Amazing Surprise! Fiat money’s not worth the paper it’s printed on

Or the metal it’s made from:

The Royal Mint has launched a £50 coin, but the value of the metal is much lower

The point of fiat money being, rather, to make a profit from the seigniorage.

Back when I lived in the UK I used to make a point of getting these new issues from the bank at face value and going and spending them. Partly just a bit of amusement, talking to people at tills ‘n’ stuff. But also, near the entirety of these coins would never circulate. So, the very few that did might well become, in time, worth more than the uncirculated mint ones. And I was just doing my bit in seeding this market.

Selfless I am, selfless.

11 thoughts on “Amazing Surprise! Fiat money’s not worth the paper it’s printed on”

  1. In Australia, after decimalization in the ’60s, the original 50c coin had substantial silver content (enough that they would tarnish). Within the year the bullion value of the coin was rather more than 50c, so a number of enterprising individuals entered the arbitrage business.

    A cupro-nickel version was quickly issued in its place.

  2. I’ve forgotten what year that was true of the UK. 1963 I want to say for some reason. US quarters the same, pre-63, high silver content.

  3. Get a pile of copper coins and a magnet. You’ll find some are attracted by the magnet and some not. The newer ones are made of a copper colored steel alloy, rather than copper.

    It’s a swindle. The end of the world is nigh.

  4. “The point of fiat money being, rather, to make a profit from the seigniorage.”

    Sort of. So-called ‘fiat’ money is effectively backed by the requirement to pay taxes. It gains value through the government’s agreement that they will accept taxes paid in the government-issued currency. Since most people need to pay taxes at some point, and nobody wants to go to jail for not paying them, it has value for everyone. That’s what makes the government currency universally tradable.

    So governments print money and spend it on all the things governments do. It circulates round the economy, and then returns to the government when people pay their taxes. In a sense, tax expenditure is pre-paid – issuing currency effectively borrows the value of future taxes. You get the services first, and then pay for them with taxes later.

    But this does mean that since the government expects to get all the currency it issues back, the seigniorage is not pure profit. It gets the profit when it issues it, but it makes a corresponding loss when it has to accept it in payment of taxes. The seigniorage and taxes are different names for the same thing, so to say the government both makes a profit from issuing currency and collects taxes is double-counting – if you consider one of them to be real then the other is unreal.

    And of course, most money, even of the official government currency, is created through private loans. People commonly denominate their loans in terms of the government currency because it’s usually more stable than the alternatives. The ‘seigniorage’ here is the difference between the value of the paper your mortgage repayment contract is printed on, and the promise to repay that it represents.

  5. No, seigniorage is a very specific word. It means “the profit made by the difference between the cost of making money and what you can get with money”.

    Yeah, happy enough with your other points, but they’re not seigniorage.

  6. “So governments ‘print’ money”

    If it’s not the physical notes and coins bit (nor QE), which it mostly isn’t, then “borrow”. Bonds issued or, In your own parlance, IOUs…

  7. That’s what I mean, too.

    Your mortgage provider prints out a copy of the mortgage contract from their printer. It costs about 10p. You pick up the pen and sign it. It’s now worth £150k. The difference in value is precisely the difference between the cost of producing this piece of ‘money’ and what you can get for it, which for you is £150k to buy a house with, and for the mortgage company is 20 years of repayments worth £150k.

    A mortgage contract is ‘money’, in the sense of a credible and enforceable promise to pay real value at a later date. The same definitions can be applied.

    Of course, the conventional definition makes a technical distinction between ‘money’, ‘currency’ and ‘cash’. If you only apply the term’ seigniorage’ to cash, as is conventionally done, then you’re right. But I didn’t think you was making that distinction, so I didn’t either.

  8. @ Tim
    !948, I think.
    When silver 3d pieces were replaced with lumps of 12-sided yellow-green metal.
    Pre-1948 silver sixpences and thruppences (and the odd four-penny piece) were saved for Christmas puddings because the new coinage was toxic.

  9. NiV: “So-called ‘fiat’ money is effectively backed by the requirement to pay taxes.”

    I would cautiously disagree. Seems more like it ultimately has to do with momentum plus effectively outlawing alternatives via finance/banking laws.

    If there were a viable tax-invisible alternative currency everybody would use it & change to £ as necessary. It would of course be banned immediately.

  10. Bloke in Costa Rica

    Never mind seigniorage or fiat money or whathaveyou. The Telegraph is affecting surprise that the face value of a coin is higher than its bullion value. The South African Rand, as of time of writing, is 21.90 to the pound. Krugerrands, you will note, are not selling at 4.5p each. Similarly, one is unlikely to find gold sovereigns available for a pound. Unless I’m missing something that’s the be-all and end-all of the matter.

  11. “Seems more like it ultimately has to do with momentum plus effectively outlawing alternatives via finance/banking laws.”

    Which question are you talking about? What backs the value of fiat currencies, or why do people use them in preference to the alternatives? An answer to the second question doesn’t mean my answer to the first is wrong.

    Incidentally, alternatives aren’t outlawed, although they do have to meet a number of conditions on their security. Bitcoin’s current woes are an example of what can go wrong.

    A tax-invisible currency would necessarily be invisible to the justice system, too, which would mean you couldn’t enforce contracts. They’d actually be relatively easy to set up and use, without the authorities finding out about it. But only an idiot would use them, since you’d immediately get ripped off by all and sundry.

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