Hello keropi!
First of all, let me correct one of the statements in your question.
The cost of of producing a hundred-dollar bill does not appear to be
$5:
"The Federal Reserve orders new currency from the Bureau of Engraving
and Printing, which produces the appropriate denominations and ships
them to the Reserve Banks. Each note costs about four cents to
produce, though the cost varies slightly by denomination"
Fed Points 1: How Currency Gets Into Circulation
http://www.ny.frb.org/pihome/fedpoint/fed01.html
So, disregarding the the cost of printing currency, which is very low,
what happens then with the "rest" of the money?
The usual way in which the Fed puts money into circulation is by
buying bonds from banks, firms or households (this is called an open
market operation). Say the Fed wants to put $100 into circulation, so
it buys $100 in Treasury Bills from a firm. What happens here is that,
at the end of the day, the Federal Reserve has had its resources
increased by $100, because now the Treasury owes $100 to the Fed; and
this increase in resources was done at a cost of just four cents for
the Fed.
Is this the end of the story? Clearly not, otherwise the Fed could
continually increase its resources by putting money into circulation
all the time. The truth is that the other effect of putting money into
circulation is inflation. Thus, the Fed gains resources at the cost of
reducing the purchasing power of everyone in the country. This is
what's usually called "seigniorage" or, more intuitively, "inflation
tax" (there is a slight difference between these terms, but it's not
important here). Of course, there is nothing wrong with this. Printing
money is one of the three ways in which any government can meet its
financial needs. In order to finance public spending, a country must
raise money either by:
- Printing money
- Collecting taxes, which, like printing money, reduces everybody
else's purchasing power
- Issuing bonds, which eventually will have to be repaid by collecting
taxes or printing money
So, where does this moeney go? It ends up going to the government, to
finance public spending, at the cost of infaltion. In developed
countries, like the US, monetary emission is done in a rational and
"controlled" way, so inflation is not high. In developing countries,
however, when it's not viable to raise taxes, or the government has no
access to financing through bonds (say, because people don't trust the
government will repay them); they turn to printing money as the only
way of meeting their financial needs. This usually ends in high levels
of inflation; or worse, hyper-inflation. For example, Germany after
WWI was not able to pay the indemnizations the "winning" countries had
required. So, the German government began to print money to pay for
this. It had to print so much money that it experienced a
hyper-inflation: in 3 years, prices rose something like 200.000.000
times.
Please follow these links to learn more about the sbuject
Inflation tax
http://www1.worldbank.org/publicsector/tax/inflationtax.html
http://ingrimayne.saintjoe.edu/econ/optional/HideTaxes.html
Definition of seigniorage
http://www.investopedia.com/terms/s/seigniorage.asp
I hope this helps. If you have any doubts regarding my answer, please
request a clarification before rating it.
Best wishes!
elmarto |
