Seigniorage - Overseas Circulation

Overseas Circulation

A very profitable type of seignorage is from the international circulation of banknotes. While the cost of printing banknotes is minimal, the foreign entity must provide goods and services at the face value of the note to obtain it. The banknote is retained because the entity values it as a store of value because of mistrust of the local currency.

Overseas circulation is intimately tied in with large value banknotes. One purpose of using foreign currency is for store of value, but another is efficiency of private transactions, many of which are illegal.

American currency has been circulating globally for most of the 20th century. Certainly in World War 2, the amount of currency in circulation was increased several fold. However, the modern era of huge printings of the United States one hundred-dollar bill started with the fall of the Soviet Union in 1991. Production was quadrupled with the first ever trillion dollar printing of this bill. As of the end of 2008, U.S. currency in circulation with the public amounted to $824 billion and 76% of the currency supply was in the form of $100 denomination banknotes, amounting to twenty $100 bills per U.S. citizen. Over the past decade there has been considerable controversy concerning the amount of U.S. currency circulating abroad. Porter and Judson have claimed that in the mid nineties between 53 and 67 percent of U.S. currency was overseas, whereas Feige’s estimates suggested a figure closer to 40 percent abroad. Most recently, Goldberg writing in a New York Federal Reserve publication asserted that “about 65 percent ($580 billion) of all banknotes are in circulation outside of the country. However, these assertions are contradicted by the Federal Reserve Board of Governors Flow of Funds statistics which show that at the end of March 2009, only $313 billion (36.7 percent) of U.S. currency was held abroad. Feige calculates that since 1964, "the cumulative seigniorage earnings accruing to the U.S. by virtue of the currency held by foreigners amounted to $167–$185 billion and over the past two decades seigniorage revenues from foreigners have averaged $6–$7 billion dollars per year".

The American $100 bill has some competition, primarily from the €500 note. The larger value of the banknote makes it easier to transport larger amounts of money. As an example, to carry $1 million in currency on board an airplane, and it is in $100 bills, the weight of the money is 22 pounds. It is difficult to carry this much without a briefcase and some physical security. Since it is against authority of Title 26 of the United States Code (U.S.Tax Code) regulations to carry more than $10,000 without reporting it (31 USC 5311), it is unlikely to pass security unnoticed. The same amount in €500 notes would weigh less than three pounds, and it could probably be dispersed in clothing and in luggage without attracting attention or alerting a security device. For many illegal operations the problem of transporting currency is more difficult than transporting cocaine because of the size and weight of the currency. The ease of transporting banknotes makes the euro very attractive to Latin American drug cartels.

The Swiss 1000 franc note is probably the only other banknote that is in circulation outside of its home country. It is worth slightly more than US$1000. However, to the non-Swiss it doesn't provide a significant advantage over the €500 note as there are 20 times as many of the €500 note circulating and they are more widely recognized. As a reserve currency it is roughly 0.1% of the currency composition of official foreign exchange reserves.

Governments differ radically in their issuance of large banknotes. As of August 2009, the number of 1000 franc Swiss banknotes circulating is over 3 times the population of Switzerland. In comparison the number of £50 banknotes circulating slightly less than 3 times the population of UK. But the 1000 franc banknote is worth roughly £600. The British government has traditionally been wary of large banknotes since the counterfeiting Operation Bernhard in World War II which caused the Bank of England to withdraw all notes larger than £5 from circulation, and not reintroduce other denominations until the early 1960s (£10), 1970 (£20) and March 20, 1981 (£50).

The American treasury considered re-issuing a US$500 banknote when the euro banknotes began circulating. There was concern that the high value banknotes would provide competition. However, after recognition that the $500 banknote would provide a huge advantage to worldwide criminal operations and dictatorships, the decision was made not to pursue this option.