Seigniorage is the difference between the cost of producing and distributing paper, metal and electronic money, and its value.
Traditionally, seigniorage referred to the profit that rulers made from permitting metals to be converted into coins. Today, it may also refer to the power of a nation whose banknotes and coins are held as a reserve currency by other countries.
The term ‘seigniorage’ comes from the Old French word ‘Seigneuriage’, meaning ‘right of the lord (seigneur) to mint money’. The word can also be spelled ‘seignorage’ or ‘seigneurage’.
BusinessDictionary.com says that seniorage is: “Government income received from minting of currency, and resulting from the difference between the cost of materials (ink, paper, metal) and the currency’s face value (par value).”
People sometimes use the term ‘seigniorage’ with the simple meaning of the government’s ability to print new money.
According to the Financial Times’ glossary of terms, seigniorage is:
“The profit made by a government from the printing of money, literally the face value of the money minus the cost of physically making it.”
Seigniorage — government revenue
Seigniorage is the revenue governments derive because the cost of minting coins or printing paper money is less than the market value of the money.
The basic idea behind seigniorage is that the government loses money if the cost of producing money in circulation is greater than its value, and makes money when its value exceeds its cost of production.
It is the value generated by the government by adding its stamp to an ordinary piece of metal or paper — plus all electronic bank entries today.
When the government earns revenue from seigniorage — when the money it creates is worth more than the cost of producing it — that income is used to finance some of its expenditure.
For example, if it costs the US government 5 cents to produce each paper dollar bill, the seigniorage is $0.95, i.e. $1 minus the $0.05 cost of producing it.
Sometimes the production of money can result in a loss rather than a gain for the government that is producing it. This is more common with the production of coins from metal.
Metals, such as silver, gold, copper or nickel, have their own inherent value, called the ‘melt value’.
A one-cent coin in the US — commonly known as a ‘penny’ — is made mostly of zinc. In 2018, the cost of making a 1 cent coin was 2.06 cents, because the melt value of zinc had risen.
Over time, the face value of many coins — especially silver or gold ones — may fall below their melt value.
When decisions are taken about what type of money to make (ie. notes or coins), the argument boils down to these two options:
- Paper bills are cheaper to make, but don’t last as long.
- Coins are often more expensive to make, but last a long time (and then get recycled).
Now obviously, given that notes are cheaper, and have to be issued more frequently, it seems like the US authorities are just greedy for more seigniorage revenue. And while that might make sense to the conspiracy theorists — it does make you wonder why the coin-making countries are so… altruistic?
If we were dealing with banknotes, we would keep them in our wallets. But since we’re talking about coins, we don’t carry them in general. We only ever carry them on purpose — and because our shopping trips are usually en route to something else — We rarely remember to take the coins to pay for parking.
And this is why countries like coins… Because you need so many more of them in circulation. We tend to spend notes quickly — but coins get stuck in jars and forgotten about in drawers. Some estimates suggest that you need 3 to 4 times the value of coins in circulation as you would notes.
Which is why the other countries aren’t really that altruistic at all. It’s just a question of choosing between volume over time and volume as a once-off. And they choose the once-off option.