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Seigniorage (pronounced /ˈseɪnjərɪdʒ/ ), also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency.


[edit] Overview

Seigniorage derived from specie - metal coins - arises from the difference between the face value of a coin and the cost of producing, distributing and retiring it from circulation.

Seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.[1]

Seigniorage is an important source of revenue for some national banks.

In macroeconomics, seigniorage is regarded as a form of inflation tax, as paying for government services by issuing new currency (rather than collecting taxes paid out of the existing money stock) has the effect of creating a de facto tax that falls on those who hold the existing currency, as a result of its effective devaluation through the introduction of additional money.[2]

[edit] Examples

[edit] Scenario A

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 then redeems it in gold. He ends up with exactly one ounce of gold again. No seigniorage occurs.

[edit] Scenario B

Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person redeems an ounce of gold for its value in currency, keeps that currency for a year, then trades the currency back in for an amount of gold at market value, which may yield a different amount of gold from that started with if its price has increased or decreased during that year.

If the value of gold has gone up in the interim, then the amount the redeemer receives in return for his paper notes will be less than he originally paid for them. Seignorage occurs.

If, however, the value of gold has decreased and the redeemer gains more than he paid in, it has not.

Seignorage, therefore, is the positive return on issuing notes and coins, or "carry" on money in circulation.

The opposite, "cost of carry", is not regarded as a form of seignorage.

[edit] Ordinary seigniorage

Ordinarily seigniorage is only an interest-free loan (for instance of gold) to the issuer of the coin or paper money. When the currency is worn out, the issuer buys it back at face value, thereby balancing exactly the revenue received when it was put into circulation, without any additional amount for the interest value of what the issuer received. Currently, under the rules governing monetary operations of major central banks (including the central bank of the USA), seigniorage on bank notes is simply defined as the interest payments received by central banks on the total amount of currency issued. However, if the currency is collected, or is otherwise taken permanently out of circulation, the back end of the deal never occurs (that is, the currency is never returned to the central bank). Thus the issuer of the currency keeps the whole seigniorage profit, by not having to buy worn out issued currency back at face value.

[edit] Seigniorage as a tax

Seigniorage can be seen as a form of tax levied on the holders of a currency and as such a redistribution of real resources to the issuer. The expansion of the money supply causes inflation. This means that the real wealth of people who hold cash or deposits decreases and the wealth of the issuer of the money increases. This is a redistribution of wealth from the people to the issuers of newly-created money (the central bank) very similar to a tax.

This is one reason offered in support of the creation of modern, independent, central banks whose primary objective is arguably to ensure the value of currency by controlling monetary expansion and thus limiting inflation. Independence from government is required to reach this aim - indeed, it is well known in economic literature that governments face a conflict of interest in this regard. In fact, "hard money" advocates argue that central banks have utterly failed to obtain the objective of a stable currency. Under the gold standard, for example, the price level in both England and the US remained relatively stable over literally hundreds of years, though with some protracted periods of deflation[citation needed]. Since the US Federal Reserve was formed in 1913, however, the US dollar has fallen to barely a twentieth of its former value through the consistently inflationary policies of the bank. Economists counter that deflation is hard to control once it sets in and its effects are much more damaging than modest, consistent inflation.

Ultimately, banks or governments relying heavily on seigniorage and fractional reserve sources of revenue will find it counterproductive. Rational expectations of inflation take into account a bank's seigniorage strategy, leading to economy damaging hyperinflation. Instead of accruing seigniorage from fiat money and credit most governments opt to raise revenue primarily through taxation and other means.

[edit] Seignorage today

The "50 State" series of quarters (25-cent coins) was launched in the U.S. in 1999. The U.S. government planned on a large number of people collecting each new quarter as it rolled out of the U.S. Mint, thus taking the pieces out of circulation[citation needed]. Approximately 147 million people are collecting the coins.[3] Each set of 50 quarters is worth $12.50. Since it costs the Mint less than 10 cents for each 25-cent piece it produces, the government made a profit whenever someone "bought" a coin and chose not to spend it. The U.S. Treasury estimates that it has earned about US$4.6 billion in seigniorage from the quarters so far. [4]

In some cases, national mints report the amount of seigniorage provided to their respective governments; for example, the Royal Canadian Mint reported that in 2006 it generated $C93 million in seigniorage for the Government of Canada.[5]

According to some reports, currently over half the revenue of the government of Robert Mugabe in Zimbabwe is in seigniorage.[6] Zimbabwe has experienced hyperinflation (see Hyperinflation in Zimbabwe), with the annualized rate at about 231,000,000% in July 2008 (prices doubling every 17.3 days).[7]

[edit] See also

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[edit] References

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