The U.S. Treasury has discovered that "seignorage" works. Building on the free money the public forked over after the Treasury issued quarters in honor of each state, the Treasury is starting a series of dollar coins featuring each U.S. president.
We don't think of the federal treasury as making "profits," but that is what will happen here. The process long was familiar to monarchs. As societies evolved, rulers discovered the right to coin money. Money met society's needs for a medium of exchange and a store of value. Uniform coinage facilitated commerce even two millennia ago.
But coining money also had a personal benefit. A ruler could buy silver or gold bullion with a market value of $900, for example, and mint it into 1,000 one-dollar coins. The $100 in purchasing power that the ruler gained from minting money became known as seignorage (SAN-yer-ij) — the income that a lord gained from his mint.
Because paper money is cheap to produce compared with gold or silver coins, governments get seignorage from any increase in the money supply. Here's how it works:
The federal government borrows $1,000 by selling Treasury bonds. The Federal Reserve buys those bonds, paying for them by simply increasing the money supply. The government has $1,000 to spend without anyone "overtly" paying taxes. That is seignorage.
The qualifier "overtly" is important. If the Fed increases the money supply too rapidly, it causes inflation. The government will have money to spend, but the buying power of every dollar in circulation will decrease. The loss of the public's buying power from inflation is an implicit tax resulting from goosing the money supply.
But there is no inflationary effect if consumers never spend new money. That happens when governments issue coins that people collect. Over time, every grandparent who buys all the state quarters as stocking stuffers makes an interest-free $12.50 loan to the U.S. Treasury for each grandchild so favored. Coins tucked away in dresser drawers don't add to inflation.
If one American in 10 collects a full set of presidential dollars, the Treasury will gain $1.29 billion in spending power without effectively adding to money already in circulation.
The same applies to postage stamps. Tiny nations issue attractive stamps and earn a lot of money as stamp collectors around the globe buy the new stamps. Most are never used as postage. The philatelists are making an interest-free perpetual loan to the nation that issued the stamps. The sums can be very important for the Seychelles or Togo.
In the larger scheme, the few billion dollars in seignorage that the U.S. may get from presidential coins is not very important. We add nearly $1 billion a day to the national debt. But it still is easy money. Being the lord of the manor still has it perquisites.
Economist Edward Lotterman teaches and writes in St. Paul, Minnesota. Write him at email@example.com