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[James Gleick]

Perry E. Metzger wrote:
>
>James Gleick writes:
>> 
>> 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.

You're giving a definition straight from a dictionary--an old one. Welcome to the modern world.

>> 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.

Then you're learning something new.

>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.

On the contrary. The Federal Reserve holds Government securities corresponding to the dollar value of currency in circulation. It earns interest income on this amount, and returns this income to the Treasury. This is called seigniorage. It amounts this year to something over $20 billion.

This is a very real issue. To the extent that electronic money replaces currency (reduces the amount in circulation), it will cost the Treasury seigniorage--and the Government is acutely aware of this. Whether the beneficiaries are consumers, banks, or other issuers of digital cash will depend on the system. 


--
James Gleick
gleick at around.com
http://www.around.com