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Box 8: Seigniorage, cash and bank’s ‘special profits’ The Bank of England sells bank notes to commercial banks. They sell these notes at face value (a £10 note sells for £10), yet the cost of printing a £10 note is just a few pennies. The difference between the face value and cost of production gives the Bank of England a substantial profit. This profit from the creation of money is known as ‘seigniorage’, and is paid over to the Treasury, where it can be used to fund government spending or to reduce taxation. Between 2000 and 2009 this seigniorage amounted to nearly £18 billion.14 The growth of digital commercial bank money, vis-à-vis government issued cash, can be seen to have the effect of significantly reducing this seigniorage profit to the Government proportionate to the total money supply. 15 Commercial banks do not generate seigniorage themselves as they issue credit which will, at some point, be repaid in full. However, as we discussed in Section 3.4 on Fractional Reserve Banking, commercial banks can be seen to generate ‘special profits’ from their power to issue money in the form of credit through the interest charged upon loans and used overdraft facilities. Huber and Robertson16 suggest the interest charged on the issuance of money by banks can be viewed as a ‘money tax’, since the Government could issue non-interest bearing money directly in to the economy. They also argue that banks enjoy a form of additional ‘special profit’ because they don’t have to first borrow this money like other organisations. This ‘special profit’ can be thought of as equivalent to the central bank’s base rate over the course of the loan. The total profits arising are then the rate of interest charged on the loan (e.g. 8 per cent), added to the base rate (e.g. 2 per cent) = 10 per cent, minus any interest paid by the bank to the customer on any portions of the loan that the customer has not yet spent. This is opposed to an interest rate ‘spread’ profit of 8 per cent – 2 per cent = 6 per cent. Using this methodology, Huber and Robertson calculated that in 2000 the ‘special profits’ generated through this were £21 billion.17

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub  

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub  

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub

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