A parody of seigniorage

Posted by Marc Hodak on June 2, 2009 under History, Irrationality | 2 Comments to Read

On a recent trip to D.C., I got some change from a vending machine, and thought, “Damn, someone managed to get a fake coin into the change box.”  It looked like a casino token.  I was pissed.  When I looked more closely, I got confused.  It’s markings said United States of America and indicated a value of $1.  I shrugged and put it in my pocket.  Shortly afterward, I saw a sign on the wall that read:

I read that one line twice:  “They Save the Nation Money.”

Once upon a time, the currencies of choice were gold or silver.  These precious metals had many properties that made them especially useful as currency– they were scarce, portable, and divisible into any useful denomination of coin.  People using such coins in exchange could be reasonably certain that the next person in the chain of commerce would accept it at an equivalent value for which they received it.  The only problem was that these metals had to be weighed for each transaction.

Monarchs exploited the opportunity to create greater trust in commerce by minting uniform denominations with the seal of the sovereign stamped on the coin.  The stamp assured its value.  To enhance the credibility of that stamp and protect the value of the coin, the sovereign threatened penalties to anyone representing a debased version of the coin as the real thing.

Eliminating the need for scales in every transaction was a huge advance in commerce, equivalent to the replacement of cash and checks with credit cards.  The monarch capitalized on the value of his stamp by selling officially minted coins to banks for slightly more than they were nominally worth in bullion, which banks were willing to pay because the demand for the coins was high.  This profit was called seigniorage.

Alas, monarchs didn’t enforce anti-counterfeiting laws against themselves.  When they began to debase their coins, their currency suffered from inflation, and their people began reverting to other trusted coins, or to bullion and scales.  To enforce their debasement, governments began forcing their people to use the debased currency via legal tender laws.  The history of how seigniorage transformed from a game of narrow spreads into a large-scale, legal counterfeiting operation is long and sordid, but it has finally, apparently come to this:

The U.S. government now advertises that the coins it wishes the public to circulate have minimal intrinsic value.

I understand that the government is promoting this as a savings versus paper bills, which cost less per dollar to produce, but must be replaced more frequently, making their overall cost higher than the equivalent currency in coin.  Still, I’m astounded that minimizing the intrinsic value of what is in circulation is being sold as a public benefit.  I’m not yet sure how it’s being bought, but I can see a whole bunch of otherwise thoughtful people nodding, “That makes sense.”