Sum's Tutorials ...."What is Seigniorage"

Seigniorage , also spelled seignorage or seigneurage, is the net revenue derived from the issuing of currency. Seigniorage derived from coins arises from the difference between the face value of a coin and the cost of producing, distributing and eventually retiring it from circulation. Seigniorage derived from notes is the difference between the interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those bank notes. Seigniorage is an important source of revenue for some national banks. In macroeconomics, seigniorage is also referred to as an inflation tax, as government could pay for services by issuing new currency rather than by collecting taxes; the "inflation tax" is paid by those who hold the existing currency.

An example
No seigniorage occurs in the following situation: A person has one ounce of gold, trades it in for a gold certificate (which allows him to redeem the certificate for one ounce of gold), keeps that certificate for a year, and then trades it in for gold -- he or she ends up with exactly one ounce of gold again.

Seignorage does occur in the following situation: A government does not issue gold certificates and instead converts gold into currency at the market rate. A person trades in an ounce of gold for its worth in currency, keeps that currency for a year, and then trades the currency back in for an amount of gold -- he or she may receive a different amount of gold from that which he or she started with, if the price of gold has increased or decreased during that year. Even if he or she were then to use the currency to buy something, someone is holding the bill for the entire time and the government still has the gold.

So, in other words, seignorage is the carry on money in circulation.


Examples
The "50 State" series of (25-cent coins) was launched in the U.S. in 1999. The U.S government planned on a large number of people collecting each new quarter as it rolled out of the U.S. Mint, thus taking the pieces out of circulation. Since it costs the Mint less than 10 cents for each 25-cent piece it produces, the government made a profit whenever someone "bought" a coin and chose not to spend it. The U.S. Treasury estimates that it has earned about US$5 billion in seigniorage revenue from the quarters so far.

In some cases, national mints report the amount of seigniorage provided to the respective government; for example, the Royal Canadian Mint reported that in 2006 it delivered $C93 million to the Government of Canada in seigniorage ("the difference between the face value of a coin and its cost of manufacture and distribution").

The introduction of €500 and €200 Euro notes is seen as a source of seigniorage revenue for the European Central Bank, particularly because no other major central bank issues currency in such large denominations. The Swiss National Bank does, however, issue CHF1000 denominations and Monetary Authority of Singapore $1000 and $10,000 denominations that are routinely circulated.

According to some reports, currently over half the revenue of the government of Robert Mugabe in Zimbabwe is in seigniorage.Zimbabwe has experienced hyperinflation, with the annualized rate topping 100,000% for January 2008