Seigniorage (/ˈseɪnjərɪdʒ/,
also spelled seignorage or seigneurage) is the difference
between the value of money and the cost to produce and distribute it.
The term can be applied in the following ways:
- Seigniorage derived from specie—metal
coins—is
a tax,
added to the total price of a coin (metal content and production
costs), that a customer of the
mint had to pay to the mint, and that was sent to the sovereign
of the political area.[1]
- 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.[2]
Seigniorage is a convenient source of revenue for some governments.
Examples
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. She keeps the currency for
one year, and then exchanges it all for an amount of gold at the new
market value. If the value of the currency relative to gold has changed
during the interim this second exchange may yield more or less than one
ounce of gold. (Assume that the value or direct
purchasing power 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"
on money in circulation.
The opposite, "cost
of carry", 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.
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.
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 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, 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.
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, 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.[3]
The expansion of the
money supply may cause
inflation in the long run.
This is one reason offered in support of
free banking, a
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[citation
needed]. 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[citation
needed]. 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.[4]
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
taxation and other means.
Seigniorage today
The
"50 State" series of
quarters (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[citation
needed]. 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.[5]
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.[6]
In some cases, national mints report the amount of seigniorage
provided to their respective governments; for example, the
Royal Canadian Mint reported that in 2006 it generated $C93 million
in seigniorage for the Government of Canada.[7]
The U.S. government, the largest beneficiary of seignorage, earned
approximately $25 billion annually as of 2000.[8]
For coinage only, seigniorage accruing to the U.S. Treasury per dollar
issued for the fiscal year 2011 was 45 cents.[9]
Occasionally, central banks have introduced limited quantities of
higher-valued banknotes in unusual denominations, with the intention of
these notes being collected. The denomination chosen will usually
coincide with an anniversary of national significance. However, the
potential seigniorage that can be earned from such printings has proven
to be limited, since the unusual denomination makes the notes more
difficult to circulate and only a relatively small number of people are
willing to collect higher-valued notes.
According to some reports, over half of
Zimbabwe governmental revenue in 2008 was seigniorage.[10]
Zimbabwe has experienced
hyperinflation (see
Hyperinflation in Zimbabwe), with the annualized rate at about
24,000% in July 2008 (prices doubling every 46 days).[11]
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
World War II, 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 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.[12]
Over the past decade there has been considerable controversy concerning
the amount of U.S. currency circulating abroad. Porter and Judson[13]
have claimed that in the mid nineties between 53 and 67 percent of U.S.
currency was overseas, whereas Feige’s[14]
estimates suggested a figure closer to 40 percent abroad. Most recently,
Goldberg[15]
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[16]
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. The larger value of the banknote makes it easier to
transport larger amounts of money. As an example, $1 million in currency
in $100 bills weighs 22 pounds, if, say, you were to carry it on board
an airplane. It is difficult to carry this much money without a
briefcase and some physical security. Since it is contrary to Title 26
of the United States Code (U.S.Tax Code) to carry more than $10,000
without reporting it (31 USC 5311), this 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.[17]
The
Swiss 1000 franc note 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 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 Swiss franc notes circulating was
over three times the population of
Switzerland. In comparison, the number of £50 banknotes circulating
is slightly less than three times the population of the United Kingdom.
But the 1000 franc note is worth roughly £600. The British government
has traditionally been wary of large banknotes since the
counterfeiting
Operation Bernhard in
World War II which caused the
Bank of England 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).
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
dictatorships, the decision was made not to pursue this option.[citation
needed]
See also
References
-
^
http://www.minneapolisfed.org/research/QR/QR2142.pdf
-
^
Bank of Canada (March 2012).
"Backgrounders: Seigniorage".
Retrieved 2 January 2013.
-
^
Brian Snowdon and Howard Vane, An Encyclopedia of
Macroeconomics, p. 246
-
^
[Hyperinflation in Zimbabwe: Money
Demand, Seigniorage and Aid shocks, Tara McIndoe-Calder Central
Bank of Ireland; University of Dublin - Institute for
International Integration Studies, May 1, 2009]
-
^
"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.
-
^
http://news.coinupdate.com/state-quarters-program-seigniorage-0133/
-
^
Annual Report (2006), Royal Canadian Mint, p. 4
-
^
http://banking.senate.gov/docs/reports/dollar.htm
-
^
United States Mint FY 2013 President’s Budget Submission
United States Treasury
-
^
Gerson,
Michael (2008-02-20).
"Dying Silently In Zimbabwe". The Washington Post.
Retrieved 2009-05-29.
-
^
http://www.newzimbabwe.com/pages/inflation180.17386.html
-
^
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.
http://ideas.repec.org/p/pra/mprapa/19564.html
-
^
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
-
^
Feige, 1997, E. L. Feige, 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.
(1997), pp. 151–208.
http://ideas.repec.org/p/pra/mprapa/13805.html
-
^
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.
-
^
http://www.federalreserve.gov/releases/z1/current/ and
See:Edgar L. Feige "New estimates of overseas U.S. currency
holdings, the Underground economy and the "Tax Gap"
http://ideas.repec.org/p/pra/mprapa/19564.html
-
^
"Latin American drug cartels find home in West Africa".
CNN. September 21, 2009.
External links