Seigniorage

  

Categories: Banking, Econ

No, this isn't what happened to your great uncle when he used to wander around the neighborhood without any pants on, mumbling about Jimmy Carter.

Seigniorage has to do with the value of money. Specifically, the term applies to the difference between the face value of money and the cost of producing it. Once upon a time, the government actually made a profit on this difference. Like, if a king minted a 10 denarius coin, and that coin only cost 2 denarius to make, then the king just created 8 denarius of buying power.

The way currency is made and regulated is more complicated now than it used to be, when people mostly went to the bathroom outside and took advice from doctors who talked about "humors." Seigniorage doesn't operate in that straightforward way anymore (at least not in developed economies with central banks).

But, in a broad sense, seigniorage still describes the difference between the face value of money and its production cost. If a hundred-dollar bill costs three cents to make, then the seigniorage for that bill becomes $99.97.

Sometimes, the seigniorage can be negative. Pennies used to contain a lot more copper. But copper got expensive enough that the melt value (the amount you could get by melting the coin down to its component parts) was higher than $0.01. Until the 1980s, the penny was 95% copper. However, in 1982, the government switched over to a copper-plated zinc composition...meaning current pennies are 97.5% zinc and only 2.5% copper.

However, the seigniorage for the penny still remains negative. It costs approximately two cents (the exact amount changes with the price of the various components) to make a penny. So, warm up your hot pot. Time to get into the used zinc business.

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