what does seigniorage mean?

Wednesday, March 25, 2009

seigniorage:

the difference between the cost of the bullion plus minting expenses and the value as money of the pieces coined, constituting a source of government revenue.

Wikipedia breaks it down:

Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person redeems an ounce of gold for its value in currency, keeps that currency for a year, then trades the currency back in for an amount of gold at market value, which may yield a different amount of gold from that started with if its price has increased or decreased during that year.

If the value of gold has gone up in the interim, then the amount the redeemer receives in return for his paper notes will be less than he originally paid for them. Seignorage occurs.