of seignorage is from the international circulation of banknotes. While the cost of printing banknotes is minimal, the foreign entity must provide goods and services at the face value of the note to obtain it. The banknote is retained because the entity values it as a store of value because of mistrust of the local currency.

Overseas circulation is intimately tied in with large value banknotes. One purpose of using foreign currency is for store of value, but another is efficiency of private transactions many of which are illegal.

American currency has been circulating globally for most of the 20th century. Certainly in WWII, the amount of currency in circulation was increased several fold. However, the modern era of huge printings of the United States one hundred-dollar bill
United States one hundred-dollar bill
The United States one hundred-dollar bill is a denomination of United States currency. U.S. statesman, inventor and diplomat Benjamin Franklin is currently featured on the obverse of the bill. On the reverse of the banknote is an image of Independence Hall. The time on the clock according to the...

 started with the fall of the Soviet Union in 1991. Production was quadrupled with the first ever trillion dollar printing of this bill. As of the end of 2008, U.S. currency in circulation with the public amounted to $824 billion and 76% of the currency supply was in the form of $100 denomination banknotes, amounting to twenty $100 bills per U.S. citizen. Over the past decade there has been considerable controversy concerning the amount of U.S. currency circulating abroad. Porter and Judson have claimed that in the mid nineties between 53-67 percent of U.S. currency was overseas, whereas Feige’s estimates suggested a figure closer to 40 percent abroad. Most recently, Goldberg writing in a New York Federal Reserve publication asserted that “about 65 percent ($580 billion) of all banknotes are in circulation outside of the country. However, these assertions are contradicted by the Federal Reserve Board of Governors Flow of Funds statistics which show that at the end of March 2009, only $313 billion (36.7 percent) of U.S. currency was held abroad. 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 some competition, primarily from the €500 note
500 euro note
The five hundred euro note is the highest value euro banknote and has been used since the introduction of the euro in 2002....

. The larger value of the banknote makes it easier to transport larger amounts of money. As an example, to carry $1 million in currency on board an airplane, and it is in $100 bills, the weight of the money is 22 pounds. It is difficult to carry this much without a briefcase and some physical security. Since it is against authority of Title 26 of the United States Code (U.S.Tax Code) regulations to carry more than $10,000 without reporting it (31 USC 5311), it is unlikely to pass security unnoticed. The same amount in €500 notes would weigh less than three pounds, and it could probably be dispersed in clothing and in luggage without attracting attention or alerting a security device. For many illegal operations the problem of transporting currency is more difficult than transporting cocaine because of the size and weight of the currency. The ease of transporting banknotes makes the euro very attractive to Latin American drug cartels.

The Swiss 1000 franc note
Banknotes of the Swiss franc
The first banknotes in Switzerland were issued in 1825 by the Caisse de Dépôt of the city of Bern.During the 19th century the Cantons had the right of printing notes. Following the law of 8 March 1881 the Swiss National Bank had the exclusive right to issue banknotes in Switzerland. First notes...

 is probably the only other banknote that is in circulation outside of its home country. It is worth slightly more than US$1000. However, to the non-Swiss it doesn't provide a significant advantage over the €500 note as there are 20 times as many of the €500 note circulating and they are more widely recognized. As a reserve currency
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...

 it is roughly 0.1% of the currency composition of official foreign exchange reserves.

Governments differ radically in their issuance of large banknotes. As of August 2009, the number of 1000 franc Swiss banknotes circulating is over 3 times the population of Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....

. In comparison the number of £50 banknotes circulating slightly less than 3 times the population of UK. But the 1000 franc banknote is worth roughly £600. The British government has traditionally been wary of large banknotes since the counterfeit
Counterfeit
To counterfeit means to illegally imitate something. Counterfeit products are often produced with the intent to take advantage of the superior value of the imitated product...

ing Operation Bernhard
Operation Bernhard
Operation Bernhard was the codename of a secret Nazi plan devised during the Second World War by the RSHA and the SS to destabilise the British economy by flooding the country with forged Bank of England £5, £10, £20, and £50 notes...

 in World War II which caused the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

 to withdraw all notes larger than £5 from circulation, and not reintroduce other denominations until the early 1960s (£10), 1970 (£20) and March 20, 1981 (£50). Circulation rates are so low that Britain could stop printing the £50 note and much of the population wouldn't notice.

There is a banknote for 500 Latvian lats
Latvian lats
The lats is the currency of Latvia. It is abbreviated as Ls. The lats is sub-divided into 100 santīmi ....

 which is currently one of the most valuable notes in the world, as it is worth more than $1000, but it is unlikely to be accepted outside of Latvia
Latvia
Latvia , officially the Republic of Latvia , is a country in the Baltic region of Northern Europe. It is bordered to the north by Estonia , to the south by Lithuania , to the east by the Russian Federation , to the southeast by Belarus and shares maritime borders to the west with Sweden...

. Likewise, the 10000 Singapore dollar
Singapore dollar
The Singapore dollar or Dollar is the official currency of Singapore. It is normally abbreviated with the dollar sign $, or alternatively S$ to distinguish it from other dollar-denominated currencies...

 note is the most valuable, but is rarely used and unlikely to be accepted outside of Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

. Other currencies in Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

, like the British pound, and the Scandinavian currencies
Krona
Krona may refer to:In monetary units, where krona and its variants mean crown:* Danish krone* Estonian kroon* Faroese króna* Icelandic króna* Norwegian krone* Swedish krona* Czech koruna* Slovak koruna* Czechoslovak korunaOther:...

 do not issue large value banknotes. Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...

 in particular has never needed much currency since electronic transactions are commonplace, and their population is small with over 60% of the population living in one metropolitan area
Reykjavík
Reykjavík is the capital and largest city in Iceland.Its latitude at 64°08' N makes it the world's northernmost capital of a sovereign state. It is located in southwestern Iceland, on the southern shore of Faxaflói Bay...

. Their largest banknote
Icelandic króna
The króna is the currency of Iceland. The króna is technically subdivided into 100 aurar , but in practice this subdivision is no longer used....

 is worth less than €28.

South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

 is an example of a country with a high Human Development Index
Human Development Index
The Human Development Index is a composite statistic used to rank countries by level of "human development" and separate "very high human development", "high human development", "medium human development", and "low human development" countries...

 that fears counterfeiting so much that they don't utilize large banknotes. South Korea has a larger purchasing power parity per capita than Latvia, but until recently the largest South Korean banknote
South Korean won
The won is the currency of South Korea. A single won is divided into 100 jeon, the monetary subunit. The jeon is no longer used for everyday transactions, and appears only in foreign exchange rates...

 was worth about US$8, which was a severe impediment to routine business. On June 23, 2009 they issued a new banknote worth five times as much.

The American treasury considered re-issuing a US$500 banknote when the euro banknotes began circulating. There was concern that the high value banknotes would provide competition. However, after recognition that the $500 banknote would provide a huge advantage to worldwide criminal operations and dictatorship
Dictatorship
A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual, the dictator. It has three possible meanings:...

s, the decision was made not to pursue this option.

Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

 briefly issued a $1000 Canadian dollar
Canadian dollar
The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies...

 bill in 1992, but the Royal Canadian Mounted Police
Royal Canadian Mounted Police
The Royal Canadian Mounted Police , literally ‘Royal Gendarmerie of Canada’; colloquially known as The Mounties, and internally as ‘The Force’) is the national police force of Canada, and one of the most recognized of its kind in the world. It is unique in the world as a national, federal,...

 was able to successfully argue against the continued printing of this bill in 2000; it is still legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

 but no more are being printed, and it will diminish as older bills are destroyed. It was not widely circulated outside of Canada.

See also

  • Central bank
    Central bank
    A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

  • Digital gold currency
    Digital gold currency
    Digital gold currency is a form of electronic money based on ounces of gold. It is a kind of representative money, like a US paper gold certificate at the time that these were exchangeable for gold on demand. The typical unit of account for such currency is the gold gram or the troy ounce,...

  • Fractional reserve banking
  • Full reserve banking
  • Money
    Money
    Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

  • Monetarism
    Monetarism
    Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

  • Demurrage (currency)
    Demurrage (currency)
    Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold...


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