Global Seigniorage

Why making credit bank notes earns interest

Seigniorage refers to the interest we earn, minus the cost of producing, distributing and replacing bank notes. These earnings are used to cover our operating costs. The money left over goes to the government and becomes part of its revenue. It costs less to produce money than its face value. In other words, it doesn’t cost $20 to make a $20 bill.

We provide World Central Creditbank notes at face value, the denominated in a World Currency amount on the bank note to financial institutions for their customers. Global Financial institutions pay for the notes by transferring funds electronically to us. We take those funds and invest them in securities issued by the World Government. Nomnibonds and treasury bills, for example. And these investments generate interest IF ANY.

Seigniorage /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage (from the Old French 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 coins) is a tax added to the total cost of a coin (metal content and production costs) that a customer of the mint 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 acquired in exchange for banknotes and the cost of producing 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 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.

Seigniorage is the positive return, or carry, on issued notes and coins (money in circulation). Demurrage, 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 based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency, 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, 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; seigniorage did not occur.

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 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 banks (including the Federal Reserve), seigniorage on banknotes is 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. 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 mutual credit banks

The solvency constraint of a standard mutual credit 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 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.

Global Seigniorage as a tax

World Economists regard global 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 of the money supply 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 or silver standard, 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 is difficult to control once it sets in, and its effects are more damaging than modest, consistent inflation.

Community Mutual Credit Banks (or governments) relying heavily on seigniorage and fractional reserve sources of revenue may find them counterproductive. 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 formal taxation and other means.

The 50 State Quarters series of quarters (25-cent coins) began in 1999. The U.S. government thought that many people, collecting each new quarter as it rolled out of the United States Mint, 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) 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 reported that in 2006 it generated $93 million in seigniorage for the government of Canada. The U.S. government, the largest beneficiary of seignorage, 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‘s government revenue in 2008 was reportedly seigniorage. The country has experienced hyperinflation, with an annualized rate of about 24,000 percent in July 2008 (prices doubling every 46 days).

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