> When the central bank lends money at positive interest rates, the interest profits or “seigniorage” are distributed to everyone like dividends (they would in

> When the central bank lends money at positive interest rates, the interest profits or “seigniorage” are distributed to everyone like dividends (they would in the real world go to the government which would spend or distribute them). If seigniorage was not distributed, at the end of each loan, the money supply would shrink a little bit as the central bank would be gradually absorbing money from the economy as interest. Seigniorage serves to neutralize this. Could you elaborate on this? Is this really what happens in the real world - interest on central bank loans going to the government? I was very much under the impression that this interest goes to the central bank (and is thus destroyed), and the fact that this would appear to contract the money supply seemed like it just increased the need for the central bank to increase the money supply in other ways. To be honest, I am still not clear on how the money supply is increased permanently by a central bank - all textbook examples of money supply changes appear to only do so temporarily.