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Seigniorage, Its relation to Justice, Trust and Commitment

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Message Paul Krumm

Seigniorage is something that usually only policy wonks talk about, but if we want to discuss money as a justice issue, it is a pivotal concept that needs a more general understanding.

The standard definition of seigniorage is "the face value of a unit of money (e.g. a dollar bill) minus the cost of producing that unit." What this standard definition does is simply state the mechanics of money creation through seigniorage. What it does not do is describe how the value created through this money creation effects the relationship between its issuer and other members of the market - the function of seigniorage.

What we propose to do is go beyond the standard definition to describe and discuss the function of seigniorage in trade. We will find that it functions in very different ways, according to the way money is organized.

The principle underlying seigniorage is that money does not necessarily have to be a commodity that is traded for other commodities. It can simply be an agreement to use more or less valueless tokens, or simply numbers in an accounting system, to represent value in trade. Seigniorage - agreement money - has an advantage over commodity money. It can be created and canceled at will, in order to reflect the volume needed in trade. It is not limited/determined by the quantity of a commodity.

Seigniorage is a priori a part of any money system that involves money not backed by some specific commodity or market basket of commodities. However, there are different potential sets of money creation agreements of which seigniorage is a part.

It will be found that seigniorage has different functions and effects according to the rules of the money agreement to which it is applied. So what follows is a differential analysis of seigniorage on the market/economy under different rules of money creation. We will start with a simple set of credit clearing rules, and then move on to the rules that apply in our present money, and other proposed systems.

Seigniorage in credit clearing systems

Simple credit clearing systems are zero sum games; every one's balance revolves around zero. The money in such systems is often called mutual money.

To describe credit clearing system operation, if I buy some thing or service and don't have a sufficient balance in my account, I get a negative entry equal to the amount I don't have. In so doing, I have created money. More explicitly, my market - those who do business with me - is advancing me credit -- a loan, and in so doing has given me permission to create money.

Following the standard definition of seigniorage, "the face value of a unit of money (e.g. a dollar bill) minus the cost of producing that unit" I have created seigniorage. In creating this seigniorage, I make a commitment to bring my account back to zero by providing goods or services to others in my market/trading community. In other words, I am expected to carry my weight in the exchange system. We will come back to this commitment later. It is important.

Meanwhile, the seller gets a positive entry in their account, erasing part or all of any negative balance that they currently have - their seigniorage/commitment - and/or increasing their positive balance; their surplus/the market's commitment to them. As I make sales/receive pay for work I do, I return my balance to zero or make it positive. In so doing I cancel the money I created - eliminating my seigniorage, and potentially also having a surplus myself.

So seigniorage can be seen as money borrowed from the market of which the borrower is a part. In mutual credit clearing systems, rather than having a distinct loaning process, negative balances - loans - are limited, and simply a part of the operation of a balanced system. Seigniorage is constantly in flux and flow.

Trust and trustworthiness are the glue that makes such systems work. Traders have to be able to trust that other traders will keep their commitments. On the community scale where mutual money has been practiced, transparency and community pressure is sufficient to enforce commitments. In business to business trade systems this is also the case, however a central broker often acts as the enforcing agent. In taking part (being involved) in mutual credit clearing systems, people are expected to, and expect to, keep their commitments. System operation is covered by commensurate fees.

Trust and trustworthiness on the part of the users of the money system back its issue, instead of the value of any commodity. System operation depends on the recognition that with rights, come responsibilities, which must be balanced. We will also come back to trust, rights, and responsibilities. They also are important.

How seigniorage developed historically in our money system

Historically our present money system morphed from a system where a commodity - gold or silver - served as money. This money had intrinsic value as a result of the fact that somebody had to do work to mine, smelt, and coin it. This value backed the money which was issued by the local king. Into this situation came some Jewish goldsmiths in the late middle ages. Jews were not allowed to own land, and had become artisans as a result. A few became goldsmiths. They built vaults in which to keep their gold. People found that it was easier to leave their gold and silver in the goldsmith's vault, and carry paper receipts from the goldsmith for trade, instead of hauling around their gold and silver based money directly.

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I am a semi-retired self employed business owner who designs and builds instruments and machines. Obtained a BS in Sociology (with minors in Physics and Math) in the 1960's and became interested in studying the structural violence built into (more...)

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