In-depth Analysis

Central banks love to print money

Except for a few countries, Germany being a noticeable example, where the use of physical cash to settle everyday transactions remains high due to cultural reasons, payment by electronic means is becoming more and more common. For many of us it has been months or even years since we last touched a bank note or coin, especially since the beginning of the pandemic, when many shops stopped accepting cash fearing the transmission of the virus through money.

Strangely, despite this reduction is everyday use, physical cash remains abundant and, in some cases, there has never been so much in circulation as there is today. In Great Britain, for example, debit and credit card usage has outstripped physical money since 2017, with the trend having since accelerated due to COVID. Still, the value of all pound notes in circulation trebled over the last 20 years, reaching a total of around 75 billion pounds, in 2021.

It’s not easy to explain and reconcile the reduction in use with the increase in supply, but there are several theories: Some point at the very low interest rates of the last decade as perhaps being the reason why many prefer to keep money stashed at home, rather than in bank accounts that don’t yield any interest; or, it could be the money laundering activities of criminal organisations, which in its initial stages often requires the moving of large suitcases filled with bank notes across borders. However, no one seems to know for sure; perhaps because those who should know, the central banks responsible for printing money, seem unconcerned by the paradox.

And there is a good reason for this apparent indifference; it’s called Seigniorage. This old French word was used to refer to the monopoly of the feudal lord (seignior) over matters such as issuing money and their right to a percentage of the gold or silver used in the minting process.

As time passed, societies and nations evolved to higher degrees of sophistication and central banks eventually gained the monopoly of issuing currency, but the old principle remained in place. And, seigniorage turned out to be very profitable indeed, due to the differential between the manufacturing cost of the unit and its face value, which increased significant when bank notes, with high face values and low production costs, replaced coins as the most commonly used form of money.

Today, those with the monopoly on the issuance of money profit handsomely from it. Think of a $100 bill; although the face value of the bank note is 100 US dollars, the production cost is only 14 cents. So, for each $100 bill it issues, the Federal Reserve gets to keep $99.86, that were created out of thin air. If it wasn’t for this prerogative, governmental treasuries around the world would struggle to find the resources necessary to balance their budgets, especially during economically troubled times, when fiscal income declines and spending increases. This is the reason why no one is trying too hard to find those missing bank notes.

 

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