Seigniorage

Seigniorage ˈseɪnjərɪdʒ, also spelled seignorage or seigneurage (from the Old French seigneuriage, "right of the lord (seigneur) to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways: Seigniorage derived from specie (metal coins) is a tax added to the total cost of a coin (metal content and production costs) that a customer of the mint had to pay, and which was sent to the sovereign of the political region. Seigniorage derived from notes is more indirect; it is the difference between interest earned on securities acquired in exchange for banknotes and the cost of printing and distributing the notes. "Monetary seigniorage" is where sovereign-issued securities are exchanged for newly printed banknotes by a central bank, allowing the sovereign to "borrow" without needing to repay. Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the money supply during GDP growth and meeting yearly inflation targets. Seigniorage can be a convenient source of revenue for a government. By providing the government with increased purchasing power at the expense of public purchasing power, it imposes what is metaphorically known as an inflation tax on the public. Seigniorage is the positive return, or carry, on issued notes and coins (money in circulation). Demurrage, the opposite, is the cost of holding currency. An example of an exchange of gold for "paper" where no seigniorage occurs is when a person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and redeems it in gold. That person began with and ends up with exactly one ounce of gold. In another scenario, instead of issuing gold certificates a government converts gold into non-gold standard based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency, keeps the currency for one year, and exchanges it for an amount of gold at the new market value.