Senorage is what? Terms of Commodity Money

In 1290, Philip IV waged wars in France. Money for financing was not enough. Chasing new coins led to higher inflation. To ensure the availability of gold in the treasury, the king robbed the kingdom of the Lombards, took away the money of the Jews and confiscated the property of the Knights Templar. All this was done not to pay the seigniorage - this is a reward for the coinage of coins.

The Essence

Senorage is the income received from the increase in the money supply by the state. The government can control the amount of money in circulation. It is a key link in the country's credit policy.

In the Middle Ages, the mint was engaged in minting coins. The feudal lord received the metal from the customer. Most of the raw materials were used to make coins, and the remainder served as a payment for services. Currency seigniorage is the income that was shared between the brassage (mint) and the sovereign (feudal lord).

Education

Costs for coinage of coins of different denominations practically did not differ, but the weight strongly fluctuated. Therefore, in some countries the fee was set depending on the nominal value or as a percentage of the weight and volume of one coin. Let's consider in more detail what seigniorage (MTI) is.

This term in Latin means "main", or "senior". In terms of commodity and fiat money, it is calculated in many ways. At the time of Philip IV, the fee for services was the difference between the cost of coins and silver, which was used to make them.

Modern seigniorage is the difference between the cost of issue and the value of new banknotes.

A bit of history

The world judge made a verdict, according to which the Central Bank of Italy should return the cost to the citizens of the country for the cost of printing money. For 8 years of the Treasury, the Central Bank's debt for 2003 was 5 million euros. But by this time the litigation was transferred to the jurisdiction of the European Central Bank. With the support of the ADUSBEF Consumer Association, which deals with claims in the banking sector, the Central Bank's lawyers protested the previous decision, calling it groundless.

This example is very revealing. Senorage originated in the feudal era, but it still operates today. And today the state gets profit for the issue of banknotes. The problem is that the issue of money is not limited by anything. When their number begins to exceed the volume of available goods, there is a rise in prices.

Seigniorage and inflation tax

You can increase the money supply by issuing banknotes, giving out money stored on the deposit, and purchasing government bonds. In a stable economic environment, the issue of banknotes generates an inflationary tax. Emission reduces the value of available financial assets. Exchange rates are regulated by the state. The emission center in the person of the Central Bank gets all the benefits from the increase in the money supply. The inflationary tax is called hidden, because people who do not index their income and who keep it in the form of deposits in the bank suffer from the emission.

The state receives additional capital, increasing the rate of inflation. The Americans noticed this first and created a single emission center - the Federal Reserve. The next impetus to establish a monopoly was the Great Depression. Today, there is already a scheme in which the government receives money from the market.

Profit from fiat money

If the money is made of material that has its value, the share premium consists of the difference between the cost price and the denomination of banknotes (paper or electronic). For example, if the cost of a hundred-dollar bill is 4 cents, the seigniorage will be 9,996 cents. And this is with a single turn. If you take into account, for every year of 10 years of the life of the bill takes an average of 4 turns, the income is very tangible.

The issue of non-cash pays off almost completely. Therefore, some scientists argue that electronic seigniorage is a key factor in the accumulation of wealth in the 21st century.

The profit from the issue of banknotes increases if the currency is used abroad. For example, the USA receives a greater seigniorage than any other country in the world. The dollar is used in international trade, in the accumulation of reserves. In this case, seigniorage is the income from additional assets that a country can acquire from its foreign reserves, less investment by non-residents and all administrative expenses.

Information on how much the seigniorage is, is a state secret. And it is not disclosed. Seigniorage in Russia fluctuates within 15% of GDP. In the Netherlands, it is 0.66%, in the USA - 3%, and in Italy and Greece - more than 10%.

Senorage is not only an income, but also a loss from issuance. The costs of making fine denominations are often not covered by their nominal value. Therefore, many central banks do not issue them or issue them in very small quantities.

Where does the seigniorage go?

The issue income does not go to private hands, but goes to the Central Bank. In the US, the profit from the emission is transferred to the accounts of the Federal Reserve, although the state regulates its use. Part of the profit (6%) goes to pay dividends, and the rest is credited to budget revenues. For comparison, private investors of the Bank of Japan receive 4% of the share premium. Seigniorage in Russia is divided into two parts. Half receives the state, and the second part finances the activities of the Bank of Russia.

In the Russian Federation, only 15 million banknotes and 50 million coins have been issued. That is, even according to the most conservative estimates, the revenue from the emission is significant. Seigniorage can also arise as a result of subsidence of a portion of withdrawn and unused banknotes from collectors. However, Eurostat banned the countries of the euro area to send emission income to reduce budget deficits. But in countries with hyperinflation, on the contrary, seigniorage is used as one of the sources of income.

Conclusion

The issue of money is a profitable activity. Therefore, only the state has a monopoly right to issue banknotes. Since the realization of this idea is carried out by the Central Bank, it records the financial result from the operation in the lines of its balance sheet. But in the Russian Federation, half of the funds go to the state budget.