1) U.S. prints a $20 bill, making, let us say, $19.90 in seignorage. (I don’t know what that number really is.)

2) Jose sends said bill to his Tia Maria in El Salvadore.

3) Bill circulates in El Salvadore until nearly destroyed — about a year. (Bills do not have long lives.)

4) Bill is exchanged at Banco del Salvadore and returned to the United States, where it is exchanged for a new one.

5) Old bill is destroyed, at a cost of another 10 cents, thus destroying $20.

So, for 10 cents (the cost of producing the replacement $20 bill), the government got use of the $20 for a year. That loan is “interest free,” because it matters not whether that bill is exchanged one, two, or twelve years after it was issued.

I think the deal might be that you are referring to the strict classical definition of the term, and I’m talking about a more contemporary use of it, as in the privilege of…

I didn’t have access to the article you referenced, could only see the abstract. Look, if you want to insist you’re right, I don’t really care. But if you’re really researching the issue, and NOT to find anything about the link between seigniorage and interest free loans, you’d have to be trying pretty hard. I don’t want to psychoanalyze, but it certainly is an intriguing phenomenon…

anyway, since I am indefatigable in my efforts to spread knowledge throughout the land, let me offer you this bit from a paper prepared for the European Parliament Committee on Economic and Monetary Affairs by a professor at the London School of Business:

“Moreover, the creator of international money is the only true international lender of last resort, and that confers power in the international economy. Think of the key role of the US Treasury alongside the IMF in the Mexican
crisis, the Asian crisis, and Brazil. Where was Europe, except to help pay the bills (see Coeuré and Pisani-Ferry, 2000)? On the strictly economic side, the issuer of the international currency benefits from seigniorage. Conventional estimates indicate that 50 to 60% of the total
US outstanding dollar notes are held abroad. The underground economy – the Russian mafia, longer-established organized crime, drug dealers – accounts for a lot of these currency holdings. Foreign holders of cash dollars give the US Treasury an interest-free loan. The flow of this international seigniorage to the United States is around 0.1% of GDP per year.”

http://www.europarl.europa.eu/comparl/econ/pdf/emu/speeches/20001123/portes/default_en.pdf

Wikipedia notwithstanding, seigniorage and the inflation tax, “the reduction in the real value of the stock of base money due to inflation,” are not the same thing. Seignorage is not time dependent. It is the one-time difference between the cost to print the notes or mint the coins, and the face value of those notes and coins. (Negative seignorage occurs when the notes and coins are retired.)

The inflation tax, however, is time dependent — the longer a security is held, the more it is affected by inflation. Bidders factor expected inflation into their calculations when they purchase government bonds. If a nation pursues a policy of printing its way out of debt, bidders lower their bids for that nation’s bonds accordingly.

Again, there is no evidence that the United States is pursuing such a policy, so it cannot be argued that nations holding dollar-denominated securities are giving us an interest free loan. The loans carry the real interest which is the difference between the nominal yield of the bonds and our inflation rate.

You’re saying that if it costs .1 to print, then seigniorage from printing a $ is .9 but that .9 depends on how many $ exist. If there were only 1 $ in the world, it would be worth a zillion pounds sterling, or something, or a tillion pork bellies, or whatever. If there were $2 in the world, each one would be worth 1/2 a trillion pork bellies, etc. It isn’t about how many pennies are in a $, it’s about purchasing power.

the abstract of the paper you referenced says, “In this paper I analyse four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base)…”

exactly! Thank you paper that jack references for helping me try to explain this concept to him, but I don’t think it worked! lol

next, try the wikipedia entry: http://en.wikipedia.org/wiki/Seigniorage

The control of the money supply is the ability to print so much money that fixed-rate bonds held by other countries actually lose value because the inflation rate becomes higher than the yield on the bond. This is known as an “inflation tax.” Here is a good paper explaining the difference.

There is no indication that the United States is pursuing such a policy, so your entire argument is invalid.

It would only work if you’re keeping puft bucks in your bank account. If you were, I could simply print more money until I had enough to buy a house, but the value the money in your bank account would decrease as a consequence.

think of everyone’s $ holdings as slices of a pie, and then think about how the US can control the size of it’s own slice. If it decides to increase the size of it’s own slice (by printing more $), every other slice would have to get smaller.

this “interest free loan” from seigniorage privilege doesn’t mean a literal transfer of cash, it’s just a way that the supplier of $ can increase it’s own slice of the pie at the expense of everyone else who is holding that currency.

No, I simple do not understand how another country’s holding our currency translates into an interest-free loan to us. But the next time you want to buy a house or a car, I will be happy to give you such an interest-free loan. Just send me the money.

It doesn’t seem like you understand. That’s fine, but I don’t really appreciate your calling me ignorant on account of your own misunderstanding. You don’t need to be defensive. Please understand that this isn’t coming from some neo-Marxist critique of global capitalism. It’s a well understood component of economic theory when it comes to reserve currency/monetary policy/global economics/etc. I’d explain it again but i think I did a pretty good job the first time, so maybe you should re read that post or do some more research on the idea yourself.

ok, I can’t help it: in essence, whoever controls the supply of dollars (the US) controls the value of the dollar. (instead of “controls the value” maybe I should say, “controls a powerful lever for influencing the value…”) When the US prints more dollars, the value of each individual dollar is diminished. ok? Similarly, maybe you’ve heard of Debeers having some stockpiles of diamonds that they wont release onto the market because they don’t want to devalue diamonds; by controlling the supply, they control the price.

when we print more money and keep it in the bank, we are effectively extracting value from other countries that hold dollars in reserve, and giving it to ourselves. We aren’t literally taking money from Mexico or China (or any other country that holds dollars in reserve), but we are temporarily undermining the value of their holdings in order to temporarily increase the value of our own. This is, in essence, an interest free loan. Is that any clearer?

First, you missed what Ed was saying, so I will repeat it:

“[In] the worse (sic) case Mexicans hold on to the dollars (like China) and essentially gives us a loan at 0% interest.”

How is it the entity holding the money is giving us a loan? It’s completely backward.

Now, what has that got to do with Seigniorage? China and Mexico are not issuing dollars.

You are also showing your ignorance again. Smith does, in fact, discuss seigniorage in The Wealth of Nations, specifically in Book IV, Chapter VI, and mentions it elsewhere. I again encourage anyone who has any interest in economics or politics to read and digest The Wealth of Nations.

Your example is further flawed in that you assume that the wealth of a nation consists of its money. Money is only a medium of exchange. If there is nothing to exchange, money is meaningless. However, the lack of money does not mean lack of wealth. If you had all the money (or even gold) on the island, but I had all the arable land and livestock, I submit that I would be far wealthier than you.

Money is nothing more than a myth agreed upon. When the people stop believing the myth, then we get hyperinflation.