In a post about Penny on June 10th, I wrote:
The US government is going to have a pretty penny (pun intended) in seigniorage. That’s not as much as before. Because more people use credit cards and cryptocurrencies to purchase goods and services. Still, that’s a fair amount.
The biggest profit from Seiigniorage is a $100 bill. Printing one costs the federal government 9.4 cents. So, if the Fed spends this $100, it will make a profit of $99.90. Not bad. Printing a $1 invoice costs 3.2 cents to the Fed. So even on a $1 bill, the Fed will still earn 97 cents.
In the comments, Rob Rawlings wrote:
I am a bit confused by the idea that by printing new memos, the government will win something prominent. I’m glad that it’s fixed if I’m wrong, but don’t they win Zeniorage when they buy back their bonds with newly created e-money, rather than when printing a new paper note? When printing these new notes (as they match the increased demand for holding rather than electronic money), the printing costs seem to be a real cost.
I agreed that the cost of printing is actually a cost, but that cost is smaller than a $100 bill, or even a $1 bill.
Rob replied:
Where is the “net Zeniorage” located if a newly printed memo is provided to the bank in exchange for a comparable amount of basic funds? It appears to have happened before when the government created new basic money by buying back bonds.
Somehow, in responding, I missed the second sentence of Rob above. I think that’s true. The bottom line is that there is Zeniorage and he has identified where it will happen.
As you see when quoting Jeff Hammel, I think I even made the mistake of moving towards talking about “Net Zeniorage.”
I brought in Jeff Hammel, a leading expert in financial theory and policy.
I think there is a definitional difference here. If you want to see pure pureness when defining, it’s okay and sometimes beneficial. But what I think is that the standard way of thinking about Zeniorage is two other main ways in which the government generates revenue, as explicit taxes and taxes similar to government borrowing (taxes on actual cash balances). Both of these have, at least in theory, associated collection costs. But no matter how the government creates new dollars and puts them in circulation, the burden placed on government subjects (ultimately through real cash balance reductions) is still ultimately dollars, as well as coins, invoices, or reserves of non-profit banks.
I agree with Jeff. Well, most of it. I’ll do something a little fussy here and point out that tax burden is not an income that is never collected. It is, in this case, the loss of death from those who economy to hold actual cash balances, in addition to that amount.
I recall that there may be readers who may think I am claiming that the federal government is insisting on printing more $100 bills. i haven’t.
Instead, I’m making a more modest point, and that’s this. However, let’s say the Federal Reserve chose the best monetary policy. However, it is defined. Scott Sumner has one definition, John Taylor has another. But let’s assume that, in choosing this optimal monetary policy, the Fed assumes there is no additional demand for US currency in other countries. In other words, they assumed that even if US currency is currently being held overseas, there would be no additional demand.
But, after all, there is additional demand. The optimal monetary policy has since not been chosen by the Fed. The best policy is to print more $100 invoices.
Note 1: I would like to thank Rob Rawlings for putting up a good point, and Jeff Hummel for helping me think through it.
Note 2: I gave instructions to ChatGpt and drew a picture of a $100 bill as Ben Franklin’s head size is exaggerated due to being whimsical on my part. I think Franklin’s expression makes him look like Jack Benny, no matter what size.
