What is 'Seigniorage'
Seigniorage is the difference between the value of money and the cost to produce it — in other words, it's the economic cost of producing a currency within a given economy or country. If the seigniorage is positive, then the government will make an economic profit; a negative seigniorage will result in an economic loss.
BREAKING DOWN 'Seigniorage'Seigniorage may be counted as revenue for a government when the money that is created is worth more than it costs to produce it. This revenue is often used by governments to finance portions of their expenditures without having to collect taxes. If, for example, it costs the U.S. government $0.05 to produce a $1 bill, the seigniorage is $0.95, or the difference between the two amounts.
Seigniorage gives a country the potential to turn a profit when money is produced. While it is most often defined by the difference between the cost of printing new currency and the face value of that same currency, it can also be expressed as the amount of goods or services a government can acquire through the printing of the new notes.
Seigniorage and Losses
In some situations, the production of currency can result in a loss instead of a gain for the government creating the currency. This is more commonly experienced in the production of coins, as the metal the coin is produced of has its own inherent value. This value, often called the melt value, may be higher than the denomination it represents from the beginning, or, when combined with production costs, may result in a loss. For example, the U.S. penny was shown to cost 1.7 cents in 2014 with a face value of 1 cent.
As time passes, the melt value may also change as market demands shift, and it can potentially lead to the value of the metal being worth more than the face value of the currency. This is most evident in silver coins, such as the U.S. silver quarter and silver dime.
Seigniorage and the Federal Reserve
While the basic principle behind seigniorage suggests a country is able to profit from the production of new bills, there can be other factors affecting the entire transaction. Within the United States, should the Federal Reserve agree to increase the number of dollars available within the U.S. economy, it will purchase a treasury bill in exchange for permitting the production of more dollars. While the government may appear to profit when the cost of production is lower than the face value of the bills, it is important to note that treasury bills require interest payments to be made to the Federal Reserve in addition to the original investment placed when the treasury bill was purchased.