Seigniorage (1)

27 June and 1, 2 and , translated from Dutch by the author.

Terminology and definition

The word seigniorage is sometimes written seignorage, or in French seigneuriage.

Seigniorage is the difference between the face value of a coin on the one hand (the value assigned to the coin in a system using fiat money or fiduciary money), and the total of material value and production costs on the other hand.

In a different context, seigniorage can also denote the difference between interest yield and investment results, of assets that serve as the counter value of cash and money of account, and the costs of money production, distribution and management.


In the case of coins it is pretty clear that seigniorage is real. In the days when kings, counts and dukes granted the right to mint coins to towns, cities or other entities, it was usual that coins did not consist entirely of gold or silver, but that cheaper metals like copper were added to reach the nominal weight again.

The difference in value was seen as a tax for the ruler.

Where it comes to modern coins, it is even clearer: silver and gold are no longer used, but rather metals such as copper, bronze, nickel or even steel. The difference between face value and melt value is considerable.

What happens in accounting terms when a mint mints coins?

Suppose that the initial, very much simplified balance sheet contains only base metals, machines and equity.

DescriptionDebit (assets) Credit (liabilities)
Base materials for coins 80
Minting machinery 100
Shareholders’ equity 180

Now half the metal stock is used to mint coins. They are worth a lot more than the metals, so the production is advantageous. Later on expenses will have to be booked. To keep things simple I disregard those costs. The new balance sheet and income statement after minting the coins becomes:

DescriptionDebit (assets) Credit (liabilities)
Base materials for coins 40
Minted coins 250
Minting machinery 100
Shareholders’ equity 180
Gross seigniorage 210

The increased value of the metal, that has now turned into coins, is at the left of the balance sheet, being belongings. The yield of striking the coins, the minting benefit, is at the right (credit item) of the profit and loss statement.

Minting is clearly a lucrative business.


Upgraded paper

Producing banknotes seems even more profitable than minting coins. Where even modern coins have at least some intrinsic value, because of the metal they are made of, paper money consists almost solely of nominal value: especially in the case of larger denominations, the paper itself is virtually worthless in comparison.

Production costs are somewhat higher, because of the many advanced security measures that are required nowadays. But using smart machines and mass production the costs can be kept under control.

If in the example balance sheets of the previous chapter, we replace the metal by paper, and we disregard production costs again, but merely look at the value increase of paper changing to paper money, after processing half the paper stock the balance sheet might look like this:

DescriptionDebit (assets) Credit (liabilities)
Paper for making banknotes 40
Printed banknotes 4000
Printing presses and other equipment 100
Shareholders’ equity 180
Gross seigniorage 3960

A considerable yield. Even after subtracting costs, a sizeable profit remains!

Money as claim

But is the above really correct? Historically, coins had a value of their own (though less now), but banknotes are made of worthless paper. Banknotes obtain their value because in essence they are IOUs of the issuing entity (nowadays almost always a central bank, formerly sometimes also other banks).

An IOU, an acknowledgement of debt of the issuing entity means a claim, by the holder of the banknote, on that entity. In this series of articles, that was always my definition of money: money (M1/M2 etc.) is claims of the public on banks. In other words: money is what banks owe the public.

By analogy: bank reserves are what central banks owe non-central banks.

From this view on the matter, it is wrong to book the increased value of paper that became paper money, as a revenue at the credit side. It should be a liability. Liabilities are also credit, not surprisingly, because revenues represent an increase of shareholders’ equity, which essentially are a liability of the company vis-à-vis its owners. That I explained before.

No revenue but a liability, that means: no seigniorage, no money creation benefit. Direct money creation benefit, literally off the money printing press, can only exist in case of incorrect accounting.

On balance sheet right after production?

In the previous, the value of manufactured but so far unissued banknotes, was immediately reflected on the balance sheet as an asset. The balancing item at the right was a liability to the holder. So then that is a claim of the holder (the central bank) on itself. Hardly makes sense. Zero on balance. Note 1

A different approach is to consider printed banknotes largely worthless as long as they haven’t been issued. Then this is also true of worn banknotes the central bank took back, effectively withdrawing them from circulation. Of course if there is nothing at the right of the balance sheet is there is nothing at the left.

In this representation, banknotes only obtain their value, as a claim on the central bank that issues them, once they leave that bank’s vault (of the cash transport car when delivered to a non-central bank or ATM?).

Here too, the balancing item should be a liability, not a revenue, so there is no direct money creation benefit.

In the annual reports of central banks that I looked at, by the ECB and the Bank of England, I did see issued banknotes, but not unissued banknotes in their own vaults. So it looks like this is the way central banks account for them. MMM also follows this logic.

This representation also fits better to the usual definition of money: what banks owe the public. Amounts that a bank owes itself, are not part of that, because a bank does not belong to the public.

Depreciation for getting lost

If formally banknotes are liabilities of the issuer, how realistic is that? They stay in circulation for a long time. They are exchanged between non-banks to make payments, but their value is not claimed back at the issuing bank. Also when a banknote is worn-out and is withdrawn from circulation, it is replaced by a new banknote, but not by something that has a value of its own, other than by being a claim of the holder.

Is a claim that is never claimed really a claim? I think yes. For banknotes, and money in general, are valuable and therefore usable as a means of payment, only because they are a claim of the holder, on a bank for whom they are a liability. Payment means the transfer of a bit of such claim.

It is true though, that some of the money is never seen again. Foreign central banks use foreign (to them) currencies as reserves, as a balancing value, for their own currency at the credit (right) side of the balance sheet.

Coins are collected just like stamps. To a lesser extent banknotes too. People lose money, there’s money in the streets, in the mud and in sewers somewhere. Criminals may have buried money and never got the chance to dig it up or tell anyone about the location, before they died unexpectedly. There is black money in vaults, in order to evade taxes. Or because it was obtained from criminal activity and laundering attempts were never successful.

When the euro was introduced, of course the old coins and banknotes could be handed in and exchanged. But that never fully happens. A lot of old currency is permanently gone.

Some of those factors may be a reason for central banks to charge off parts of the outstanding money. A bit of liability then becomes a revenue after all. But how much? And exactly which denominations? Difficult to decide.

So you could say seigniorage, which I argued does not exist, in a restricted sense and to a limited extent does exist.

Coins revisited

Different kinds of money, bank balances, banknotes and coins, are interchangeable. But there are restrictions: banks must report cash deposits or withdrawals over a certain threshold as suspicious transactions. In many countries shops need accept payments in coins only up to a certain amount. Such rules exist because of the hassle of counting and the security of transport to the bank.

The word demurrage does not only refer to a delay of a ship etc., but also to a fee charged by the Bank of England for changing coins into bullion. Perhaps to cover for handling costs, or also because of the difference between face value and metal content?

All forms of money, coins, paper money and bank balances, are arithmetically equivalent. Then is it realistic to interpret paper money and bank balances completely as claims, but not coins?

I don’t think so. In my opinion that part of the face value of coins which exceeds the metal value, should also be seen as a claim of the holder, so as a liability of the issuer. The consequence of that notion is however, that the easy to understand idea of a money minting benefit in the case of coins, is in fact an illusion. If the non-metal part of the face value of coins are in the balance sheet as liabilities, then the mint, just like a banknotes printer, will no longer gain from striking coins.

Therefore my conclusion is: money creation benefit or seigniorage does not exist, not when printing paper money, and not even in the case of minting coins.

Bank reserves and money of account

Central banks can create money by printing and issuing banknotes, but also by creating bank reserves. A simple way is to give a loan to a non-central bank (to the left in the central bank balance sheet, to the right for the bank) in exchange for on demand bank reserves (to the right for the central bank, to the left for the bank).

More complicated ways exist, to be discussed in a subsequent article.

The simple way is completely analogous to the case when a non-central bank books a payback obligation for a client (debit, to the left of the balance sheet) in exchange for an on demand money balance (to the right, credit).

In both cases the party granting the loan and creating the money, books only an asset and a liability, but not a revenue. There is no money creation benefit. There is no seigniorage.

Different meaning of seigniorage

If money creation does not directly benefit a bank, the bank will have to cover its costs in some other way. The solution is to use the interest margin, a.k.a. spread. Supplied loans bring in more interest than on demand balances and savings. Also if on the balance sheet, other types of assets balance the money liabilities at the right, e.g. government bonds, other bonds, shares, precious metals, they can yield a profit, in the form of interest, dividend or price rises.

That together is also sometimes called seigniorage. But it is a very different kind of seigniorage than the minting benefit that is so easy to depict. I find it important to distinguish those meanings of ‘seigniorage’, and not to mix and confuse them without mention, which in my opinion happens too often.

Note 1

I never tire of stressing that money creation does not mean that a bank first creates money and then hands that created money over to someone. Yet, when accounting for the production of banknotes like this, it does work that way.

But even then, the central bank cannot simply print banknotes and spend them on fun things, to enrich itself. That’s because for sold or spent freshly printed paper money, the claim of the holder, which is a liability of the bank, remains. In effect, the central bank borrows its expense from the party it makes the payment to.

See also my article on monetary financing.

In principle, a non-central bank too could create money in advance, before supplying it to the borrower. Then the bank would prepare a loan, including its debit and its credit side, before a borrowing client is known. That is a loan to and from the bank itself, with the on demand money in a transaction account owned by the bank and administered by the bank itself. It’s possible, but it makes no sense.

So I maintain what I stated in my previous article: a money creating entity cannot use that money for its own benefit. That’s because created money spent is money borrowed. Borrowed from those it is paid out to.

Those who think money creation is a cheap form of financing, are only fooling themselves.

End of note 1.

Copyright © 2016 R. Harmsen. All rights reserved.