Seignorage and why cash is a poor investment

My Favorite Obscure Economics Concept: Seignorage. Why do governments so often let inflation get out of control? Because they can profit from it. Seignorage is the process in which governments implicitly tax their citizens by printing money. Suppose you're running a small, semi-corrupt country and you don't have enough money in the government coffers to pay your army. As the soldiers grow restless, you have two choices: 1) Raise taxes, which is politically unpopular but also harder than it sounds in poor countries without the infrastructure to collect the revenue. Or, 2) Phone the central bank and instruct them to begin printing money (which, if you've been in power long enough, probably has your picture on it). Of course, when you print money to pay the army, it depreciates the value of all the currency already in circulation, which is effectively a tax on everybody holding cash. A loaf of bread now costs 10 percent more, or 50 percent more, or 500 percent more, depending on how much money the government prints. Seignorage is technically the purchasing power that the government derives (e.g., paying the army) from printing money
-Charles Wheelan Ph.D.