What is 'Seigniorage'?

Seigniorage is the difference between the value of money and the cost to produce it — in other words, 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. 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 seigniorage 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 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 because the metal used to produce the coin has its own inherent value. This value, often called the melt value, may be higher than the denomination it originally represented; or, when combined with production costs, may result in a loss. For example, the U.S. penny was shown to cost 1.5 cents in 2016 with a face value of 1 cent.

Over time, 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 that a country can profit from the production of new bills, there can be other factors affecting the entire transaction. Within the United States, if the Federal Reserve agrees 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 the Federal Reserve in addition to the original investment placed when the Treasury Bill was purchased.

RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. China Currency Bill

    The China Currency Bill was a potential law passed by the U.S. ...
  3. Tax Anticipation Bill - TAB

    A tax anticipation bill was a type of short-term Treasury debt ...
  4. Lawful Money

    Lawful money is any form of currency issued by the United States ...
  5. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, ...
  6. Key Currency

    A key currency used is money issued by stable, developed country ...
Related Articles
  1. Investing

    10 Things You Probably Didn't Know About The Money In Your Wallet

    Here are some fun and interesting facts about the money that you use on a day-to-day basis.
  2. Insights

    How Currency Works

    Currency offers key advantages over economies based on direct trade, including a broader market for sellers' goods and services and transport ease.
  3. Investing

    The Treasury and the Federal Reserve

    Find out how these two agencies create policies to manage the economy and keep it on an even keel.
  4. Insights

    What is Money?

    Money: It's a part of everyone's life, and we all want it, but what is it, how does it gain value, and how it was created?
  5. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  6. Trading

    3 factors that drive the U.S. dollar

    We look at three important factors that affect U.S. dollar value, and how to determine when it's the right time to buy currency.
  7. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  8. Investing

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  9. Trading

    7 Currency Blunders You Could Cash In On

    The government has made its share of mistakes when it comes to printing money, and the results are collector's items.
  10. Trading

    The U.S. Dollar: What Every Forex Trader Needs To Know

    The U.S. dollar is by far the most significant currency in the global market. Find out what you need to know if you want to trade it.
RELATED FAQS
  1. Who decides when to print money in the U.S.?

    Learn the U.S. Treasury's Federal Reserve Bank's roles in the process of printing money in the United States. Read Answer >>
  2. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
  3. Who uses bills of exchange?

    Find out who uses bills of exchange, why they are important in international trade and what happens when a bill is traded ... Read Answer >>
  4. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
Trading Center