HOME

TheInfoList



OR:

Seigniorage , also spelled seignorage or seigneurage (from the
Old French Old French (, , ; Modern French: ) was the language spoken in most of the northern half of France from approximately the 8th to the 14th centuries. Rather than a unified language, Old French was a linkage of Romance dialects, mutually intell ...
''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
coin A coin is a small, flat (usually depending on the country or value), round piece of metal or plastic used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order t ...
s) is a
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
added to the total cost of a coin (metal content and production costs) that a customer of the
mint MiNT is Now TOS (MiNT) is a free software alternative operating system kernel for the Atari ST system and its successors. It is a multi-tasking alternative to TOS and MagiC. Together with the free system components fVDI device drivers, XaAES ...
had to pay, and which was sent to the sovereign of the political region. * Seigniorage derived from notes is more indirect; it is the difference between interest earned on
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...
acquired in exchange for banknotes and the cost of printing and distributing the notes. "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. Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circula ...
during GDP growth and meeting yearly inflation targets. 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 Carry or carrying may refer to: People * Carry (name) Finance * Carried interest (or carry), the share of profits in an investment fund paid to the fund manager * Carry (investment), a financial term: the carry of an asset is the gain or cost of ...
, on issued notes and coins (money in circulation).
Demurrage The term "demurrage" from Old French ''demeurage'', from ''demeurer'' – to linger, tarry – originated in vessel chartering and referred to the period when the charterer remained in possession of the vessel after the period normally allowed ...
, 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 A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general d ...
, 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 Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
, 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 and demurrage occurred; 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 Sterling (abbreviation: stg; Other spelling styles, such as STG and Stg, are also seen. ISO code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound ( sign: £) is the main unit of sterling, and ...
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 bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
s (including the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
), seigniorage on banknotes is the
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is disti ...
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 money 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 In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This includ ...
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.
Inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reducti ...
of the
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circula ...
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 Gold is a chemical element with the Symbol (chemistry), symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a Brightness, bright, slightly orange-yellow, dense, s ...
or
silver standard The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians 3000 BC until 1873. Following t ...
, 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 In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflati ...
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.
Rational expectations In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency 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 (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was somet ...
and credit, most governments opt to raise revenue primarily through formal
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
ation and other means


Contemporary use

The 50 State Quarters series of quarters (25-cent coins) began in 1999. The
U.S. government The federal government of the United States (U.S. federal government or U.S. government) is the national government of the United States, a federal republic located primarily in North America, composed of 50 states, a city within a feder ...
thought that many people, collecting each new quarter as it rolled out of the
United States Mint The United States Mint is a bureau of the Department of the Treasury responsible for producing coinage for the United States to conduct its trade and commerce, as well as controlling the movement of bullion. It does not produce paper money; th ...
, would remove the coins from circulation. Each complete set of quarters (the 50 states, the five inhabited U.S. territories, and the
District of Columbia ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument and Lincoln Memorial on the National Mall, United States Capitol, Logan Circle, Jefferson Memorial, White House, Adams Morgan, N ...
) 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. The Treasury Department estimates that it earned about $6.3 billion in seigniorage from the quarters during the program. Some countries' national mints report the amount of seigniorage provided to their governments; the
Royal Canadian Mint }) is the mint of Canada and a Crown corporation, operating under the ''Royal Canadian Mint Act''. The shares of the Mint are held in trust for the Crown in right of Canada. The Mint produces all of Canada's circulation coins, and manufactures ...
reported that in 2006 it generated $93 million in seigniorage for the
government of Canada The government of Canada (french: gouvernement du Canada) is the body responsible for the federal administration of Canada. A constitutional monarchy, the Crown is the corporation sole, assuming distinct roles: the executive, as the ''Crown-in ...
. The U.S. government, the largest beneficiary of seigniorage, earned about $25 billion in 2000. For coins only, the U.S. Treasury received 45 cents per dollar issued in seigniorage for the 2011 fiscal year. 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 Zimbabwe (), officially the Republic of Zimbabwe, is a landlocked country located in Southeast Africa, between the Zambezi and Limpopo Rivers, bordered by South Africa to the south, Botswana to the south-west, Zambia to the north, and Moz ...
's government revenue in 2008 was reportedly seigniorage. The country has experienced
hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as ...
ever since, with an annualized rate of about 24,000 percent in July 2008 (prices doubling every 46 days).


International circulation

The international circulation of banknotes is a profitable form of seigniorage. 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 World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposing ...
. Large-scale printing of the
United States one-hundred-dollar bill The United States one-hundred-dollar bill ($100) is a denomination of United States currency. The first United States Note with this value was issued in 1862 and the Federal Reserve Note version was launched in 1914, alongside other denominations ...
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). The amount of U.S. currency circulating abroad is controversial. According to Porter and Judson, 53 to 67 percent was overseas during the mid-1990s. Feige estimates that about 40 percent is abroad. In a New York Federal Reserve publication, Goldberg 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, 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 (10 kg), and it 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 (1.4 kg), 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. 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 A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international tra ...
, 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 ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
. 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
counterfeit To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...
ing
Operation Bernhard Operation Bernhard was an exercise by Nazi Germany to forge British bank notes. The initial plan was to drop the notes over Britain to bring about a collapse of the British economy during the Second World War. The first phase was run from ear ...
during
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposing ...
, which caused the
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 to act as the English Government's banker, and still one of the bankers for the Government of ...
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).


See also

* Breakage *
Currency substitution Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency. The process is also known as dollarization or euroization when the foreign currency is the dollar or the euro, respectively. Currency su ...
*
Fractional reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve ...
* Full reserve banking * Gold certificate *
Hyperinflation in Zimbabwe Hyperinflation in Zimbabwe is an ongoing period of currency instability in Zimbabwe that, using Cagan's definition of hyperinflation, began in February 2007. During the height of inflation from 2008 to 2009, it was difficult to measure Zimbab ...
*
Inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reducti ...
*
Inflationism Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy. Mainstream e ...
*
Inflation hedge An inflation hedge is an investment intended to protect the investor against (hedge) a decrease in the purchasing power of money ( inflation). There is no investment known to be a successful hedge in all inflationary environments, just as there is n ...
*
Money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...
*
Monetarism Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...
*
Quantitative easing Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary po ...
*
Silver certificate A silver certificate is a certificate of ownership that silver owners hold instead of storing the actual silver. Several countries have issued silver certificates, including Cuba, the Netherlands, and the United States. Silver certificates have als ...


References


External links


"A better way to account for fiat money at the Central Bank"
By Thomas Colignatus, December 31, 2005
Creating New Money: A Monetary Reform for the Information Age
by Joseph Huber and James Robertson
Extensive discussionInformation about Seigniorage Sovereignty & Seignorage
By
Kosuke Takahashi is a Japanese journalist. He contributes to IHS Jane's Defence, NK News and Toyo Keizai Online among other media by writing in both English and Japanese. He is also currently a regular TV commentator of Tokyo MX's Morning Cross program. He worke ...
of
Asia Times Online ''Asia Times'' (), formerly known as ''Asia Times Online'', is a Hong Kong-based English language news media publishing group, covering politics, economics, business and culture from an Asian perspective. ''Asia Times'' publishes in English and ...
, January 23, 2009.
Dollar notes to be replaced by coins – The Royal Mint view
By The Royal Mint, January 16, 2013 {{Authority control Numismatics Tax Management accounting