Forex: Seigniorage
The essence of the liquidity problem is the need for an adequate supply of reserves.
On the other hand, the essence of the confidence problem, is the need for some arrangement to cope with destabilizing shifts of confidence among different types if reserves.
Insofar as the efficiency objective is concerned, the challenge to the monetary order is to ensure an optimal quantity and composition of international liquidity.
Insofar as the consistency of objective is concerned, the challenge is to minimize conflict over distribution of the benefits and costs of creating international liquidity.
This, including the related gains and losses of political prestige and autonomy. Needless to say, this is a tough challenge, too.
At the heart of this challenge is the concept of the seigniorage.
Originally, seigniorage referred to the difference between the circulating value of a coin and the cost of bullion and minting, involving a once-for-all gain to the coin's issuer (the sovereign or the 'seigneur').
Later the term was extended to describe the gain of real resources, over and above costs of production and administration, associated with the creation and issue of any kind of money--- including also international money.
Alternative possible mechanisms for the creation of international liquidity each imply a different amount and distribution of seigniorage; these in turn imply varying consequences for national prestige and decision-making authority.
Just as economists have attempted to design optimal rules and conventions for the international adjustment process, so many have tried to design optimal rules and conventions for liquidity process.
But just as the adjustment codes for economists fail to take account of distributional considerations, so usually do their proposals for the creation of liquidity.
Most fail to address explicitly the issue of how to minimize controversy over allocation of the gains of welfare, prestige, and autonomy associated with the creation and issue of international reserves.
That the allocation of these gains matters to states should be clear.
If governments naturally seek to minimize sacrifices at home from the payments adjustment process, so too they naturally seek to maximize benefits at home from the liquidity-creation process.
Just as the problem of liquidity is really just the other side of the coin labeled 'problem of adjustment', the conflict over the gains associated with seigniorage is really just the other side of the coin labeled 'costs of adjustment'.
Likewise, across national frontiers, governments would like to be in a position to enjoy as large a share as possible of the seigniorage gains derived from control of the international money supply.
And in this respect also, an important contributing factor is the system of domestic power relationships within each state.
Key national constituencies have strong perceived interests in the choice of an international liquidity-creation, mechanism-including, especially the financial sector and the investors in international monetary assets.
The consequence of all these factors is that the process of liquidity creation, like the payments adjustment process, tends in practice to be very much a straightforward matter of international monetary power.