Making fun of the Swiss people about seigniorage...

How the Swiss Were Duped on Seigniorage

Seigniorage, the profit derived from issuing currency, has historically been a significant source of revenue for states and financial institutions. However, in Switzerland, the handling of seigniorage under the Currency Act of 1860 reveals a subtle manipulation that effectively deprived the public of its potential benefits. By examining historical documents and economic theory, particularly Ludwig von Mises’ The Theory of Money and Credit, we can uncover how the Swiss state redirected these profits away from general wealth creation, prioritizing specific fiscal policies over public gain.The Nature of SeigniorageSeigniorage arises when the issuer of money—whether a state or a bank—profits from the difference between the cost of producing currency and its nominal value. As Mises explains, issuers of fiduciary media, such as token coins or banknotes, may treat this profit as an addition to their income or capital without necessarily reserving funds to back the issued currency (The Theory of Money and Credit, p. 278). Historically, this practice has roots in both state minting privileges and the operations of deposit and giro banks. While banks often used fiduciary media to fund loans or production, states could similarly issue convertible treasury notes or token coins, reaping seigniorage as a form of revenue.The critical distinction lies in the issuer’s intent. An issuer might cover their obligations by setting aside a credit fund, or they might simply pocket the seigniorage as income. In Switzerland’s case, the state’s approach to seigniorage under the 1860 Currency Act leaned toward the latter, but with a twist that masked its true impact on the public.The Swiss Currency Act of 1860Switzerland’s monetary policy in the mid-19th century was shaped by the need to unify a fragmented system of cantonal currencies under a federal framework. The Currency Act of May 7, 1850, laid the groundwork for this unification, but it was the amendment of January 31, 1860, that addressed the allocation of seigniorage profits. According to the 1860 Act, any surplus revenue from minting new coins—after covering production costs—was to be set aside in a currency reserve fund, as stipulated in Article 8:

“The surplus revenue that may result from new coin minting shall be set aside in reserve to be used, as necessary, to cover all or part of the costs arising from the withdrawal of worn Swiss coins, in accordance with Article 13 of the Currency Act of May 7, 1850. The interest from this reserve fund shall be added to the capital.” (RO VI, p. 394)

This provision appears prudent at first glance, earmarking seigniorage for the maintenance of the currency system. However, as Mises notes, some states, including Switzerland, began to treat seigniorage not as an increase in national wealth but as a resource for specific purposes (The Theory of Money and Credit, p. 279). By directing these profits into a restricted reserve fund, the Swiss state effectively removed them from broader economic circulation, limiting their potential to benefit the public directly.The Deception in the DetailsThe 1860 Act’s allocation of seigniorage to a reserve fund for replacing worn coins sounds like sound fiscal management, but it obscures a critical point: these profits were not treated as general revenue that could reduce taxes, fund public services, or stimulate economic growth. Instead, they were locked away for a narrow purpose, ensuring that the state retained control over this wealth without distributing its benefits to the populace.The 1850 Currency Act had already established that losses from melting down cantonal currencies would be borne by the cantons, while seigniorage from new minting would be distributed among them based on an 1838 silver contribution scale (Loi du 7 Mai 1850). This arrangement suggested a degree of fairness, as cantons shared in the profits. However, the 1860 amendment shifted the focus to a federal reserve fund, centralizing control and limiting the flexibility of these funds. The Swiss public, unaware of the broader implications, was effectively “duped” into accepting a system where seigniorage—a potential source of public wealth—was siphoned into a state-controlled fund under the guise of monetary stability.Historical Context and Economic ImplicationsThe 1860 Act also introduced bimetallism, granting legal tender status to French gold coins alongside silver (RO VI, p. 394). This move aligned Switzerland with international monetary trends, particularly the Latin Monetary Union, but it further entrenched the state’s authority over currency issuance. By controlling both the issuance and the profits of money creation, the Swiss government positioned itself to benefit disproportionately from seigniorage, while the public saw no direct return.Mises highlights that the value of fiduciary media, such as token coins, is not affected by how the issuer uses the profits (The Theory of Money and Credit, p. 278). However, the economic consequences for society depend on whether those profits are reinvested in the economy or hoarded for specific state purposes. In Switzerland’s case, the decision to reserve seigniorage for coin replacement rather than general revenue meant that the public missed out on potential tax relief or infrastructure investment. This subtle redirection of wealth represents a form of economic sleight-of-hand, prioritizing state interests over those of the citizenry.A Missed Opportunity for the Swiss PeopleThe Swiss approach to seigniorage in 1860, while not overtly malicious, reflects a broader trend of states treating currency issuance as a tool for control rather than public enrichment. As Hans Altherr notes in Eine Betrachtung über neue Wege der schweizerischen Münzpolitik (1908), the currency reserve fund was a deliberate choice to segregate seigniorage from general wealth (p. 61). This policy ensured that the state could maintain its monetary system without sharing the profits of money creation with the public.In modern terms, this could be likened to a government taxing its citizens indirectly by withholding the economic benefits of money creation. The Swiss people, trusting in the state’s commitment to monetary stability, were unaware that they were being shortchanged. Seigniorage, which could have bolstered the economy or reduced fiscal burdens, was instead funneled into a narrow reserve, leaving the public none the wiser.Lesson learned?
The Swiss Currency Act of 1860, while ostensibly presented as a measure to stabilize and unify the nation’s monetary system, subtly diverted the benefits of seigniorage away from the public. By channeling the profits from money creation into a restricted currency reserve fund, the Swiss state ensured that these funds served narrow fiscal purposes—primarily the replacement of worn coins—rather than contributing to broader economic prosperity. As Ludwig von Mises observes, states often treat seigniorage as a resource for specific ends rather than an increase in national wealth, and Switzerland’s approach exemplifies this practice (The Theory of Money and Credit, p. 279). The Swiss public, trusting in the government’s commitment to monetary stability, was effectively duped into accepting a system that prioritized state control over public benefit. This historical case underscores a broader lesson: the profits of money creation, if not transparently managed, can become a tool for governments to consolidate power while leaving citizens unaware of the wealth quietly withheld from them.