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January 12, 2009
Seigniorage?
By Wade Rousse
The title of this posting should make your “jargon alert” siren begin to flash and whistle. A friend recently asked me to explain “seigniorage.” I consider the friend an intelligent person, and his question prompted me to think others might be equally confused about the meaning of the term, thus this posting.
There are three ways a government can get revenue to finance its spending. First, it can tax. Second, it can borrow – by selling government bonds. And third, it can print money. The revenue raised from printing money is called seigniorage.
Harvard University professor Greg Mankiw writes an interesting case study in his text book titled “Macroeconomics.” He mentions that seigniorage hasn’t been a major source of revenue in the U.S. for a very long time. However, this was not always the case. During the American Revolution, the Continental Congress relied on printing fiat money to help finance the war.
In 1775, $6 million of new Continental currency was printed, and in 1776 $19 million more was added to the pile. The trend continued in 1777, 1778 and 1779, as $13 million, $63 million and $125 million of new currency was printed.
This large increase in the quantity of the Continental dollar made it nearly worthless. At the time, a familiar expression was, “It’s not worth a continental,” – meaning that the item had little real value.
So, seigniorage is simply another economics term that sounds confusing at first but essentially refers to a fairly simple concept – raising revenue by printing money.
Posted by Wade at January 12, 2009 8:15 PM
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Comments
This is factually inaccurate and largely misses the point. Seignorage is actually a very important factor in today's economy.
Seignorage is indeed the profit made by printing money, but your explanation leaves out the important details.
When the treasury prints a $100 bill, they send it out into the economy in exchange for $100 worth of something, be it gold/treasury bill/etc. 5 years down the road, this asset has generally increased in value. However, the $100 bill is still worth $100. This additional profit earned by the government is seignorage.
Where seignorage is most profitable is when currency becomes popular abroad. The US government earns approximately $25 billion per year in seignorage due to the fact that the dollar is in wide circulation overseas.
Posted by: Brian at October 31, 2009 11:48 PM
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