Re: Seigniorage in Australia
From: Peter Lawrence (peterl_at_netlink.com.au)
Date: 08/20/04
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Date: Fri, 20 Aug 2004 03:06:03 GMT
Bill Ryan wrote:
>
> The following is a brief excerpt from an article on
> the website of the
> Reserve Bank of Australia (RBA), at
> http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jul97/bu_0797_1.pdf>
> "When a commercial bank requires additional notes to
> meet the needs of its customers it buys those notes
> from the RBA. The bank pays for these notes by
> providing the RBA with another financial asset - such
> as a government security - the value of which is
> equal to the face value of the notes. Seigniorage
> arises because the cost of producing the notes is
> much smaller than the value of the asset received by
> the RBA."
That was a good description of what happens here and how, but it it is quite
wrong about why. The article understandably used "because" for something that
applies only within the current institutional framework, since it is itself
an institutional product. But for our better understanding we should read
that "because" as "by means of" or something like that.
The thing is, it is both practically and theoretically possible to print and
issue Australian dollars directly for all sorts of things, not just through
the banks for securities. It is just not institutionally possible, within
current institutions.
> ---------------------------------------
> ----------------------------------
> [Reply] In the old days, so the story goes, the King
> would take taxes in gold coins, which he would re-
> coin at higher face value, thereby gaining
> "seigniorage" over and above the taxes he initially
> collected, as he spent them into circulation in
> payment for whatever King's spend money on. Those
> who opposed this practice - that is to say, the
> goldsmiths - called it "debasement."
Wrong. There is seigniorage in the brand of the product, as it were, even
when there is no debasement. After 1945 forgers found there was enough
premium on gold sovereigns that they could make a profit even using the
proper quality of gold - which they did, since it made it easier to pass the
forgeries. The royal mint responded by coining and issuing gold sovereigns
dated 1925, in effect making its own forgeries since it was taking back
ownership of its own brand with a coin with a false date (and King). The
premium on the value of the brand was the seigniorage.
Ironically, this is not the first time this sort of thing has happened. The
demand for the brand of late 18th century Maria-Theresa thalers led the
Austrain mint to keep making coins with that date and head to the present
day.
For what it's worth, fiat money usually doesn't get most of its value through
direct force or legal obligations to accept it as payment, but through
indirect use of the force that makes it acceptable as payment for taxes and
other government charges. These are imposed more directly, except for returns
from revenue yielding assets which involve another level of indirection. PML.
-- GST+NPT=JOBS I.e., a Goods and Services Tax (or almost any other broad based production tax), with a Negative Payroll Tax, promotes employment. See http://users.netlink.com.au/~peterl/publicns.html#AFRLET2 and the other items on that page for some reasons why.
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