Lets think about these two scenarios below...Then ask yourself, what is the Republican party truly afraid of!?
Seigniorage (pron.: /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage):
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.
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, and then 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. Seigniorage occurred. If the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold. Seigniorage did not occur.
Seigniorage, 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 seigniorage.
Seigniorage as a tax
Some economists regarded seigniorage as a form of inflation tax, redistributing real resources to the currency issuer. Issuing new currency, rather than collecting taxes paid out of the existing money stock, is then considered in effect a tax that falls on those who hold the existing currency. The expansion of the money supply may cause inflation in the long run.
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. 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.
Banks or governments relying heavily on seigniorage and fractional reserve sources of revenue can find it counterproductive. Rational expectations of inflation take into account a bank's seigniorage strategy, and inflationary expectations can maintain high inflation. Instead of accruing seigniorage from fiat money and credit most governments opt to raise revenue primarily through taxation and other means.
Information Edited and Posted by: Michelle R. Jackson