Seigniorage : The last roll of the dice for cash

In simple terms, seigniorage is the profit that a government or central bank makes from issuing currency. It is the difference between the cost of producing the currency and the face value of the currency. For example, if it costs a government £0.10 to produce a £1, then the seigniorage for that  is £0.90.

Surprisingly seigniorage is considered a relatively small source of revenue for most governments, but in reality it is a significant amount of revenue. For example, the US government generates about $70 billion in seigniorage each year. Here in the UK in 2022, the Bank of England's seigniorage income was £1.2 billion. This is equivalent to about 0.1% of the UK's GDP, in 2023 the estimate is £1.5 billion.  

The Bank of England's seigniorage income is derived from the Note Circulation Scheme. Under this scheme, banks buy new banknotes from the Bank of England at face value. The Bank of England then invests this money in assets such as government bonds. The income on these assets is used to offset the cost of printing and issuing banknotes. The balance of the income is returned to HM Treasury.

As of March 2023, there are over 4.6 billion Bank of England notes in circulation in the UK. Together, they are worth about £81 billion. The most common denomination of banknote in circulation is the £20 note, with over 2.2 billion notes in circulation. The £5 note is the second most common denomination, with over 1.2 billion notes in circulation. The £10 note and £50 note have about 900 million and 600 million notes in circulation, respectively.

The Bank of England regularly issues new banknotes to replace damaged or worn out notes. In 2022, the Bank of England issued over 1 billion new banknotes. The Bank of England also withdraws old banknotes from circulation from time to time. In September 2022, the Bank of England withdrew the paper £20 and £50 notes from circulation. These notes have been replaced with new polymer notes.

The Bank of England estimates that the average lifespan of a banknote is about 8 years. As of March 2023, a conservative estimate is that 10% of all Bank of England banknotes in circulation are no longer in use. This is equivalent to about £8 billion. The most common reason for banknotes to be taken out of circulation is because they are damaged, worn out or taken overseas or being withdrawn from circulation by the Bank of England.

Seigniorage can be used for a variety of purposes. It can be used to finance government spending, to reduce taxes, or to increase the money supply. However, it is important to note that seigniorage can also lead to inflation. If a government prints too much money, it can cause the value of the currency to decrease, which can lead to inflation.

There are a number of reasons why the seigniorage benefits from cash should be ring fenced for the benefit of people that use cash. First, cash is a valuable tool for financial inclusion. It is a convenient and affordable way for people to make payments, even if they do not have access to a bank account. Second, cash is a safe and secure way to store money. It is not vulnerable to fraud or cybercrime. Third, cash is a private way to make payments. It is not subject to government surveillance.

If the seigniorage benefits generated from cash are used for the benefit of people that use cash, it will help to promote financial inclusion, financial security, and privacy. It will also help to ensure that the benefits of cash are shared by everyone, not just the wealthy and the privileged.

There are a number of ways that the seigniorage benefits from cash could be used for the benefit of people that use cash. For example, it could be used to:

• Provide financial education and literacy programs to people who do not have access to a bank account.

• Fund microloans and other small business lending programs.

• Support programs that help people to save money and build their financial security.

• Promote the use of cash machines and other cash access points in low-income communities.

The future of seigniorage in the UK is uncertain. The increasing use of electronic payments is likely to lead to a decline in the demand for physical currency, which could reduce the amount of seigniorage income that the Bank of England generates. However, the Bank of England has said that it is committed to maintaining a healthy level of seigniorage income, and it is likely to find new ways to generate seigniorage income in the future.

One possible way for the Bank of England to generate seigniorage income in the future is through the issuance of central bank digital currency (CBDC). CBDC is a digital form of currency that is issued by a central bank. It is similar to electronic money, but it is backed by the full faith and credit of the government. The issuance of CBDC could generate seigniorage income for the Bank of England in a number of ways. First, the Bank of England could charge a fee for the issuance of CBDC. Second, the Bank of England could earn interest on the money it holds in CBDC accounts. Third, the Bank of England could use CBDC to purchase assets such as government bonds.

The issuance of CBDC is a controversial topic, and there are a number of risks associated with it. However, if the Bank of England does decide to issue CBDC, it could generate a significant amount of seigniorage income for the UK government.

By using the seigniorage benefits from cash for the benefit of people that use cash, governments can help to make cash a more accessible, secure, and private form of payment for everyone.

Overall, there are a number of strong arguments in favour of releasing the value of lost banknotes to benefit improved financial inclusion. The UK government should take steps to do so as soon as possible.