Seigniorage

Introduction.

Seigniorage, derived from the French word "seigneur," meaning lord or sovereign, refers to the profit made by a government by issuing currency. Throughout history, seigniorage has played a significant role in shaping economies and has had profound implications for societies. In this article, we will explore the history of seigniorage, its implications with historical past, present, and future.

What is Seigniorage?

Seigniorage refers to the profit that a government makes by issuing currency. It represents the difference between the face value of the money (coins or banknotes) and the cost of producing and distributing that currency. In simpler terms, seigniorage is the revenue generated when a government creates money.This practice underscores the power vested in governing bodies to create and manage currency for economic governance. (Usually supported by strong military might of empire)

Mechanics of Seigniorage:

Seigniorage hinges on the process of money creation. When governments mint coins or print banknotes, the cost of production is typically lower than the currency's nominal value. This disparity constitutes seigniorage revenue, enhancing government finances without resorting to taxation.( no body like taxes! )

There are four primary methods for governments to generate revenue:

1. Taxation, which is the main source of income.

2. Borrowing, as the name suggested.

3. Seizing resources through war and invasion.

4. Creating Money

Creating money, known as seigniorage, is the simplest way to generate revenue with minimal effort. However, there is a limit to how much it can be done. If excessive, the public's trust in the currency diminishes. History shows that when empires resort to excessive seigniorage, their financial stability deteriorates, leading to a loss of both economic power, political influence and even it's empire.

Pros & Cons:

To be honest, I have a difficult time convincing myself there are any pros, but for objective purposes, I'll try to list some.

Pros:

• Revenue Generation: Seigniorage provides fiscal flexibility for governments without imposing additional taxes on citizens.

• Monetary Policy Tool: Governments can adjust the money supply through seigniorage, influencing economic variables like inflation and growth. (Read more about Keynesian economics for further understanding, although it may not always make sense in real world scenario...)

• Incentivization: Seigniorage encourages the maintenance of monetary systems, though it comes with potential risks.

Cons:

• Inflationary Pressure: Overuse of seigniorage can lead to inflation, reducing the purchasing power of the currency.

• Distorted Incentives: Short-term gains from seigniorage may undermine long-term economic stability.

• Market Perception: Excessive reliance on seigniorage can erode market confidence, leading to currency devaluation or instability.

Examples 1:

Ancient Rome - Decline and Fall of the Roman Empire

Background: The Roman Empire, one of the most powerful and enduring civilizations in history, faced a gradual decline and eventual collapse. While numerous factors contributed to its downfall, including external invasions, internal strife, and economic instability, the abuse of seigniorage played a significant role in exacerbating these issues.

Emperor: Emperor Nero (reigned 54–68 AD) and subsequent emperors during the Crisis of the Third Century (235–284 AD)

Abuse of Seigniorage: During the reign of Emperor Nero and subsequent emperors, the Roman government increasingly debased its currency as a means to finance its lavish expenditures, including extravagant public works, military campaigns, and personal luxuries of the ruling elite. Debasement involved reducing the precious metal content of coins while maintaining their face value, thereby increasing seigniorage revenue for the state.

Consequences: The abuse of seigniorage had devastating consequences for the Roman Empire:

• Inflation: The debasement of the currency led to rampant inflation as the value of Roman coins diminished. Citizens experienced a decline in purchasing power, eroding their standard of living and causing economic hardship. (Ancient rulers minted coins with nominal values exceeding production costs, profiting from the disparity. )

• Social Unrest: Inflation and economic turmoil exacerbated social inequality and unrest within the empire. The widening wealth gap between the rich and the poor, coupled with rising prices for essential goods, fueled discontent among the populace and contributed to social instability.

• Economic Decline: The erosion of the currency's value undermined economic confidence and disrupted trade and commerce. Inflationary pressures, combined with excessive taxation to compensate for declining revenues, stifled economic growth and productivity.

• Military Weakness: The financial strain caused by debasement and inflation weakened the Roman military. The government struggled to maintain a well-equipped and paid army, leaving the empire vulnerable to external threats from barbarian invasions and internal rebellions.

• Loss of Trust: The debasement of the currency eroded trust in the Roman monetary system and undermined the credibility of the central authority. Citizens resorted to bartering and hoarding goods, further destabilizing the economy.

Fall of the Empire: While the abuse of seigniorage was not the sole cause of the Roman Empire's decline and fall, it significantly contributed to the empire's weakening and eventual collapse. Economic instability, social unrest, and military weakness weakened the empire's ability to govern effectively and defend its borders, ultimately leading to its fragmentation and downfall.

Legacy: The example of ancient Rome serves as a cautionary tale about the dangers of abusing seigniorage and mismanaging a nation's monetary system. It highlights the importance of fiscal responsibility, economic stability, and public trust in sustaining the long-term prosperity and stability of an empire.

Example 2:

Ancient Chinese dynasty can be seen during the later years of the Tang Dynasty (618–907 AD) and the subsequent collapse of the Tang Empire.

Background: The Tang Dynasty is often regarded as a golden age in Chinese history, characterized by economic prosperity, cultural flourishing, and military expansion. However, towards the latter half of the dynasty, the empire faced internal unrest, external invasions, and economic challenges that contributed to its decline.

Emperor: Emperor Xuanzong (reigned 712–756 AD) and subsequent emperors during the later years of the Tang Dynasty.

Abuse of Seigniorage: During the later years of the Tang Dynasty, the central government faced financial strains due to prolonged military campaigns, lavish court expenditures, and administrative inefficiencies. To address these challenges, emperors resorted to various measures, including the debasement of the currency and excessive issuance of paper money.

Debasement of Currency: Similar to the practices in ancient Rome, the Tang government debased its metallic currency by reducing the precious metal content while maintaining the face value of the coins. This allowed the government to generate seigniorage revenue by profiting from the disparity between the production cost and the nominal value of the coins.

Introduction of Paper Money: The Tang Dynasty was one of the earliest civilizations to issue paper money as a form of currency. While initially intended to facilitate trade and alleviate the burden of carrying heavy coins, the excessive issuance of paper money led to inflation and currency devaluation.

Consequences: The abuse of seigniorage during the later years of the Tang Dynasty had several consequences that contributed to the decline of the empire:

• Inflation and Economic Instability: The debasement of metallic currency and the excessive issuance of paper money led to inflation and economic instability. Prices soared, and the value of the currency plummeted, causing hardship for the common people and undermining confidence in the monetary system.

• Social Unrest: Economic hardships exacerbated social inequalities and unrest within the empire. Peasants, burdened by heavy taxes and inflated prices, revolted against the government, contributing to internal strife and rebellion.

• Decline of Imperial Authority: The financial mismanagement and economic turmoil weakened the authority of the central government and eroded the legitimacy of the ruling dynasty. Provincial governors and military commanders gained greater autonomy, further fragmenting the empire's unity and control.

• Military Weakness: The financial strain resulting from seigniorage abuse undermined the effectiveness of the Tang military. Troops were poorly paid and supplied, making it difficult to defend the empire's borders against external threats, such as nomadic invasions.

Fall of the Empire: The abuse of seigniorage, along with other factors such as political corruption, internal rebellions, and external invasions, contributed to the decline and eventual collapse of the Tang Dynasty. By the early 10th century, the empire had fragmented into smaller regional states, marking the end of the Tang Empire and the beginning of a period of disunity in China's history known as the Five Dynasties and Ten Kingdoms period.

Legacy: The example of the Tang Dynasty serves as a cautionary tale about the dangers of abusing seigniorage and mismanaging a nation's monetary system. It underscores the importance of prudent fiscal policies, economic stability, and public trust in sustaining the long-term prosperity and stability of an empire.

Present:

Presently, the production cost of a US dollar $100 bill is a mere 8.6 cents, highlighting the substantial profit margin associated with seigniorage by the money producing Central Bank (source: https://www.federalreserve.gov/faqs/currency_12771.htm)

In contrast, consider Bitcoin: as of the time of writing this article, producing 1 BTC using an S19j Pro mining machine at a normal household electricity rate costs approximately $56,949 USD. While this cost can vary, even for professional mining companies, the significant expense involved underscores the tangible investment of resources (Electricity, which is back by nature, physics) and effort required to produce Bitcoin. This stands in stark contrast to traditional currency production, where the cost is close to zero. This comparison highlights the fundamentally different nature of Bitcoin and traditional currencies in terms of production costs and underlying value.

Future:

With digital currencies like Central Bank Digital Currency rolling out worldwide, the cost of producing this kind of money approaches zero. No physical labor or printing machinery is even required; a simple click of a button by a designated officer can create CBDC "out of thin air." This raises concerns about the potential for centralized authorities to exert control over individuals' finances, coercing them to store their hard-earned value in a currency that can be easily inflated it away. Such a scenario challenges traditional paradigms of seigniorage and necessitates adaptive policy frameworks to address the evolving dynamics of monetary systems.

Conclusion:

As we journey through the history of money, seigniorage stands out as a crucial aspect of economics. Whether looking at ancient civilizations or modern digital trends, its impact is clear. While new forms of money emerge, the essence of seigniorage remains—a reminder of the close link between governance and currency historically.

Making a profit from creating money is normal and some may argue it can help stabilize or incentive to maintain the monetary system, but when monopolization of this power by a single entity—be it an empire or state—it always leads to abuse over time, a common trait of human nature.

Separate the state and creation of money might be better idea? Others even argue that true democracy is unachievable without independent money? So, the question remains: If given the opportunity to choose (although we not always have such privilege), what type of money would you prefer?

Flying cash (Chinese: 飛錢), or Feipiao, a cheque from the Tang Dynasty. was a type of paper negotiable instrument used during China's Tang dynasty invented by merchants but adopted by the state. Its name came from their ability to transfer cash across vast distances without physically transporting it.

Coins for this issuer were issued from 54 until 68, under emperor Nero Claudius Drusus Germanicus, was the fifth and last Roman Emperor of the Julio-Claudian dynasty. Popular legend remembers Nero as a playboy engaged in petty amusements while neglecting the problems of the Roman city and empire, the emperor who "fiddled while Rome burned".

Author: Numpi21

Twitter@Numpi_21

Blocktime #836801