Monetary Ramblings – Part 2 (Seignorage in practice)

Last week, the NPR had an article on the golden, rarely used, 1-Dollar coins. Apparently, various government institutions decided that using metal coins would be less wasteful than the still-dominant 1-Dollar bill, because they don’t have to be replaced as often. However, most people prefer to hold the bills instead of the coins and so there have been difficulties to get the latter into circulation. The result are piles of idle coins without any use. However, as minting is controlled by Congress, that seems no reason to stop making more of them.

The process  of how the decision to manufacture these metal pieces was made illustrates the common logrolling in Congress:

…Congress decided that a new series of dollar coins should be minted to engage the public. These coins would bear the likeness of every former president…It was easier for the bill’s sponsor, then-Rep. Mike Castle (R-DE), to move the presidential coin bill forward if it didn’t displace other dollar coins honoring Sacagawea, the teenage Native American guide to Lewis and Clark…The mint would be required to make a quota of Sacagawea coins. Currently, the law says 20 percent of dollar coins made must have Sacagawea on them.

So the coins are just stored in vaults and never see the light of day, but Congress took care to ensure that the useless pile of presidential-faces metal had a politically correct quota of minority-honoring metal added to it.

At least some of the coins have made it into circulation though, earning seigniorage income for the federal reserve:

Some 2.4 billion dollar coins have been minted since the start of the program in 2007, costing taxpayers about $720 million. The government has made about $680 million in profit by selling some 1.4 billion dollar coins to the public since the program began.

Note, that this formulation is misleading. The government could always make about 1.4 billion dollars of seignorage profit by simply buying various assets and crediting peoples’  bank accounts in return with newly “minted” digital money at almost no cost. As explained in my previous post, long-term financial stability that is the limiting factor on this. Thus, the opportunity cost of spending $ 720 million  to make metal coins and earning $ 1.4 billion by issuing them, is issuing the same amount of money at almost no production cost. The “$ 680 million in profit” are thus actually an economic loss of $ 720 million.

So why might the government still try and get out the golden coins? The article suggest that the Government Accountability Office pretended that seigniorage profits are benefits from making the coins –  but that can’t be true, because the government can have those  profits by issuing money in other forms as well. Consequently, the Fed set the record straight:

When this profit, known as seigniorage, is factored out, switching to the dollar coin would actually cost taxpayers money over three decades, according to a Federal Reserve analysis of the GAO’s figures. The cost works out to $3.4 billion.

There you go. The Government Accountability Office did not understand that seigniorage is a normal part of monetary policy and pretended that making golden coins somehow creates value in a way different from the tax on money holdings that normal seigniorage (issuing of money) represents.

HT to Russ Roberts

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