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During the era of metal-based money, the monetary base consisted of precious metal coins. The difference between the face value of the coins and the cost of acquiring the metal and minting them generated a financial benefit for the State treasury, known as seigniorage. In a modern fiat money system the meaning of seigniorage is quite different.

Seigniorage in a Fiat Money System

In the U.S. today the monetary base is created by the Fed when it buys Treasury securities from the public and credits a seller’s bank with a reserve deposit at the Fed.  Interest paid on Treasury securities acquired by the Fed is the main source of income for the Fed. The Fed keeps enough to cover its expenses, and refunds the balance to the Treasury.  

On average, over ninety percent of the interest received by the Fed is refunded to the Treasury.  The refunded amount is a source of spending power for the Treasury which is independent of tax revenues. Thus it is the equivalent of seigniorage for the Treasury. The value of the seigniorage automatically increases as the Fed monetizes Treasury securities to meet the private sector demand for additional cash.

How the Issue of Notes Affect Seigniorage

The Bureau of Engraving and Printing in the Treasury produces all notes for the Fed. The Fed buys the notes at cost, and pays by crediting the Treasury's account at the Fed. The Fed provides notes on demand to banks at face value, debiting their accounts at the Fed in payment. Banks provide notes on demand to depositors, debiting their individual accounts in payment. Conversely depositors can return notes to their banks and regain credits in their accounts. Likewise banks can return notes to the Fed and regain credits in their Fed accounts.

Until the Fed issues the notes to banks, they are not a part of the monetary base, but only engraved pieces of paper stored in the vaults of the Fed. Since the Fed buys notes at cost and “sells” them to banks at face value, it would seem that seigniorage from notes accrues to the Fed. However when the Fed issues or redeems notes with banks, it simply swaps liabilities on its balance sheet. The asset side of the balance sheet remains unchanged.  Thus the Fed gains nothing from the “sale” of the notes.

How the Issue of Coins Affects Seigniorage

The U.S. Mint, a bureau of the Treasury, produces all coins. It sells them to the Fed at face value for credit in its account at the Fed. The difference between the face value of the coins and the cost of their production is seigniorage for Treasury, which accrues at the time of sale to the Fed. 

Coins held by the Fed are carried on its balance sheet as assets. Those assets vanish when sold to the private sector. The Fed sells the coins to banks at face value, who in turn sell them to the public at face value. This peculiar distinction between coins and notes is a hold-over from the days when the monetary base was precious metal

Who Really Benefits from Seigniorage?

As the late economist Herb Stein observed, "The government is no one; there is nobody here but us people."  In other words, government should be viewed as a public trust, rather than the people who work for it.  All citizens, including government officials, are tax-payers and consumers of government services. It follows therefore that the seigniorage benefits accrue to the people as a whole and not the government itself.

What about Federal Reserve notes that are bought by foreign interests for use overseas? The foreign currencies acquired from the purchase of those notes represent a claim on foreign goods and services.  If the notes never return, they are a gift of seigniorage to people of the U.S. 

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