Notice how and when the FRNs become money, i.e., are vested with face value, and when they revert to valueless objects. These transformations occur as provided and defined by federal law.
This entire process is the exact analog of the transformation of poker chips in a casino. FRNs in circulation are representative of and traceable to something of value in the economy--labor, possession of real assets, etc. Poker chips in possession of the players, likewise, represent real value accumulated by the players in the real economy. Players may cash in their chips at their pleasure and receive from the casino the cash value of the chips. The chips are then returned to the casino's supply to be used again.
If seigniorage were drained off by the casino, once chips were issued to a player the cash received from the player would be retained by the casino, and the player would not be able to cash in his chips. In our Federal Reserve monetary system, if the FR was pocketing the seigniorage on FRNs, bank customers holding FRNs would be unable to exchange them at face value at their bank. Clearly, this is not the case. The FR system's FRNs are exactly analogous to poker chips in a casino.
The FRN transactions discussed in this article are also given in Modern Money Mechanics.
There are reasons why the FR system is not serving the proper functions of an honest economy, but theft of seigniorage is not one of them. This will be discussed in a future article.
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