Seigniorage
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Seigniorage (pronounced /ˈseɪnjərɪdʒ/ sayn-yə-rij), 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 derived from notes is the difference between the interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those bank notes.[1] Seigniorage is an important source of revenue for some national banks. In macroeconomics, seigniorage is also referred to as an inflation tax, as government could pay for services by issuing new currency rather than by collecting taxes; the "inflation tax" is paid by those who hold the existing currency.[2]
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[edit] An example
No seigniorage occurs in the following situation: A person has one ounce of gold, trades it in for a gold certificate (which allows him to redeem the certificate for one ounce of gold), keeps that certificate for a year, and then trades it in for gold -- he or she ends up with exactly one ounce of gold again.
Seignorage does occur in this situation: A government does not issue gold certificates and instead converts gold into currency at the market rate. A person trades in an ounce of gold for its worth in currency, keeps that currency for a year, and then trades the currency back in for an amount of gold -- he or she may receive a different amount of gold from that which he or she started with, if the price of gold has increased or decreased during that year. Even if he or she were then to use the currency to buy something, someone is holding the bill for the entire time and the government still has the gold.
So, in other words, seignorage is the carry on money in circulation.
[edit] Further discussion
Ordinarily seigniorage is only an interest-free loan to the issuer. 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, or is taken permanently out of circulation, the back end of the deal never occurs. Thus the issuer of the currency keeps the whole seigniorage profit, by not having to buy worn out issued currency back at face value.
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.
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[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.
A seigniorage reform for the information age on a full-reserve banking base is proposed by Joseph Huber and James Robertson: Creating new money. They argue for 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.
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.
[edit] Examples
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]. Since it costs the Mint less than 10 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$5 billion in seigniorage revenue from the quarters so far. [3]
In some cases, national mints report the amount of seigniorage provided to the respective government; for example, the Royal Canadian Mint reported that in 2006 it delivered $C93 million to the Government of Canada in seigniorage ("the difference between the face value of a coin and its cost of manufacture and distribution").[4]
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 [5]. The Swiss National Bank does, however, issue CHF1000 denominations [6] and Monetary Authority of Singapore $1000 and $10,000 denominations that are routinely circulated. [7]
According to some reports, currently over half the revenue of the government of Robert Mugabe in Zimbabwe is in seigniorage.[8] Zimbabwe has experienced hyperinflation, with the annualized rate topping 100,000% for January 2008.
[edit] See also
[edit] External links
[edit] References
- ^ http://www.bankofcanada.ca/en/backgrounders/bg-m3.html Bank of Canada Backgrounder on Seigniorage
- ^ [http://books.google.com/books?id=HSVakrh8TToC&pg=PA246&dq=seigniorage+macroeconomics&sig=8biDt3jtUXRForOCnW9rk_NzyEs#PPA365,M1 Brian Snowdon and Howard Vane, An Encyclopedia of Macroeconomics, p. 246
- ^ bill H.R. 902, p.5
- ^ Annual Report (2006), Royal Canadian Mint, p. 4
- ^ cepr.org
- ^ Swiss National Bank (SNB) All SNB banknote series
- ^ MAS: Singapore Circulation Notes Portrait Series
- ^ Michael Gerson - Dying Silently In Zimbabwe - washingtonpost.com
