Seignorage

Seigniorage /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage (from 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 the following ways:

The term also applies to monetary seignorage, where sovereign-issued securities are exchanged for newly minted bank notes by a central bank, thus allowing the sovereign to 'borrow' without needing to repay. However, monetary seignorage refers to the sovereign revenue obtained through routine debt monetization, including expanding the money supply during GDP growth and meeting yearly inflation targets.

Seigniorage is a convenient source of revenue for some governments. By providing the government with increased purchasing power at the expense of the public's purchasing power, it imposes what is metaphorically known as an inflation tax on the public.

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. That person ends up with exactly one ounce of gold again. No seigniorage occurs.

Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency. This person keeps the currency for one year, and then exchanges it all for an amount of gold at the new market value. If the value of the currency relative to gold has changed during the interim this second exchange may yield more or less than one ounce of gold. (Assume that the value or direct purchasing power of one ounce of gold remains constant through the year.)

If the value of the currency relative to gold has decreased, then the person receives less than one ounce of gold. Seigniorage occurred.

If the value of the currency relative to gold has increased, then the person receives more than one ounce of gold. Seigniorage did not occur.

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