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Cash is a public good

In modern society, people need to pay for their most basic needs including food, water and shelter. Cash is the only payment instrument which is issued in the best interests of society by a public authority.

Cash is issued by central banks or monetary authorities. It is typically part of the central bank’s mandate to supply banknotes. Coins are generally supplied by Treasury Departments. In both cases this service is carried out in the best interests of the public. The precise objectives of the central bank in terms of cash supply vary from country to country, but they are generally based on four principles:

  • Security: banknotes should be difficult to counterfeit
  • Quality: notes which are no longer fit for circulation are withdrawn and destroyed;
  • Efficiency: the overall cost of the issue and circulation of notes should be kept to a minimum;
  • Confidence: the public should have a high level of trust in its banknotes.
In 1943, American psychologist Abraham Harold Maslow published A Theory of Human Motivation44 and developed his theory on the hierarchy of needs. It is often represented as a pyramid with the most basic needs at the bottom and other needs as successive layers, with “self-actualisation” at the top. As each need is satisfied, the desire grows to achieve the next.

In Maslow’s view, the first level comprises the physiological needs, which are essential to human behaviour: air, water and food. In modern society, with 54% of the global population living in cities, most people need to pay to obtain food and water. Accordingly, payment has become a basic need. Some non-cash payments aim to fulfil higher needs; in particular, many premium payment cards clearly aim to provide self-esteem, status and recognition. Marketing experts will probably argue that the most profitable products are those which satisfy the higher needs. However, in modern society, payments are required to cover the most basic needs.

Payments are a basic need
Cash generates revenue for the central bank and ultimately the state in the form of seigniorage. The word derives from the old French word seigneuriage, which refers to the right of the lord to mint money45 and consists in the net revenue derived from the issuing of banknotes and coins.

Banknotes are a non-interest bearing asset. But when they are issued, they are recorded as a liability on the central banks’ balance sheet and invested in interest-bearing assets. Seigniorage is the difference between the interest earned and the costs of producing and distributing banknotes.

For coins, the process differs as these are not redeemed by the issuing authority. Consequently, the seigniorage is the difference between the face value and the cost of production and is generated at the time of sale.

Simply put, seigniorage is an income source for the central bank and consequently the government. It is sometimes viewed as a tax. In the case of the euro, the applicable interest rate is the marginal rate for the Eurosystem’s main refinancing operations (MRO). This rate has varied considerably over the past decade as illustrated below. It is also worth noting that currencies held by non-residents also generate income.
Euro banknotes in C-circulation, ECB seigniorage and the marginal MRO rate 
44 in Psychological Review
46 Main Drivers of the ECB Financial Accounts and ECB Financial Strength over the First 11 Years, by Olivier Vergote, Werner Studener, Ioannis Efthymiadis and Niall Merriman. Occasional Paper Series n° 111/May 2010