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Über dieses Buch

This book analyzes the revenues from the creation of currency by a central government. Adopting an institutional perspective, it develops a general theory of seigniorage by identifying three monetary regimes in economic history and the history of economic thought: a commodity currency, a fiat currency and a credit currency regime. As such it provides a modern analytical framework to analyze the nature of revenues from the creation of currency and their optimal height, whether currency is issued by means of minting coins, by printing and spending paper notes, by crediting private entities, or combinations thereof.

The results of this analysis stretch beyond the immediate topic. The book establishes a relationship between the theory of seigniorage and government debt, the theory of the interest rate, the optimal rate of inflation, or the effectiveness and inflationary limits of outright monetary transactions.



Chapter 1. Seigniorage in Institutional Perspective

In this book I take an institutional perspective on one of the oldest issues in economics: seigniorage, i.e. the revenue from the supply of legal tender currency. The issue is in fact older than the discipline of economics as an independent field of research.
Seigniorage is not only a very old economic issue; it touches and infiltrates several other issues in economics. It is a source of finance; it is connected to inflation, growth and government debt.
The first chapter of this book gives an introduction to the topic. It provides the definitions for the applied terms, like money, currency, seigniorage, and introduces the method and structure. Most importantly three (ideal type) institutional supply mechanisms are distinguished, i.e., commodity, fiat, and credit currency, which govern the structure of the rest of the book.
Jens Reich

Chapter 2. Seigniorage in the History of Economic Thought

This chapter deals with the history of economic thought regarding the revenue from the supply of currency, its justification, or, in more modern welfare-theoretical terms, its optimal level. It is confined mostly to continental European writers of the last three centuries. It is shown that different forms of organization of the currency supply constitute different instruments to generate seigniorage. Three regimes are distinguished: In a commodity currency, mints charge a tax on deliveries of the currency-commodity, e.g., gold. In a fiat currency, seigniorage is collected by issuing currency to finance government spending. In a credit currency, seigniorage is realized as interest payments to the government or its authorities. Regarding optimal seigniorage two approaches are distinguished. One determines seigniorage as optimal if it covers the cost (of production and maintenance) of the currency, the second builts upon the former but adds a broader utility based framework.
Jens Reich

Chapter 3. Seigniorage from Fiat Currency: Present State of Economics

This chapter shows that the mainstream approach to seigniorage is, in its variants, always based on a fiat currency. An exogenously-given currency supply and an empirical demand function are assumed. The latter will be reconciled with the quantity equation, which is usually omitted in other publications. The framework is furthermore amended for unannounced, i.e. dishonest, monetary expansions.
Regarding optimal seigniorage, a cost covering approach is developed. The latter is at odds with the usually presented Friedman rule. It differs in the derived optimal currency growth rate, the optimal nominal interest rate, and the optimal rate of inflation. The Friedman-rule appears as a special case of the cost covering approach, which coincides only under certain conditions.
Jens Reich

Chapter 4. Seigniorage from Commodity Currency

This chapter transfers the modern approach to seigniorage to a commodity currency. Seigniorage is earned as a fee for minting or by devaluation of coins. As a result and in contrast to a fiat currency an optimal seigniorage can be achieved by multiple combinations of these instruments. Hence without specifying further goals, like a constant unit metal content, there is no result comparable to that of a fiat currency. Another striking difference is different degree in of freedom of monetary policy that a government faces. The commodity basis limits the government in its monetary policy but renders hyperinflations highly unlikely.
Jens Reich

Chapter 5. Seigniorage from Credit Currency

This chapter transfers the modern framework to a credit currency; a currency in which the responsible authority determines interest rates at which the currency can be borrowed. A peculiarity of credit currency is a specific form of costs of production—expected losses. Optimal seigniorage and hence charged interest rates have to cover expected losses from central banks’ lending operations. This resolves a puzzle in economics. It allows reconciling the practical norms of central banks with the suggested optimal interest and inflation targets by economic theory. It can furthermore be shown that if the central bank charges a bank rate below its optimum it creates an external effect and thereby subsidizes its debtors and potentially induces systemic miss-pricing of credit risks.
Jens Reich

Chapter 6. Seigniorage in Mixed Currency Systems

Monetary systems usually consist of several ideal type currencies. This chapter deals with such mixed currency regimes. It will be argued that in every mixed system, only one form of currency can dominate. The other currency forms have to adapt to the dominant form. The currency supply as well as seigniorage can be understood as the sum of the mixed currency forms and the return from their supply. The most remarkable insight is the opportunity to make us of several instruments in mixed regimes. A government can e.g. choose whether the currency demanded should be supplied via the central bank against interest, or whether it should increase expenditure financed from the printing press. A government can thereby capitalize or decapitalize its seigniorage revenue.
Jens Reich

Chapter 7. Extended Seigniorage

This chapter extends the perspective to seigniorage effects on tax returns and the debt service. It will be shown that the impact of seigniorage is quite heterogeneous for the three identified currency regimes. The effects are sometimes even in opposite direction. Furthermore, the intertemporal dimension of a government’s seigniorage policy is particularly highlighted. The existence of government debt provides an optimality rationale for the composition of mixed currency regimes. This is demonstrated for a mixed credit-fiat currency. Changing the composition of the supplied total currency, e.g. replacing credit currency with fiat currency, shifts seigniorage revenue from the future to the present (or vice versa). This mechanism provides a trade-off between the composition of the currency and the supply of government debt.
Jens Reich

Chapter 8. General Theory of Seigniorage

The last chapter summarizes and generalizes the findings. It gives an idea of the magnitude of the dependence of economic theory on underlying institutions and monetary theory. In proposing a general and comprehensive institutional toolkit which can be applied to any currency supply regime of a central government it provides a general theory of seigniorage. To demonstrate the latter, the theory is applied to the Eurozone, determining the inflationary limits to government purchases. Lastly, it formulates two open questions for future research. The first concerns the relation of monetary theory and equilibrium theory, in particular with respect to interest rates. The second raises the question whether similarities between currency and other privately issued liabilities, like bank money or derivatives, might lead to similar, signiorage-like revenues from their supply.
Jens Reich
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