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The Private Equity for Families Blog

Seignorage May Be Treasury’s Next Profit Center?

Just recently I learned the $100 Bill has a new look. Series 2009A, the new look, was finally issued four years late in 2013 due to printing problems with the new security features. If you look at the new $100 bills, the left face looks like old money and the right half looks like new money. In fact, the bill folds naturally along the blue line that contains a hologram. The old money side lacks almost all the security features that deter counterfeiters like a gold ink well that turns green and a watermark of Ben Franklin’s face. Here is a link to a You Tube Video about the new security features:


Why Has The Fed Doubled The Benjamins?

It is also interesting that the number of $100 bills in circulation has almost doubled from 6.6 billion in 2009 to 12.5 billion in 2017 while other denominations like the $10 and $20 have only grown slightly. Why double the circulation of the biggest denomination when Treasury spokesmen like Peter Sands and Lawrence Summers writing for The Washington Post in the February 25, 2016, edition opine the $100 Bill should be banned to deter criminals?:

“Our advocacy for the elimination of high denomination notes is based on a judgment that any losses in commercial convenience are dwarfed by the gains in combatting criminal activity, not any desire to alter monetary policy or to create a cashless society.”

It is estimated that 75% of the old and new bills are circulating outside the United States. Given the US Dollar’s international status as the world’s reserve currency, these notes are critical foreign reserves. Recently, there have been reports of travelers having difficulty exchanging old $100 bills for local currencies. The reason is fear of counterfeit currency. The department of Treasury estimates that approximately $150 million of counterfeit $100 bills are circulating worldwide.

A Clever Plan May Soon Be Hatched

It is also interesting that there are many reports (maybe self-serving) that 75% of the bills in circulation contain traces of cocaine. The preponderance of those bills are old money, not the 2009A series. These new bills give Treasury a one-time chance to challenge the cash economy of which drug money is a big part.  Allowing a short period where the old bills would be retired and exchanged for the new $100 bills will force criminals and tax evaders either to exchange or forfeit their holdings.  The amount of new bills in circulation would eventually return to 6.6 million. Customers of banks should have no problems, but people living off the banking grid might find the conversion to be painful. For example, if you are a drug lord and have $100.0 million of old bills in a heavily guarded warehouse, it will be difficult to exchange 50 tractor trailers of $100 bills without drawing attention. Simply by presenting them, you open yourself up to tax evasion inquiries. To level the playing field for honest citizens who are too poor to have a bank account, the Treasury may allow a small amount to old bills to be exchanged at banks with no questions asked.

Foreign Exchanges May Be Impractical

If you are a foreign holder, you will also struggle with the conversion. How that exchange process would be handled is the single biggest reason why the exchange might be impractical.  Again, if you are a customer of an international bank, the exchange should be fine. The conversion process would force many people living in a shadow economy into mainstream banking, albeit for a short time, where it is much harder to avoid taxes and where central banks know who you are.  Central banks have always disliked the shadow economy anyway because cash is redeemable at face value and cannot be part of a monetary policy that charges negative interest.

This Is A Money Maker For Treasury Called Seigniorage

I am convinced that the U.S. Treasury has a plan to cause a huge amount of claims on the US Treasury to simply vanish. If you assume that 25% of the old $100 Bills in circulation are dirty money or cannot be redeemed, and if you assume they cannot be converted or laundered to other denominations, that could mean that as $660 Billion of old bills undergo conversion (6.6 Billion old bills in circulation X $100), $165 Billion could become worthless as the period for exchange expires. This has been done with the $1000 bill and bearer bonds, so there is precedent for the retirement playbook. It will also help banks open up new relationships with non-criminals.

If it is successful, the cash economy may be closed forever to criminals and tax evaders. If the Treasury can do it with the 2009A conversion, they can do it again with Series 2020A.

The term for this is called seigniorage. This is the profit the US Treasury keeps when it prints money and then later pays out less than face value for retiring it. So, if I am doing the math correctly, the Treasury may eliminate dirty cash worth $165 Billion at the expense of $12.5 cents for printing each new bill. This is the kind of trade that would make Goldman Sachs partner proud.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.