# Seigniorage Explained: Impact on Inflation and Government Revenue

![Stacks of coins with quarter and penny in front](https://www.investopedia.com/thmb/Biz7nnijhZTU2wPK164N_7lsrLU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/describe-coins-to-collectors-768487-hero-d4f91906c6624a44b91a873060c09dd9.jpg)

*— Sarbasri Bhaumik / Unspalsh*

> **Definition**
>
> Seigniorage is the profit made by a government from the difference between the face value of currency and the cost to produce it.

## What Is Seigniorage?

Seigniorage is the profit a government earns when the face value of money, like a $10 bill or a quarter, exceeds the cost of producing it. This revenue can support government spending and, under certain conditions, influence inflationary pressures. While not inherently inflationary, seigniorage can become so if excessive money is issued without economic backing. Governments often use monetary policies to manage seigniorage strategically and minimize inflation risks.

### Key Takeaways

*   Seigniorage is the profit a government makes when the face value of money exceeds its production cost.
*   In some cases, like the U.S. penny, production costs can exceed face value, leading to a loss.
*   Excessive reliance on seigniorage can contribute to inflation if not managed properly.
*   Central banks use monetary policy tools to mitigate potential inflationary effects from seigniorage.
*   Moderate inflation can increase seigniorage revenue, but high inflation can reduce demand for domestic currency.

## How Seigniorage Functions in Economics 

Seigniorage is counted as revenue for a government when the money it creates is worth more than it costs to produce. This revenue is often used by governments to finance portions of their expenditures without having to collect taxes. For example, if it costs five cents to make $1, the seigniorage is 95 cents. Seigniorage gives a country the potential to turn a profit when it produces money.

While the definition of seigniorage is most often the difference between the cost of printing new [currency](https://www.investopedia.com/terms/c/currency.asp) and the face value of that same currency, it is also the number of goods or services a government can acquire through the printing of new notes.

In some situations, the production of currency can result in a loss instead of a gain for the government creating the currency. Coin production often results in a loss because the metal used has its own value. This value, often called the melt value, may be higher than the denomination it originally represented or, when combined with production costs, may result in a loss. For example, the U.S. penny, with a face value of one cent, cost 3.07 cents to produce in 2023—the eighteenth year in a row that production costs exceeded the penny's face value.

Over time, melt value can change with market demands, making the metal worth more than the currency’s face value. One example is silver coins, such as the U.S. silver quarter and the silver dime.

## The Federal Reserve's Example of Seigniorage

The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) annually orders new currency from the Treasury's Bureau of Engraving and Printing, covering production costs. The Fed provides detailed information on each currency denomination and the cost to produce it. In 2023, for example, it cost 5.3 cents to produce a $20 bill, and 8.6 cents to produce a $100 bill.

The U.S. Mint is responsible for coin production, which is influenced by the number of requested [Federal Reserve Bank orders](https://www.investopedia.com/ask/answers/082515/who-decides-when-print-money-us.asp). The Federal Reserve then purchases the coins at face value.

### $1,168.6 Million

The Federal Reserve’s currency operating budget in 2025.

## Financial Implications of Seigniorage

While seigniorage allows profit from new bills, other factors can influence the process.  To increase dollars in the economy, the Federal Reserve buys [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), allowing more money to be made.

While the government may appear to profit when the cost of production is lower than the face value of the bills, it is important to note that Treasury bills require interest payments to the Federal Reserve in addition to the original investment placed when the Treasury bill was purchased.

## Gresham's Law and Seigniorage Dynamics

Gresham's law is a monetary principle stating that "bad money drives out good." Gresham’s law was originally based on the composition of minted coins and the value of the precious metals used in them. In other words, if a gold coin is worth $5 and a silver coin is worth $0.50, people will hoard the gold coin and instead exchange 10 silver coins. As a result, the gold coins drop out of circulation, and thus the bad money (the silver) drives out the good (the gold).

This becomes a form of effective seigniorage since the gold becomes worth more even though its face value is the same as 10 silver coins. However, since the abandonment of metallic currency standards, the theory has been applied to the relative stability of different currencies' value in global markets.

## Exploring the Link Between Seigniorage and Inflation

Seigniorage itself does not necessarily create inflation, but it can contribute to inflationary pressures under certain circumstances. The relationship between seigniorage and inflation is complex, but let's take a closer look.

When a government or [central bank](https://www.investopedia.com/terms/c/centralbank.asp) engages in seigniorage by creating new money, it increases the money supply. If this increase in the money supply outpaces the growth of goods and services in the economy, it can lead to inflation. This is based on the quantity theory of money, which suggests that an increase in money supply, all else being equal, will lead to a proportional increase in the price level.

The inflation impact of seigniorage depends on how the new money is used. If the government uses seigniorage to finance productive investments that increase the economy's productive capacity, it may not lead to significant inflation. On the other hand, if seigniorage is used to finance current consumption or unproductive expenditures, it's more likely to be inflationary.

Central banks use various monetary policies to control inflation. They may offset the potential inflationary effects of seigniorage through other mechanisms, such as adjusting interest rates or conducting open market operations. Therefore, while excessive seigniorage can contribute to inflation, the central banks that can very closely monitor the impact of seigniorage and adapt their policies accordingly.

## How Inflation Influences Seigniorage Revenue

In general, moderate levels of inflation can increase seigniorage revenue for governments, but this relationship becomes more complicated at higher inflation rates.

In a low to moderate inflation environment, rising prices increase the nominal demand for money. This increased demand for money allows the government to issue more currency, thereby generating more seigniorage revenue. Additionally, inflation erodes the real value of [government debt](https://www.investopedia.com/updates/usa-national-debt/), which can be seen as an indirect form of seigniorage as it reduces the government's real debt burden.

However, as inflation rates increase beyond moderate levels, the relationship becomes more nuanced. High inflation can cause currency substitution, where people use [foreign money](https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp) or other value stores instead of domestic currency. This behavior reduces the demand for the domestic currency, meaning the government issues less currency which decreases seigniorage revenue.

## What Are the Origins of Seigniorage?

The origins of the term seigniorage date back to the days of feudal lords in Europe. Those who were “seigneurs” or lords had the authority to mint coins.

## What Is the Seigniorage of $1?

If the U.S. dollar costs 2.8 cents to produce, this means the seigniorage of $1 is 97.2 cents.

## How Many Coins Does the U.S. Mint Produce?

The U.S. Mint produces billions of circulating coins annually, usually over 10 billion coins. Circulating coins, such as the penny, nickel, dime, and quarter, are defined as those used for everyday transactions. The U.S. Mint also produces commemorative coins and precious metal coins.

## Can Cryptocurrencies Generate Seigniorage?

Cryptocurrencies can indeed generate a form of seigniorage, albeit through different mechanisms than traditional currencies. In proof-of-work cryptocurrencies like Bitcoin, miners are rewarded with newly created coins for validating transactions, which can be seen as a form of seigniorage.  

## Can Seigniorage Lead to Hyperinflation?

While seigniorage itself doesn't necessarily lead to hyperinflation, excessive reliance on seigniorage as a source of government funding can contribute to hyperinflationary scenarios. This typically occurs when governments, facing severe fiscal deficits, resort to rapidly increasing the money supply to finance expenditures. As more money is created, its value decreases, leading to higher prices.

## The Bottom Line

Seigniorage is the profit governments earn when the face value of money exceeds its production cost, often used to fund spending without raising taxes. However, when production costs surpass the face value, like with some coins, it can result in losses.

While seigniorage itself isn't always inflationary, excessive reliance on it, especially for unproductive spending or in deficit-heavy economies, can fuel inflation or even hyperinflation. Central banks use monetary tools to manage these risks, highlighting the need for careful oversight to maintain stability.  

> **Article Sources**
>
> 1.  Federal Reserve Bank of Dallas. "[Seigniorage Revenue and Monetary Policy](https://www.dallasfed.org/~/media/documents/research/er/1998/er9803b.pdf)."
>     
> 2.  United States Mint. “[2023 Annual Report](https://www.usmint.gov/wordpress/wp-content/uploads/2024/01/2023-Annual-Report.pdf).” Page 10.
>     
> 3.  Federal Reserve System. "[2025 Currency Budget](https://www.federalreserve.gov/foia/files/2025boardbudget.pdf)."
>     
> 4.  United States Mint. "[How Coins Are Made: Bringing Coins Into Circulation](https://www.usmint.gov/news/inside-the-mint/how-coins-are-made-bringing-coins-into-circulation)."
>     
> 5.  Federal Reserve Bank of Cleveland. “[The Tale of Gresham’s Law](https://www.clevelandfed.org/publications/economic-commentary/2005/ec-20051001-the-tale-of-greshams-law).” (Download)
>     
> 6.  European Central Bank. “[What Is Seigniorage?](https://www.ecb.europa.eu/ecb/educational/explainers/tell-me/html/seigniorage.en.html)”
>     
> 7.  Federal Reserve System. "[How Much Does It Cost to Produce Currency and Coin?](https://www.federalreserve.gov/faqs/currency_12771.htm)"