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To: Haim R. Branisteanu who wrote (73731)	5/28/2010 3:20:51 PM
From: Snowshoe	Respond to of 74559

>>what you mean "seniorage"<< He meant seigniorage, but he has spelling problems just like you <g>... en.wikipedia.org 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]

To: Haim R. Branisteanu who wrote (73731)	5/28/2010 11:27:31 PM
From: RJA_	Read Replies (2) \| Respond to of 74559

>>what you mean "seniorage" en.wikipedia.org Seigniorage (pronounced /'se?nj?r?d?/), 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 send 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. 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. [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 in the long run. 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 free banking, a gold standard, or at a minimum the reduction of political control over central banks. The latter could then take as their primary objective ensuring a stable 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.