Understanding Seigniorage: How Governments Profit from Currency Production
What is Seigniorage?
Seigniorage is the difference between the face value of money, like a $10 bill or a quarter coin, and the cost to produce it. Essentially, the cost of creating currency within an economy or country is typically lower than its actual exchange value, benefiting governments that mint this money. When seigniorage is positive, the government profits, whereas negative seigniorage means a loss.
Key Takeaways
- Seigniorage is the variance between the face value of money—both paper bills and coins—and production costs.
- Positive seigniorage accounts for additional revenue for a government since the money it creates holds more worth than the production costs.
- Occasionally, currency production can lead to a loss, particularly in coin manufacturing due to the inherent value of metal used.
Financing Government Expenditures
Seigniorage serves as revenue for a government when produced money’s worth outweighs its production cost. This revenue can finance governmental expenditures without the need for increased taxes. For instance, if producing $1 costs the U.S. government 5 cents, then the seigniorage is 95 cents, illustrating a profitable margin.
While seigniorage typically represents the difference between printing costs and face value, it also encompasses the volume of goods or services acquired via new note issuance. However, currency production sometimes results in losses rather than profits. This phenomenon predominantly occurs in coin production where the metal’s melt value potentially exceeds its denomination, thus leading to losses.
Real-World Example of Seigniorage
The Federal Reserve places annual orders with the Department of the Treasury’s Bureau of Engraving and Printing, responsible for money production costs. For instance, it cost the Federal Reserve 13.8 cents to produce a $20 bill and 17 cents for a $100 bill in 2022. Coin production operates likewise under U.S. Mint’s purview, influencing Federal Reserve Bank’s acquisition at face value.
Fun Fact: The Federal Reserve’s currency operating budget was $1 billion in 2022.
Special Considerations
While the principle behind seigniorage suggests potential profit from printing new bills, various factors can affect the overall transaction. For example, increasing dollar availability within the U.S. economy usually involves purchasing Treasury bills, requiring additional interest payments alongside the original investment, potentially moderating perceived profits.
Seigniorage and Gresham’s Law
Gresham’s Law, which states that “bad money drives out good,” has historical relevance linked to the intrinsic precious metal values in coins. If a gold coin valued at $5 circulates alongside a lesser-intrinsic value of $0.50 silver coin, individuals hoard gold while using silver, causing the former to vanish from active exchange.
History of Seigniorage
The term originates from European feudal lords or “seigneurs,” who held the exclusive minting authority. This historical context underscores the principle’s longevity in economic history.
Cost of Producing Currency
For a sense of modern currency production costs, in 2022, creating a U.S. dollar cost about 7.5 cents, resulting in seigniorage of 92.5 cents per dollar bill.
U.S. Mint Production Volumes
In 2021, the U.S. Mint produced over 14 billion circulating coins, supporting daily transactions. The circulating portfolio includes pennies, nickels, dimes, and quarters, with the Mint also generating commemorative and precious metal coins.
Bottom Line
Seigniorage permits governments to generate revenue when money’s face value surpasses production expenses. Operational gains help fund expenditures independently of tax collection. At times, like in producing the U.S. penny, loss absorption highlights the variability and complexity of seigniorage.
Related Terms: Gresham’s Law, Treasury bill, U.S. Mint, Federal Reserve.
References
- United States Mint. “2021 Annual Report”. Page 8.
- United States Mint. “2021 Annual Report”. Page 27.
- United States Mint. “2021 Annual Report”. Page 10.
- Wired. “Can I Find Any 1964 Silver Quarters?”
- Board of Governors of the Federal Reserve System. “How Much Does It Cost to Produce Currency and Coin?”
- Board of Governors of the Federal Reserve System. “How Does the Federal Reserve’s Buying and Selling of Securities Relate to the Borrowing Decisions of the Federal Government?”
- European Central Bank. “What Is Seigniorage?”
- U.S. Mint. “The United States Mint Celebrates 230th Anniversary”.
