A classic argument for central bank controlled fiat money goes like this: a commodity such as gold is very costly to produce. All the resources, capital, and labor devoted to mining gold for monetary purposes could be employed elsewhere in the economy, to the benefit of society, if only we had a fiat standard.

This argument is by no means conclusive. We would not stop producing champagne either, just because sparkling water is cheaper. However, there is an undeniable grain of truth in it. At first glance it seems we could save a lot of resources under a fiat standard. But do we really?

Business Accounting for Central Banks

The euro provides a suitable case study to go after this question. How much does it actually cost to produce the euro and to conduct enlightened monetary policy along the way?

The European Central Bank (ECB) was founded in June 1998. By the end of 1999, it employed 732 full time staff, among which 55 held managerial positions. By the end of 2003, these numbers had increased to 1,213 and 84, respectively. All of these employees were hired on permanent contracts. This policy has changed in 2004. At the end of 2016, the ECB employed 3171 full time staff and total annual staff costs amounted to some €467 million. Staff costs have grown at an average annual rate of 12.7%. But that is hardly the end of the story.

Administrative costs have grown from €61 million in 1999 to €414 million in 2016 at an average annual rate of 12%. Another item of expenditure are costs for coin and note production services, which was added to the annual accounts in 2002, the year the euro was introduced in cash. That year it amounted to €118 million. Thereafter it dropped and remained always below €9 million per year.

Depreciation of fixed assets is the fourth item of expenditure contained in the ECB’s profit and loss account. It increased in 2015 from €15 million to €64 million, since the ECB moved into the new headquarters at the East end of Frankfurt, Germany. The new building is owned by the ECB and construction costs amounted to more than €1.3 billion.