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Encyclopedia > Seigniorage

Seigniorage, also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. Seigniorage derived from coins arises from the difference between the face value of a coin and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage is an important source of revenue for some national banks. Seigniorage derived from notes is the difference between the interest earned on the government's securities portfolio, and the costs of producing and distributing bank notes. Look up revenue in Wiktionary, the free dictionary. ... Face Value is the title of Phil Collins debut solo album, released in February of 1981. ... This article does not cite any references or sources. ... “Banker” redirects here. ...

Contents

How it works

To see how seigniorage works, let's compare two scenarios.


Imagine you start the year with one ounce of gold. You trade it in for a gold certificate, which allows you to redeem the certificate for an ounce of gold. You keep the certificate for a year, then trade it in. At the end of the year you have exactly what you started with: one ounce of gold. No seigniorage occurred.


Now imagine that you have one ounce of gold, but the government doesn't issue gold certificates. Instead the government will convert your gold into currency at the market rate. If gold was $500 per ounce, then at the start of the year you trade your ounce for $500. You keep the currency for a year, then at the end of the year you trade the currency back in for an amount of gold. However, this time the price of gold increased over the year, so gold is now $525 per ounce. You will receive slightly less than an ounce. This slight loss is due to seigniorage.


Even if you were to then use the currency to buy something, someone is holding the bill for the entire time and the government still has the gold.


Pithily, seignorage is the carry on money in circulation. The carry of an asset is the return obtained from holding it (if positive), or the cost with holding it (if negative). ...


Further discussion

Ordinarily seigniorage is only an interest-free loan to the issuer because when the currency is worn out the issuer buys it back at face value thereby negating the revenue earned when it was put into circulation. 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. However if the currency is collected - i.e. "somewhat destroyed" or taken permanently out of the money-circulation - instead of being returned to the issuer the back end of the deal never occurs. Thus the issuer of the currency gets to keep the whole seigniorage profit, by not having to buy worn out issued currency back at face value, thereby keeping the "profit" earned when the currency were put into circulation in the first place. It has been suggested that Interest expense be merged into this article or section. ...


Example

The "50 State" series of quarters (25-cent coins) was launched in the U.S. in the late 1990s based on the Millennium quarter series in Canada[citation needed]. 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. Since it costs the Mint less than 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 $5 billion in seigniorage revenue from the quarters so far. [1]

The introduction of €500 and €200 Euro notes is seen as a source of seigniorage revenue for the European Central Bank, particularly because no other major central bank issues currency in such large denominations.[2] Obverse of redesigned quarter The 50 State Quarters program is the release of a series of commemorative coins by the United States Mint. ... The quarter is 1/4th of a United States dollar or 25 cents. ... The quarter is a Canadian coin, valued at 25 cents or one-fourth of a Canadian dollar. ... ... The United States Department of the Treasury is a Cabinet department, a treasury, of the United States government established by an Act of U.S. Congress in 1789 to manage the revenue of the United States government. ... Headquarters Coordinates , , Established 1 January 1998 President Jean-Claude Trichet Central Bank of Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain Currency Euro ISO 4217 Code EUR Reserves €43bn directly, €338bn through the Eurosystem (including gold deposits). ...


Seigniorage can be seen as a form of tax levied on the holders of a currency and as such a redistribution of real resources to the issuer. The expansion of the money supply causes inflation. This means that the real wealth of people who hold cash or deposits decreases and the wealth of the issuer of the money increases. This is a redistribution of wealth from the people to the issuers of newly-created money (mostly banks) very similar to a tax. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A tax is a financial charge or other levy imposed on... This article or section does not cite any references or sources. ...


This is one reason offered in support of the creation of modern, independent, central banks whose primary objective is arguably to ensure the 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. 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. The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. ... Deflation occurs when prices deflate, i. ...


A seigniorage reform for the information age on a full-reserve banking base is proposed by Joseph Huber and James Robertson: Creating new money. The fruit of collaboration between a German academic and a British economic writer they argue for one reform: the reappropriation by governments of the right of seigniorage now possessed by private banks. About 95% of new money currently issued takes the form of loans made by private banks to their customers. Huber and Robertson want to make this illegal. The creation of new money, both cash and non-cash should be the exclusive prerogative of the central bank. The latter should determine how much it creates in the light of the objectives chosen for the country's monetary policy and credit the new money to the government who will then put it into circulation by spending it. Full-reserve banking is a theoretically conceivable banking practice in which all deposits, banknotes, and notes in a financial system would be backed up by assets with a store of value. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... James Robertson, a British-born political and economic thinker and activist, became an independent writer and speaker in 1974 after an early career as a British civil servant. ...


However, it is important to reiterate that banks or governments relying heavily on seigniorage and fractional reserve as a source of revenue will find it counterproductive. Rational expectations of inflation will begin to take into account the bank's seigniorage strategy leading to hyperinflation which causes significant real damage to the economy. Instead of cashing seigniorage from fiat money and credit most governments opt to raise revenue primarily by other means, generally taxation. Rational expectations is a theory in economics originally proposed by John F. Muth (1961) and later developed by Robert E. Lucas Jr. ... Certain figures in this article use scientific notation for readability. ...


See also

e-gold is, according to their website, 100% backed by gold Digital gold currency (or DGC) is a form of electronic money denominated in gold weight. ... In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks of retaining only a fraction of their deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder at interest to obtain income that can be used to pay interest to depositors... Full-reserve banking is a theoretically conceivable banking practice in which all currency circulating in a financial system would be backed up by an asset that is generally considered to be a stable store of value, such as gold. ... Various denominations of currency, one form of money Money is any good or token that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. ...

External links

References


  Results from FactBites:
 
Seigniorage - LoveToKnow 1911 (463 words)
The employment of a seigniorage of about 1% on the "sovereign" was suggested by the proceedings of the Paris Monetary Conference of 1867, in order to bring about an assimilation of English and French money.
The definitive results obtained may be briefly stated as follows: (1) A seigniorage charge is the same as a debasement, but its evil effect may be avoided by limiting the amount of coin issued.
A heavy seigniorage on gold would tend to lower the profits derived from the gold mines of the world, and might even compel the abandonment of the least productive ones.
Seigniorage in the Age of Scriptural Money (3250 words)
Seigniorage is the profit that accrues to the issuing authority when money is created.
To explain and illustrate full seigniorage, let me present a scenario, "the case of the perfect counterfeiter." Imagine a counterfeiter of such sublime skill that he will never be caught and his bills will never be distinguishable from official banknotes.
Seigniorage will not lead to hyperinflation if we establish the principle and maintain the practice of two-way convertibility: money converting into goods and goods converting into money, which is as close as we can get to the spirit of barter without losing the many advantages of modern economics and technology.
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