Saturday, October 07, 2006

Seigniorage and the King’s New Clothes

My friend Al, over at Old Whig’s Brain Dump, has a piece (linked via title bar) in which he introduced a new word to my vocabulary, Seigniorage. (linked via title bar)

“Seigniorage, the profit that results from the difference in the cost of printing money and the face value of that money.”

Al wrote about the pitfalls that accompany the use of government issued coinage as he referred to historical warnings spoken by Jonathan Swift. I’m no expert; heck, I’m barely educated when it comes down to the subject of currency and exchange. What I know about the complexities involved in printing money and assigning value to such would fill a thimble; a tin thimble at that.

I really have no problem with the concept of a common currency, a means whereby the government is responsible, ( is that oxymoronic to have government and responsible in the same sentence?)…where was I, responsible for the production and issuance of coins and paper currency. Money, when backed with a precious commodity such as gold, silver, diamonds or any other item of consistent value lends credibility to such coinage and the citizenry extend their trust toward their government ( see previous oxymoronic aside ) to facilitate a method of common exchange.

I don't mind paying a convenience fee added to the actual value of that money, a reasonable expectation to cover the cost of production. The network associated with maintaining currency should yield a fee to counter production costs and future expenditures to insure such a healthy monetary system; hence the term seigniorage.

Unfortunately for most forms of currency, to include the Dollar, there is nothing of real value to back its claimed value. The old Gold Standard and Silver Certificate days are long gone. There is no pile of gold stacked in the government bank to equal the number of dollars in circulation and so we operate on a system where the government is free to print money with no expectation of ever having to validate it. The government actually has special printing presses that print money around the clock which further dilute the associated value of previously issued dollars. If you or I were to operate such a system of money creation we’d be arrested for counterfeiting, the government hides behind a different word, fiat or inflation.

I remember a story about a young boy who observed the King’s new clothes and the fakery going on. “Oh, isn’t that a grand tunic, there has never been one quite so regal. The ermine is of the finest quality and will be the envy of all.” Everyone was afraid to point out to the King that he’d been sold a “bill of goods”, that he was in fact running around naked.

Don’t look now but we all might have to hide our nakedness, for so it is with the dollar. You might want to have something of real value stashed away, some gold, some silver or diamonds for that day which surely must come when dollar bills are used as wall paper decoration.

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