Seigniorage
Candlefocus EditorThe concept of seigniorage has been used historically as far back as Roman times. Coins were struck bearing the image of the emperor which cost less to produce than the value they represented. Seigniorage was considered to be an arrangement that benefitted both the ruler and the people – allowing the ruler to monetize their power and the people to have a reliable form of currency.
Today, central banks are able to create money in the form of banknotes and coins as a way of facilitating economic activity. Because it costs less to produce the money than its face value, governments can realize a 'seigniorage gain'. This gain can either be realized explicitly as an addition to government revenue or implicitly as inflation. The Federal Reserve estimates that the US government makes about $4.6bn each year from seigniorage.
The seigniorage equation, which measures the magnitude of seigniorage, takes into account all the factors affecting its calculation including the cost of producing currency and the expected rate of inflation. In a situation where the rate of inflation is high or production costs are steep, the seigniorage gain can be reduced significantly or can even become negative – meaning that the government is losing money by producing the currency.
In summary, seigniorage is the difference between the face-value and the cost of producing a form of currency, normally coins and paper bills. It is a form of revenue, or profit, that governments are able to collect when producing currency and can be used as an additional source of revenue for budgeting. The amount of seigniorage realized in any given region is dependent on the costs of production and the expected rate of inflation. In some situations, production of currency can result in a loss instead of a gain for the government creating the currency.