Seigniorage

Seigniorage is the profit or revenue raised through coining or printing money. The word “seigniorage” stems from the French seigneur, a word for “feudal lord,” referring to feudal manors that often exercised the privilege to mint coins in the Middle Ages. In modern societies, the rights of seigniorage belong to government.

Historically, kings, dukes, counts, bishops, or city-states exercised the privilege to coin money. The coinage usually bore the name, symbol, or portrait of the responsible ruler who guaranteed the weight and purity of the precious metal content. Originally, seigniorage was the mint’s share of the coins that were struck from precious metals brought to the mint by private citizens. Some authorities define seigniorage more narrowly as the profit that mints earn from coinage of precious metals supplied by citizens.

Mints operated on the principle that private citizens brought precious metals to them, and they then tested the metal for weight and purity. A private citizen that brought precious metal meeting mint standards either received coins that had already been struck, or received the coins struck from the precious metal that he or she brought to the mint. Minted coins were worth more than equivalent amounts of precious metal because they were much more convenient for transacting business, sparing the need to weigh and evaluate the precious metal. Today, a gold coin such as South Africa’s Krugerrand enjoys a market value exceeding the market value of its gold content. By adding value to the coined metals, a mint could get by with taking a cut for itself.

Early in European monetary history, governments began minting bullion brought to mints without deducting seigniorage, minting free of charge. England began the practice of free coinage in 1666. Under England’s system, a citizen could bring gold bullion to the mint, wait until the mint turned bullion into coins, or take the bullion to the Bank of England and receive gold coins immediately at a discount of less than 0.5 percent.

The development of government paper money opened new opportunities for seigniorage because the face value of paper money far exceeds the value of the paper as raw material. When the government prints additional paper money, it makes the paper money already in circulation worth less. Prices rise, in effect imposing a tax on existing money balances in the hands of the public.

The dependence on seigniorage revenue varies substantially among modern governments. The United States government raises about 3 percent of government revenue from seigniorage, but Italy and Greece raise over 10 percent of government revenue from seigniorage. Seigniorage often accounts for 50 percent or more of government revenue in countries caught in a spiral of hyperinflation. The chief cause of hyperinflation is excessive government dependence on revenue from seigniorage, rather than from taxes or borrowing.