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Seigniorage is a convenient 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.[3]
[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. That person 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 exchanges one ounce of gold for its value in currency. They keep the currency for one year, 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
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