e$ Signorage

[Perry E. Metzger]

James Gleick writes:
> >I believe money which is never redeemed back at the bank is called
> >signorage in the currency biz.  Whatever signorage *actually* is, Kawika
> >Daquio of the ABA (B for "Banking"), the Fed makes $20 billion a year on
> >it. Not much against a trillion dollar federal budget, but, hey, every
> >little bit helps...
> 
> Seigniorage is actually the Government's interest income on all the
> currency in circulation.

Seignorage is neither of these things. It is the difference between
the cost of producing a currency token (like a quarter or a dollar
bill) and the face value of the token. In essense, its the profit
margin on printing or minting money.

> It's not obvious, but it's true, that the Fed collects the "float"
> on dollar bills you carry in your pocket,

Oh, really? From whom? First I've heard of this.

Now, it is indeed true that the Fed holds large numbers of government
bonds and theoretically earns interest on them, and that banks in a
free banking system do indeed loan out the money that backs their
notes. However, the fed has no mechanism to earn interest on dollar
bills, nor, in fact, does it need to.

Perry