|Seigniorage as a Source for a Basic Income Guarantee
Nicolaus Tideman and Kwok Ping Tsang
Advocates of a basic income guarantee need to be concerned about where the money for such a guarantee might come from. For any potential source of public revenue for a basic income guarantee, some might say, “It’s not fair to take this money away from those who would otherwise have it and use it instead for a basic income guarantee.” Therefore the advocates of a basic income guarantee should be particularly attentive to sources of revenue about which it can reasonably be said that it is appropriate for all people to share the revenue equally. Such a source of revenue, if it can be found, is the ideal way to finance a basic income guarantee.
One proposal for such a source is the rent of land. If one accepts the proposition that all people have equal rights to the pre-development rental value of land, then it follows that justice is served if this rental value is collected publicly and shared equally. But the proposition that all people have equal rights to the predevelopment value of land is not yet widely shared, so while the advocates of a basic income guarantee have an interest in spreading the understanding that all people have equal right to land, it still behooves them to search for other sources of revenue to which all persons have equal claims.
We would like to explore the possibility that seigniorage under a fiat money system or a system of fractional reserves is a candidate for such a source of revenue. If currency reserves are either non-existent or only a fraction of the nominal value of currency, then the process of currency issuance generates seigniorage, which is the difference between the face value of the money that is created and the cost of creating it.
Under existing U.S. institutions, seigniorage has two different faces. First, it arises as changes in the amount of money in circulation. Second, it is reflected in the profit of the Federal Reserve System, which is a semi-governmental organization that has a monopoly on the issuance of currency.
In the balance sheets and income statements of the Fed, the creation of currency does appear as a source of income. A “Federal Reserve Note” (a piece of paper currency), as far as accounting is concerned, is an asset that corresponds to a liability. At one time the liability was an obligation to redeem the note for gold if requested. But now the liability is purely notional. In accounting terms, the Fed’s monopoly on money creation generates a profit that arises because the Fed uses the Federal Reserve Notes that it issues to purchase U.S. Treasury bonds that yield interest. The difference between that interest and the Fed’s expenses is the Fed’s profit, which is returned to the Treasury.
Figure 1 shows the currency issued per person over the age of 20 and the annual profit of the Fed per person over the age of 20, since 1959.
The first thing to be noted about Figure 1 is that the two measures of seigniorage have had rather similar averages, even though they are quite different conceptually. It will not make much difference in the long run which of them is used to measure seigniorage.
Second, currency issued is much more volatile than Fed profit. This should not be surprising since currency issued represents a change in a stock, while profit from interest represents an interest rate applied to a total.
Third, per capita annual seigniorage, by either measure, is typically not very large, with an average of about $175 per person over 20 per year, or about $15 per person over 20 per month. It appears that seigniorage cannot be counted on as the source of very much of a guaranteed income. On the other hand, if one were to include in seigniorage the value to banks of the opportunity to issue loans on the basis of fractional reserves, then seigniorage would be considerably larger. However, any effort to transform our institutions into ones in which seigniorage by that definition was share would involve such great changes that it is not reasonable to try to estimate from today’s facts what the seigniorage would be in those circumstances.
Fourth, there is a sudden spike in currency issued at the end of 2008. This reflects the actions of the Fed in seeking to stabilize the banking system in the wake of the cataclysmic events of that year. If the same funds had been put into circulation by an equal dividend to all taxpayers, who would have then had the opportunity to decide whether they wanted to prop up the banks for whatever the banks might have offered in exchange, the dividends for all persons over 20 in the final months of 2008would have been $287 in September, $1,035 in October, $1,393 in November, and $999 in December. Seigniorage payments of this magnitude might be great enough to give people the confidence they would need to continue spending in the face of predictions of an economic downturn.
While a system of sharing seigniorage could be implemented by using the Fed’s profit to fund a Basic Income Guarantee, in what follows we assume that it would be implemented by putting equal amounts of currency in the hands of all persons over the age of 20 when the supply of currency needed to be expanded. When the supply of currency needed to be reduced, every adult would be called upon to give up the same amount of currency. To keep people from being bankrupted by this obligation, for a modest fee they would be allowed to postpone the return of currency.
One might suppose that this simpler system for expanding and contracting the money supply would reduce the Fed’s operating cost and therefore increase the seigniorage that could be paid. But the Fed’s total operating costs are about $4.2 billion per year (as of 2007) or less than $2 per adult per month, so the potential for saving on the administrative costs of the Fed is small.
The main effect of the change would be that “monetary policy” would become direct. Instead of setting an interest rate and waiting for effects to percolate through the economy, the Fed would decide how much to increase or decrease the money supply and have an immediate and equal impact on the finances of all citizens. Fiscal stimulus could happen overnight.
It would be important to guard against the possibility of a politically induced financial cycle in which governments gave inflation-inducing currency to citizens prior to elections. There are at least three ways to guard against this. First, the money-creation decision can be put in the hands of a politically independent Fed. Alternatively, the nation can make a commitment to redeem its currency for a specified quantity of a specified commodity whose price in highly correlated with the overall price level. House bricks are a promising possibility. With such a commitment, any excessive issuance of money would generate requests for redemption that would require citizens to return the money that had been issued to them. As a third possibility, there could be a specified feedback rule that required a reduction in the money supply whenever prices rose above a target level. Voters could then be expected to realize that any unusual increase in the money supply would be followed soon by an obligation to return some currency.
While it may be interesting to explore the possibility of “direct monetary policy” as a way to improve the usefulness of monetary policy, it is reasonable to conclude from the magnitudes involves that such sharing of seigniorage from the creation of money would provide a noticeable boost in incomes only in times of economic crisis.
However, there is another possible application of the idea of equal sharing of seigniorage. Upon becoming an adult, a young person might be granted an equal share of currency. What is the magnitude of the grants that this would entail? Figure 2 shows the answer. There is about $4,000 of currency outstanding for each person over the age of 20. If we had a rule of allowing every new adult to share equally in the nation’s seigniorage, we would give every 20-year-old a lifetime interest-free loan of $4,000, to be returned when he or she died or emigrated.
As a source of a monthly guaranteed income, seigniorage offers very little. But it has potential as a source of income when the economy needs a stimulus and as a source of starting cash for new adults.