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Euro Notes

Jul 31, 2010 • 268 Views
EST. TIME TO READ: 2 minutes

$1 million in $100 bills weighs 22 pounds. In $500 bills, $1 million would weigh 4.4 pounds. But the U.S. does not circulate $500 bills.

The EU does.

According to the WSJ and NPR’s Planet Money, people engaging in illegal activities prefer large denomination bills that can travel. If you are a smuggler, a money launderer, a drug dealer, or someone living in a country with a hyperinflated currency, you might select the €500 bill. Weighing close to 4 pounds per million euros, it would be your chosen currency. Today, the €500 is equal to $652.55.

This takes us to the value of the euro. It has been suggested that the international value of a currency is a “leading indicator” of that region’s financial health. Traditionally, financial health relates to a rising GDP, fiscal moderation, and monetary stability. Also, we can look at the balance sheet of the central bank.

The European Central Bank (ECB) has been called “super-solvent” because of the money it “earns” from its €500 and €100 notes. The money that a central bank earns on the currency it issues is also called seignorage.

The Economic Lesson

Most simply defined, seignorage refers to the money a central bank can make when it issues money because it costs so little to print it. The central bank gets the currency for the amount it costs to print it and then receives a market value return when it circulates it. Very hypothetically, we could say that it costs $1 to print a $100 bill. Then the Fed gets 5% interest on the $100 if it buys a treasury bill from a bank with that money. The seignorage is $4.

The WSJ estimates that 35% of the euros in circulation are in high denomination notes. The seignorage on these notes can be considerable. For that reason, the title of the WSJ article is “How Gangsters Are Saving Euro Zone.” 

 

 

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