Seigniorage

Seigniorage is the revenue that accrues to a government or monetary authority from issuing currency. In fiat-money systems it is primarily the difference between the nominal value of money and the cost of producing and distributing it. The term derives from the historical prerogative of a sovereign to mint coins.

In modern economies, seigniorage arises when a central bank increases the monetary base by creating new base money. If the central bank transfers profits to the government treasury or monetizes government debt, that creates additional seigniorage. Seigniorage can be direct, from currency issuance, or indirect, via inflation caused by money creation.

Economic effects include a potential reduction in the government’s financing costs, but at the risk of higher inflation and lower purchasing power for holders of money. It is often described as an inflation tax on money holders or savers rather than a formal tax. The distribution tends to favor the issuer and borrowers who benefit from lower real interest rates, while workers, pensioners, and those with fixed nominal incomes can bear the costs during inflation.

Historical and policy context: seigniorage was once a more prominent source of revenue when precious metals backed coinage dominated. In contemporary economies, it remains a factor mainly through monetary expansion and inflation expectations. Countries with independent central banks and credible inflation targets seek to limit seigniorage by maintaining price stability, whereas episodes of high inflation can reflect a higher reliance on seigniorage as a financing mechanism.