Seigniorage

For the medieval land ownership system, see Seigneurialism.

Seigniorage /ˈseɪnjərɪdʒ/, also spelled seignorage or seigneurage (from Old French seigneuriage 'right of the lord (seigneur) to mint money'), is the profit a government makes from issuing currency, which is the difference between the face value of money and the cost of producing it.

The term historically referred to a lord's right to mint coins, but today includes revenue from creating coins and banknotes, and interest earned by the central bank from its conduct of monetary policy. Seigniorage earned is equivalent to the increase in the money supply due to money creation minus the cost of producing the additional money.

Seignorage can also refer to:

  • Seigniorage derived from specie (metal coins) is a tax added to the total cost of a coin (metal content and production costs) that a customer of the mint had to pay, and which was sent to the sovereign of the political region.
  • Seigniorage derived from banknotes is the difference between interest earned on securities acquired in exchange for banknotes and the cost of printing and distributing the notes.

Seigniorage is the positive return, or carry, on issued notes and coins (money in circulation). Demurrage, the opposite, is the cost of holding currency.

An example of an exchange of gold for "paper" where no seigniorage occurs is when a person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and redeems it in gold. That person began with and ends up with exactly one ounce of gold.

In another scenario, instead of issuing gold certificates a government converts gold into non-gold standard based currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in that currency, keeps the currency for one year, and exchanges it for an amount of gold at the new market value. If the value of the currency relative to gold has changed in the interim, the second exchange will yield less (or more) than one ounce of gold (assuming that the value, or purchasing power, of one ounce of gold remains constant through the year). If the value of the currency relative to gold has decreased, the person receives less than one ounce of gold and seigniorage occurred. If the value of the currency relative to gold has increased, the person receives more than one ounce of gold and demurrage occurred; seigniorage did not occur.

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