Seigniorage
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Seigniorage, also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. It arises from the difference between the face value of a coin or bank note and the cost of producing and distributing it. Seigniorage is an important source of revenue for some national governments.
For example, after the "50 State" series of Quarters was launched in the U.S. in the late 1990s, the U.S. government discovered that a large number of people were collecting each new quarter as it rolled out of the U.S. Mint, taking the pieces out of circulation. Since it costs the Mint less than five cents for each 25-cent piece it produces, the government made money whenever someone "bought" a coin and chose not to spend it. The U.S. Treasury estimates that it has earned about $5 billion in seignorage profits from the quarters so farTemplate:Citation needed (April 2005).
Seigniorage can also refer to a form of tax levied on the holders of a currency, and as such a redistribution of resources to the issuer. The expansion of the monetary base usually causes inflation in the long run. This means that the real wealth of people who hold cash or deposits decreases, and the real wealth of the issuer of the money increases. This is a redistribution of wealth from the people to the issuers (mostly banks) very similar to a tax.
This is one reason offered in support of the creation of modern, independent, central banks, whose primary objective is allegedly 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 interests in this regard. In fact, 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. Since the US Federal Reserve was formed in 1913, however, the US dollar has fallen to barely a 20th of its former value through the consistently inflationary policies of the bank.
Currently, under the rules governing monetary operations of major central banks, seigniorage on bank notes is no longer defined as the difference between the face value of money and the cost of producing and distributing it, but it corresponds to the interest payments received by central banks on the total amount of currency issued. It is then only a fraction of what it used to be in the past. Seigniorage on coins is still as before, though, and it is usually earned directly by national treasuries, which are responsible for issuing coins.
A seignorage reform for the information age on a full-reserve banking base is proposed by Joseph Huber and James Robertson : Creating new money. The fruit of collaboration between a German academic and a British economic writer, they argue for one reform: the reappropriation by governments of the right of seigniorage now possessed by private banks. About 95% of new money currently issued takes the form of loans made by private banks to their customers. Huber and Robertson want to make this illegal. The creation of new money, both cash and non-cash, should be the exclusive prerogative of the central bank. The latter should determine how much it creates in the light of the objectives chosen for the country's monetary policy, and credit the new money to the government, who will then put it into circulation by spending it.