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Seigniorage /ˈsnjərɪ/ , also spelled seignorage or seigneurage (from the Old French seigneuriage, "right of the lord (seigneur) to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways:


"Monetary seigniorage" is where sovereign-issued securities are exchanged for newly printed banknotes by a central bank, allowing the sovereign to "borrow" without needing to repay. [3] Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the money supply during GDP growth and meeting yearly inflation targets. [3]

Seigniorage can be a convenient source of revenue for a government. By providing the government with increased purchasing power at the expense of public purchasing power, it imposes what is metaphorically known as an inflation tax on the public.


Seigniorage is the positive return, or carry, on issued notes and coins (money in circulation). Demurrage, the opposite, is the cost of holding currency.

An example of an exchange of gold for "paper" where no seigniorage occurs is when 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 redeems it in gold. That person began with and ends up with exactly one ounce of gold.

In another scenario, instead of issuing gold certificates a government converts gold into non-gold standard based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency, keeps the currency for one year, and exchanges it for an amount of gold at the new market value. If the value of the currency relative to gold has changed in the interim, the second exchange will yield more (or less) than one ounce of gold (assuming that the value, or purchasing power, of one ounce of gold remains constant through the year). If the value of the currency relative to gold has decreased, the person receives less than one ounce of gold and seigniorage occurred. If the value of the currency relative to gold has increased, the person receives more than one ounce of gold and demurrage occurred; seigniorage did not occur.

Ordinary seigniorage

Ordinarily, seigniorage is an interest-free loan (of gold, for example) to the issuer of the coin or banknote. When the currency is worn out the issuer buys it back at face value, balancing the revenue received when it was put into circulation without any additional amount for the interest value of what the issuer received.

Historically, seigniorage was the profit resulting from producing coins. Silver and gold were mixed with base metals to make durable coins. The British pound sterling was 92.5 percent silver; the base metal added (and the pure silver retained by the government mint) was, less costs, the profit – the seigniorage. Before 1933, United States gold coins were 90 percent gold and 10 percent copper. To make up for the lack of gold, the coins were over-weighted. A one-ounce Gold American Eagle will have as much of the alloy as needed to contain a total of one ounce of gold (which will be over one ounce). Seigniorage is earned by selling the coins above the melt value in exchange for guaranteeing the weight of the coin.

Under the rules governing the monetary operations of major central banks (including the Federal Reserve), seigniorage on banknotes is the interest payments received by central banks on the total amount of currency issued. This usually takes the form of interest payments on treasury bonds purchased by central banks, putting more money into circulation. If the currency is collected, or is otherwise taken permanently out of circulation, the currency is never returned to the central bank; the issuer of the currency keeps the seigniorage profit by not having to buy back worn-out currency at face value.

Solvency constraints of central banks

The solvency constraint of a standard central bank requires that the present discounted value of its net non-monetary liabilities (separate from monetary liabilities accrued through seigniorage attempts) be zero or negative in the long run. Its monetary liabilities are liabilities in name only, since they are irredeemable. The holder of base money cannot insist on the redemption of a given amount into anything other than the same amount of itself, unless the holder of the base money is another central bank reclaiming the value of its original interest-free loan.

Seigniorage as a tax

Economists regard seigniorage as a form of inflation tax, returning resources to the currency issuer. Issuing new currency, rather than collecting taxes paid with existing money, is considered a tax on holders of existing currency. [4] Inflation of the money supply causes a general rise in prices, due to the currency's reduced purchasing power.

This is a reason offered in support of free banking, a gold or silver standard, or (at a minimum) the reduction of political control of central banks, which could then ensure currency stability by controlling monetary expansion (limiting inflation). Hard-money advocates argue that central banks have failed to attain a stable currency. Orthodox economists counter that deflation is difficult to control once it sets in, and its effects are more damaging than modest, consistent inflation.

Banks (or governments) relying heavily on seigniorage and fractional reserve sources of revenue may find them counterproductive. [5] 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 formal taxation and other means

Contemporary use

The 50 State Quarters series of quarters (25-cent coins) began in 1999. The U.S. government thought that many people, collecting each new quarter as it rolled out of the United States Mint, would remove the coins from circulation. [6] Each complete set of quarters (the 50 states, the five inhabited U.S. territories, and the District of Columbia) is worth $14.00. Since it costs the mint about five cents to produce one quarter, the government made a profit when someone collected a coin. [7] The Treasury Department estimates that it earned about $6.3 billion in seigniorage from the quarters during the program. [8]

Some countries' national mints report the amount of seigniorage provided to their governments; the Royal Canadian Mint reported that in 2006 it generated $93 million in seigniorage for the government of Canada. [9] The U.S. government, the largest beneficiary of seigniorage, earned about $25 billion in 2000. [10] For coins only, the U.S. Treasury received 45 cents per dollar issued in seigniorage for the 2011 fiscal year. [11]

Occasionally, central banks have issued limited quantities of higher-value banknotes in unusual denominations for collecting; the denomination will usually coincide with an anniversary of national significance. The potential seigniorage from such printings has been limited, since the unusual denomination makes the notes more difficult to circulate and only a relatively-small number of people collect higher-value notes.

Over half of Zimbabwe's government revenue in 2008 was reportedly seigniorage. [12] The country has experienced hyperinflation ever since, with an annualized rate of about 24,000 percent in July 2008 (prices doubling every 46 days). [13]

International circulation

The international circulation of banknotes is a profitable form of seigniorage. Although the cost of printing banknotes is minimal, the foreign entity must provide goods and services at the note's face value. The banknote is retained as a store of value, since the entity values it more than the local currency. Foreign circulation generally involves large-value banknotes, and can be used for private transactions (some of which are illegal).

American currency has been circulating globally for most of the 20th century, and the amount of currency in circulation increased several-fold during World War II. Large-scale printing of the United States one-hundred-dollar bill began when the Soviet Union dissolved in 1991; production quadrupled, with the first trillion-dollar printing of the bill. At the end of 2008, U.S. currency in public circulation amounted to $824 billion and 76 percent of the currency supply was in the form of $100 bills (twenty $100 bills per U.S. citizen). [14] The amount of U.S. currency circulating abroad is controversial. According to Porter and Judson, [15] 53 to 67 percent was overseas during the mid-1990s. Feige [16] estimates that about 40 percent is abroad. In a New York Federal Reserve publication, Goldberg [17] writes that "about 65 percent ($580 billion) of all banknotes are in circulation outside of the country". These figures are largely contradicted by Federal Reserve Board of Governors Flow of Funds statistics, [18] [19] which indicate that $313 billion (36.7 percent) of U.S. currency was held abroad at the end of March 2009. Feige calculates that since 1964, "the cumulative seigniorage earnings accruing to the U.S. by virtue of the currency held by foreigners amounted to $167–$185 billion and over the past two decades seigniorage revenues from foreigners have averaged $6–$7 billion dollars per year". [20]

The American $100 bill has competition from the €500 note, which facilitates the transport of larger amounts of money. One million dollars in $100 bills weighs 22 pounds (10 kg), and it is difficult to carry this much money without a briefcase and physical security. The same amount in €500 notes would weigh less than three pounds (1.4 kg), which could be dispersed in clothing and luggage without attracting attention or alerting security devices. In illegal operations, transporting currency is logistically more difficult than transporting cocaine because of its size and weight, and the ease of transporting its banknotes makes the euro attractive to Latin American drug cartels. [21]

The Swiss 1,000-franc note, worth slightly more than $1,000, is probably the only other banknote in circulation outside its home country. However, it does not have a significant advantage over the €500 note to the non-Swiss; there are 20 times as many €500 notes in circulation, and they are more widely recognized. As a reserve currency, it makes up about 0.1% of the currency composition of official foreign-exchange reserves.[ citation needed ]

Governments vary in their issuance of large banknotes; in August 2009, the number of Fr. 1,000 notes in circulation was over three times the population of Switzerland. For comparison, the number of circulating £50 banknotes is slightly less than three times the population of the United Kingdom; the Fr. 1,000 franc note is worth about £600. The British government has been wary of large banknotes since the counterfeiting Operation Bernhard during World War II, which caused the Bank of England to withdraw all notes larger than £5 from circulation. The bank did not reintroduce other denominations until the early 1960s (£10), 1970 (£20) and March 20, 1981 (£50).

See also

Related Research Articles

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound Sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

<span class="mw-page-title-main">Gold standard</span> Monetary system based on the value of gold

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves.

<span class="mw-page-title-main">Cash</span> Physical money

In economics, cash is money in the physical form of currency, such as banknotes and coins.

The Australian dollar is the official currency and legal tender of Australia, including its external territories, Christmas Island, Cocos (Keeling) Islands and Norfolk Island, and three independent sovereign Pacific Island states: Kiribati, Nauru, and Tuvalu. Within Australia, it is almost always abbreviated with the dollar sign ($), with A$ or AU$ sometimes used to distinguish it from other dollar-denominated currencies. The $ symbol precedes the amount. On the introduction of the currency, the $ symbol was intended to have two strokes, but the version with one stroke has also always been acceptable. It is subdivided into 100 cents.

<span class="mw-page-title-main">Canadian dollar</span> Currency of Canada

The Canadian dollar is the currency of Canada. It is abbreviated with the dollar sign $. There is no standard disambiguating form, but the abbreviations Can$, CA$ and C$ are frequently used for distinction from other dollar-denominated currencies. It is divided into 100 cents (¢).

<span class="mw-page-title-main">Philippine peso</span> Currency of the Philippines

The Philippine peso, also referred to by its Tagalog name piso, is the official currency of the Philippines. It is subdivided into 100 sentimo, also called centavos.

<span class="mw-page-title-main">Hungarian forint</span> Currency of Hungary

The forint is the currency of Hungary. It was formerly divided into 100 fillér, but fillér coins are no longer in circulation. The introduction of the forint on 1 August 1946 was a crucial step in the post-World War II stabilisation of the Hungarian economy, and the currency remained relatively stable until the 1980s. Transition to a market economy in the early 1990s adversely affected the value of the forint; inflation peaked at 35% in 1991. Between 2001 and 2022, inflation was in single digits, and the forint has been declared fully convertible. In May 2022, inflation reached 10.7% amid the war in Ukraine and economic uncertainty. As a member of the European Union, the long-term aim of the Hungarian government may be to replace the forint with the euro, although under the current government there is no target date for adopting the euro.

Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt.

<span class="mw-page-title-main">Pound sterling</span> Official currency of the United Kingdom and other territories

Sterling is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of sterling, and the word "pound" is also used to refer to the British currency generally, often qualified in international contexts as the British pound or the pound sterling.

The Hong Kong dollar is the official currency of the Hong Kong Special Administrative Region. It is subdivided into 100 cents or 1000 mils. The Hong Kong Monetary Authority is the monetary authority of Hong Kong and the Hong Kong dollar.

<span class="mw-page-title-main">Argentine peso</span> Currency of Argentina

The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using peso or dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS.

The Singapore dollar is the official currency of the Republic of Singapore. It is divided into 100 cents. It is normally abbreviated with the dollar sign $, or S$ to distinguish it from other dollar-denominated currencies. The Monetary Authority of Singapore (MAS) issues the banknotes and coins of the Singapore dollar.

<span class="mw-page-title-main">Indian rupee</span> Official currency of India

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<span class="mw-page-title-main">Lithuanian litas</span> Former currency of Lithuania

The Lithuanian litas (ISO currency code LTL, symbolized as Lt; plural litai or litų was the currency of Lithuania, until 1 January 2015, when it was replaced by the euro. It was divided into 100 centų. The litas was first introduced on 2 October 1922 after World War I, when Lithuania declared independence, and was reintroduced on 25 June 1993 following a period of currency exchange from the Soviet ruble to the litas with the temporary talonas then in place. The name was modeled after the name of the country. From 1994 to 2002, the litas was pegged to the U.S. dollar at the rate of 4 to 1. The litas was pegged to the euro at the rate of 3.4528 to 1 since 2002. The euro was expected to replace the litas by 1 January 2007, but persistent high inflation and the economic crisis delayed the switch. On 1 January 2015 the litas was switched to the euro at the rate of 3.4528 to 1.

Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged.

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<span class="mw-page-title-main">Money</span> Object or record accepted as payment

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<span class="mw-page-title-main">United States dollar</span> Official currency of the United States

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<span class="mw-page-title-main">Currency in circulation</span>

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<span class="mw-page-title-main">Fiat money</span> Currency not backed by any commodity

Fiat money is a type of currency that is not backed by a commodity, such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was quite rare until the 20th century, but there were some situations where banks or governments stopped honoring redeemability of demand notes or credit notes, usually temporarily. In modern times, fiat money is generally authorized by government regulation.


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