Seigniorage is the difference between the face value of money (physical currency) and the cost to create it. This applies to coinage and banknotes.
Since governments usually control the production of the physical currency, if the value is more than it costs to produce, it ends up with a profit. A negative seigniorage will result in a loss.
There are a couple ways this can occur:
- 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. This customer is usually the central bank.
- Seigniorage derived from notes is more indirect; it is the difference between interest earned on securities acquired in exchange for banknotes and the cost of printing and distributing the notes.
Monetary Seigniorage
This is where sovereign-issued securities are exchanged for newly printed banknotes by a central bank, allowing the sovereign to "borrow" without needing to repay. Monetary seigniorage is sovereign revenue obtained through routine debt monetization, including expansion of the money supply during GDP growth and meeting yearly inflation targets.