The King of Coins

This fee was termed "seigniorage" as an extension of the word "seignior," which was commonly used in reference to a feudal lord or ruler. In fact, this root word is also related to other common words including "senior," "senate," "sir," and "senile." There may be a common theme at work here.

Fiat Profit

In fact, the modern use of fiat money, money with value in exchange but little or no value in use, is ideally suited to seigniorage. Rather than adding seigniorage profit onto the production of commodity money, the production of fiat money automatically generates seigniorage. By definition, the face value (value in exchange) of fiat money is greater than the cost of production (value in use). Seigniorage is unavoidable.

A Tax on Currency?

In contrast, the production of fiat money means that something of greater value is generated from something of lesser value. Government does not remove money or value from the economy as royal coin makers did with commodity money.

Of course, to the extent that seigniorage adds revenue to the government treasury, then fewer taxes need be collected to finance government expenditures. In this sense seigniorage can be thought of as a tax.

Inflation Run Amuck

Inflation, an increase in the average price level of the economy, reduces the purchasing power of money. If prices are higher, then money buys less. A primary cause of inflation is the amount of money circulating through the economy. More money means higher prices. More money means inflation.

Because government produces money and introduces it into the economy, it can spend the money BEFORE prices rise. However, when the money is spent, after it is introduced into the economy, THEN inflation arises. That is, government gets to spend the money when first produced, when it is more valuable, when prices are low. But the rest of the economy spends the money when it is less valuable, AFTER prices have risen. This loss of purchasing power is the inflation tax.