Our money is an IOU-future-value promise from the private bank members of the Federal Reserve System. The Federal Reserve promises come in two basic forms of the token we call a US dollar. A dollar can have a physical form – a coin or a piece of paper. Or a dollar can simply be a record of an amount of money. Coins and paper money are considered cash, which makes up about 3 percent of our money today. The rest of our money is an accounting entry recording a credit and balancing debit.
In the world today, coins play a very minor role in the money system; less than one percent of our money is in coinage.
It costs the US Mint between 1.8 and 8.2 cents to make coins. Some small coins cost more to produce than they are worth (the penny and the nickel), and the mint offsets this cost by selling commemorative coins of higher value. The Fed and its member banks buy the coins from the US Treasury at face value. The Mint also makes commemorative coins that are generally sold to the public. So, the Government gets the seignorage on this tiny sliver of the money supply.
In 2017, the US Mint manufactured 14 billion coins for circulation with a value of $872 million. These were sold at face value into public circulation, mostly via the Fed. The gross cost to manufacture was $480 million. The seignorage on the sale was $392 million – $0.45 per dollar of coinage issued. The Mint deducts its expenses, and in 2017, it passed $250 million in seignorage to the Government’s General Operating Fund.33
Monetized bank notes (IOUs)
Bank notes come in two forms: cash and accounting entries that are mostly digital now.
Cash notes – the fancy paper money
Cash is what comes to mind when we think money. However cash notes represent very little of the money we use – a little over 2 percent. When most people think of money creation, a picture of the printing presses at the US Treasury comes to mind. The media contributes to this dangerous misperception by using a video of these printing presses when they report on government deficit spending and debt – visually implying government just prints its own money when it overspends. The US Treasury prints our cash notes. Our government physically manufactures coins and notes, but, by current law, it only retains the power to convert the coins into national currency, not the cash bills.
Each year, the Federal Reserve Board projects the likely demand for new cash currency and places an order with the Department of the Treasury’s Bureau of Engraving and Printing. The Bureau manufactures US currency and charges the Fed for only the cost of production. For 2018, the Fed ordered 7.4 billion notes, with a face value of $233 billion.34
Manufacturing costs to the Fed were $862 million and included the printing, transportation, and destruction of mutilated currency. The physical notes cost from 5.6 cents for $1 and $2 bills to $.132 cents for a $100 bill. They last from 4.5 years for a $10 bill to $15 years for a $100 bill. Roughly 75 percent of the new bills printed each year replace old bills and do not add to the money supply.35 36
The central Fed transforms these pieces of fancy paper into money when it distributes them to commercial banks at their full face value. If your bank needs more cash notes, it has its Fed branch debit its account and issue cash, or it can give its Fed an IOU and take the proceeds as cash.
The difference between the cost to the Fed to have these paper IOUs made by our Treasury printing presses, and their value when distributed to the private banks, is the seignorage.
In 2018, the difference between the cost to produce 7.4 billion notes — $861.7 million – and the face value of $233.3 billion, is $232.5 billion. Since 75 percent of that replaces old and worn out bills, the net seignorage for 2018 is $58 billion on $58 billion in new cash money. The production cost is lost in rounding to billions.
The Fed counts this as income. The Fed takes out all its expenses, including the 6 percent dividend to its members and interest it pays them on their reserves at the central bank. Then it passes the net of seignorage on paper bills – 2 percent of our money supply – back to the government.
Accounting records – 97% of our money supply
Mostly our money today is digital bits and bytes, digitized debt- credit certificates, moved around by plastic card and bank transfer instructions. Nearly all money today is a digital, computer- based record.
A new term, digital currency, is being used by bankers, economists, and monetary reformers. They are using these words to mean more than the words alone suggest. This new use of these words needs some explaining, which I’ll do at the end of this chapter.
Under The Federal Reserve Act, seignorage on the bulk of our money creation goes to the private bankers. This is a significant reason why profits in the financial sector account for over 30 percent of all the profits earned by business in the US.37
There are costs in creating new money by making a loan: labor, overhead, defaults, and collection services. The difference between these costs and the value of the money created does not appear on anyone’s accounts. Seignorage on the bulk of our money is invisible and uncounted because money created by lending is extinguished when the loan is repaid. It is impermanent. So even though it is created over and over, such that it maintains a steady and increasing presence on the bankers’ books, no seignorage value is recorded in the accounts. Seignorage also goes uncounted because our accounting system cooperates and obscures the real benefits of money creation privilege. And seignorage goes uncounted because that’s the way the bankers want it; it obscures their very real privilege and the profits that accrue.
The new money is treated like a non-monetary, virtual service the bankers provide and sell at a percentage (interest). Their reported income includes the interest they earn on the money they create, income from their basic banking business (storage, transfer, accounting), income from serving as an intermediary between savers and borrowers, and income from investments they make that often take advantage of their ability to create the money they need to make the investment. Their expenses include payroll and the overhead costs of balancing their IOUs with IOUs from the public. The seignorage on the creation of new money goes silently into the hopper, and the net profits go to private shareholders.
The net operating income of the 5,670 banking institutions reporting to the FDIC in 2017 was $163 billion.38 This net is after paying some unusually high salaries. For example, JPMorgan Chase CEO Jaime Dimond got a 35 percent pay increase in 2015 to $27 million. He earns almost $13,000 an hour. In three hours he earns more than many of his employees earn in a year.39
Free money for bankers
It is as if the banks are borrowing the money they create from all of us who agree to use their IOUs as our money. They simply aren’t paying us any interest for the loan, as they would if they were borrowing from individual entities or from our government in a commonwealth money system.
Banks pay no cost to the commonwealth for this privilege. Our banks have the same costs a basic bank serving as an intermediary would have of labor, overhead and collection. But, unlike a basic bank, our banks pay no cost for the use of the money they create. This is a windfall. There is a reported $14 trillion supply – and it’s probably closer to $20 trillion or more, when the money created for the shadow banking sector is included in the supply count. Think about the interest the banks are collecting on $14–20 trillion!
Banks can offer plenty of free banking services like checking, a phone app, ATM transactions, etc. They can offer 2 percent back on what’s in your wallet and still make out like bandits when they have the free use of more than $14,000,000,000,000 – money created by them for our economy and upon which they earn interest or make capital gains on its use.
We get free basic banking services at a huge cost to our economy; you are paying for free banking many times over every single time you use our money. Remember: this is a choice and there is an alternative.