Le château du seigneur

The droit du seigneur was a legal or customary right of a feudal lord to have *ehem* relations with a vassal's bride on her wedding night. I'm not sure whether history records the frequency with which the right was exercised but, ick, talk about a good reason to stay single. Also, like..."legal right"? Enforceable against whom? One assumes it was the person with pre-existing rights of ownership over the woman's body, to wit: the vassal. He probably spent the night getting bloody drunk at the local hostelry and then slaughtering some other poor liege subject in a fit of transference, aka jealous rage. I doubt his wife's rights came into it at all... by dint of her having none. 🎵A real man just can't deny a woman's worth🎵* as the song goes, but real men seem to have been in short supply qua lawmakers circa 1021 AD.

Fortunate then, that, by almost any analysis you care to devise, seigneuriage (now seigneurage, seigniorage or seignorage)—which means "right of the lord" in Old French and which persists to the present day—refers to something rather different. Seignorage is a right to mint money (now a sovereign right) and the concept is taken to refer to the profitable difference between the value of money available to be spent and the cost of producing it. In this sense, seignorage is usually defined in one of two ways: either as the face value of notes minus the cost of printing them or in terms of the goods and services they can buy. When a sovereign prints money and spends it in the economy, that money is worth yay many goods and services. Seignorage is the value of those goods and services minus the production costs of the money. And, if the money can buy more or less goods and services down the track for holders in due course, then the worth of that money has increased or decreased over its lifetime.

What seignorage has in common with the droit du seigneur is very little but there is no doubt that they both have their detractors, who, in each case, allege abuse of privilege. It is sometimes said that seignorage is an incentive to mint money without economic justification, that it encourages currency devaluation and that the inflation which results from raising funds via seignorage operates like a hidden tax.

When the government pays for goods and services with newly printed money, it increases the money supply, which raises the price level, and the increase in the price level diminishes the real value of pre-existing money held by the public. Thus, inflation works like a tax on people who hold money: the newly printed money enables the government to buy goods and services at the expense of everyone who held pre-exisiting money balances, which fall in real value as a consequence of the increase in the price level.

As far as reserve currency status is concerned, it is frequently alleged that seignorage is a kind of tax that the US imposes on the rest of the world, since other sovereigns must hold dollars but only the US can print more to spend, thereby causing reserves in foreign institutions to lose value.

Seignorage crops up frequently in literature about central bank digital currencies (CBDCs). Most central banks are witnessing a decline in the use of cash in favour of commercial bank credit and/or virtual currencies, both of which are compatible with online purchases and avoid the various frictions and physical impediments that accompany commerce in coins and notes. The concern to which this gives rise is that it will eventually lead to a cashless society, undermining sovereigns' ability to raise money by issuing cash and garnering seignorage. In short, a significant shift into private money would mean a transfer of seignorage rents to the private sector. A CBDC—issued by the central bank but convenient for our modern lives—is one means by which this process of attrition might be slowed or even reversed.

There is, however, a more specific sense in which "seignorage" is used in the context of cryptocurrencies and that is with respect to algorithmic stablecoins. Stablecoins are cryptocurrencies that attempt to eliminate the excessive volatility that is characteristic of tokens in general, by pegging their market value to some external reference. There are two methods by which the peg is established and maintained: first, by backing the coins with a reference asset; and, second, by controlling supply in order to target a particular price. Algorithmic stablecoins fall into the second category—algorithms are used to increase or decrease the supply of coins and thereby maintain the price peg. They are also known as "seignorage supply" stablecoins in a nod to a 2014 paper by Robert Sams titled “A Note on Cryptocurrency Stabilisation: Seigniorage Shares.” For Sams, the distribution that occurs whenever supply of the primary stablecoin is increased, should be allocated on the basis of "seigniorage shares", a parallel supply of tokens which represent some kind of social investment in the enterprise of minting a new currency. When the stablecoin supply needs to increase, coins are exchanged for seignorage shares which are then destroyed.

Returning to the idea of CBDC as a "positive disruptor" of the current monetary narrative, seignorage is just one means by which a sovereign can raise money, another is by issuing debt and, to some extent, the two methods compete with one another. A concern that arises in regard to the increasing cashless-ness of economies is that sovereigns will be forced to fund their activities to a greater extent by issuing debt and that this has a cost not only to the sovereign itself—in the payment of interest—but also to society as a whole. The fear is that consumers turning to bank credit, e-money and virtual currency as alternatives to cash will force sovereigns to issue interest-bearing instruments at attractive rates which will mop up liquidity.

These issues are often discussed in connection with the demand curve for money in the money market and the Friedman Rule, which is an observation about the cost of holding money in a world of low-risk government bonds. Milton Friedman argued that, since it is socially useful for people to hold money instruments in preference to less liquid investments, nominal interest rates on bonds should be set to zero, eliminating the comparative opportunity cost of holding money. Since nominal interest rates are, broadly, inflation + real interest rates, inflation needs to be negative (ie, deflation), as Friedman saw it, to cancel out the value of real interest rates. The reason this rule, which is still considered insightful today, appears in CBDC literature is that digital money could satisfy the Friedman rule in a different way, by paying interest to match the nominal interest rates on bonds.

A related point that is sometimes made about CBDC and interest rates is that a policy of taking cash out of the physical world and into the virtual one would enable central banks to implement negative interest rates on the monetary instruments they issue (at least, vis-à-vis high-value, wholesale CBDC accounts). The headwinds facing monetary policy transmission in a world of ultra-low interest rates make negative interest rates an interesting proposition but a largely theoretical one in a world where account-holders can withdraw their balance and hold it in coins and notes. (It is to this practical restriction that the term "zero lower bound (ZLB)" refers). Exchanging physical cash for a digital substitute would, it is said, make it possible to conquer the zero lower bound and increase the number of options available to a central bank faced with another financial crisis.

And that, they say, is a good thing for lords...

...not to mention, real men, unreal men and women of every kind.

* Songwriters: Alicia J. Augello-Cook / Erika Rose Hedman. A Woman's Worth lyrics © Sony/ATV Music Publishing LLC, Universal Music Publishing Group