Do you know the meaning of Fiat money and Seigniorage?

The article explains the growing demand for US Dollars and how the US economy has benefitted from the Seigniorage

The unlimited notes and coins issued under the minimum reserve system are called Fiat money. The cost of issuing fiat currencies is paltry compared to their face value. Since the fiat currencies are issued and underwritten by the concerned government which is in principle, answerable to its citizen get their value by dint of regulation or law. The note-issuing authorities issue an unlimited quantity of new currency notes under a minimum reserve system based on the demand for the notes from the public.

The largest demand for US Dollars emanates from those countries where the local currency is not reliable. It is estimated by the US Federal that more than half of its notes are now overseas. The currency notes of US Dollars (US $ ) are accumulated in other countries through exports of goods and services from those countries or through public buying them through money exchangers. If those notes issued by US authorities, on no occasion return to the US, they signify that the US economy is largely benefitted by way of seigniorage.

Seigniorage means the profit made by a government from the difference between the face value of the currency note and its printing cost. It is estimated that the approximate cost of printing a note of US$ 100 is one dollar. (The printing cost of notes of lower face value like 1$ or 2$ may be around 4 to 5 cents). Therefore the US Government profits by US$ 99 each time it prints a currency note of US$ 100/-.

Many people are wondering about the reasons behind the growing demand for US Dollars. We all know that across the world the Government of each country prints and circulates its currency as a medium of exchange for goods and services within the geographical borders of that country (e.g. Rupees in India). Since the currency notes used in exporters’ countries are different, the importers have to make the payment to the supplier of the goods in a currency acceptable to the exporter. The US dollar is a standard currency that is freely convertible against currencies of diverse countries across the world and therefore is mostly accepted by the exporters of all countries. Also, in the international markets commodities like gold, petroleum, and many other commodities are quoted only in US dollars. Besides, many non-US-based companies also quote prices in US$ for their products and services. Hence there is always a good demand for US dollars across the world.

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