Legal Definitions - seigniorage

Seigniorage refers to the profit a government or central bank makes by issuing currency. It is the difference between the face value of money (such as a banknote or coin) and the actual cost to produce and distribute it. Historically, the term also encompassed the right of a sovereign to charge a fee for minting coins or, more broadly, the authority and associated benefits held by a lord over land and vassals. In its modern financial context, seigniorage is a significant source of revenue for governments, derived from their exclusive power to create money.

Here are some examples illustrating seigniorage:

• Example 1: Issuing a Banknote

  Imagine the national central bank prints a new series of $50 banknotes. The physical cost of the paper, ink, security features, and the printing process for each $50 bill is approximately $0.12. When this $50 banknote is put into circulation, the central bank effectively gains $49.88 ($50 face value - $0.12 production cost). This $49.88 is the seigniorage, representing the profit the government earns simply by creating money.

• Example 2: Commemorative Coin Production

  A country's mint produces a special edition $1 coin to commemorate a national anniversary. The coin is made of a base metal alloy, costing $0.25 in materials and $0.10 to mint. While it has a face value of $1, it might be sold to collectors for $10 due to its limited edition status. The seigniorage, in this case, is the profit generated from the difference between the coin's face value (or its higher selling price to collectors) and its production cost. If we consider the face value, the seigniorage is $0.65 ($1 - $0.35). If sold for $10, the profit of $9.65 ($10 - $0.35) also demonstrates the broader concept of profit derived from the authority to issue currency, even if it's not for general circulation.

• Example 3: Digital Currency Creation

  A central bank decides to introduce a new digital currency, a Central Bank Digital Currency (CBDC). Unlike physical cash, there are no material costs for paper or metal. The primary costs are the initial development and ongoing maintenance of the secure digital infrastructure, which are negligible per unit of currency once established. When the central bank digitally issues 1 million units of this CBDC, the seigniorage is nearly the full face value of these units, as the cost of "producing" each digital unit is almost zero. This highlights how seigniorage can be even more substantial in a digital economy.