Seigniorage

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Seigniorage (pronounced /ˈseɪnjərɪdʒ/), also spelled seignorage or seigneurage can have the following two meanings:

  • Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.[1]
  • 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.[2]

Seigniorage is a convenient source of revenue for some national banks.

Contents

Examples

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

Scenario B

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. They keep the currency for one year, and then exchange it all for an amount of gold at the new market value. This second exchange may yield more or less than one ounce of gold if the value of the currency relative to gold has changed during the interim. (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. Seignorage occurred.

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

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.

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. This usually takes the form of interest payments on treasury bonds purchased by central banks, putting more dollars into circulation. 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.

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