Understanding seigniorage

The Bank of Canada covers the cost of day-to-day business with “seigniorage,” which means earning money from issuing bank notes.

Why making bank notes earns interest

It costs less to produce money than its face value. In other words, it doesn’t cost $20 to make a $20 bill.

We provide bank notes at face value—the dollar amount on the bank note—to financial institutions for their customers. Financial institutions pay for the notes by transferring funds electronically to us. We take those funds and invest them in securities issued by the Canadian government—bonds and treasury bills, for example. And these investments generate interest.

Seigniorage refers to the interest we earn, minus the cost of producing, distributing and replacing bank notes. These earnings are used to cover our operating costs. The money left over goes to the government and becomes part of its revenue.

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Historically, the revenue from producing money went to a country’s “seigneur,” or ruler.

How seigniorage is calculated

Here’s how seigniorage works.

Interest earned

As an example, we’ll use the vertical $10 bill.

Let’s say our investments generate 2 percent interest per year for the lifespan of the bank note.

$10 x 2% = 20 cents per year

Cost of bank notes

It costs 27 cents to produce and 15 cents to distribute a bank note, for a total of 42 cents.

Our sample $10 bill has an average lifespan of 7 years.

We determine the annual cost of putting a bank note into circulation by dividing the total cost of producing and distributing it (in this case, 42 cents) by the average lifespan of the bank note (in this case, 7 years):

42 cents ÷ 7 years = 6 cents per year

So, the annual cost of putting a note into circulation, and replacing it when it’s worn, works out to 6 cents.

Interest – cost = seigniorage

Recall that seigniorage refers to the amount of interest earned minus the cost of producing, distributing and replacing the bank note.

For our example, that means we would earn 14 cents each year for each $10 bill in circulation:

20 cents – 6 cents = 14 cents

We’re responsible for the design, production and distribution of all Canadian bank notes.

What seigniorage is worth

Seigniorage changes from year to year, depending on the amount of interest we earn on our investments and the value of bank notes in circulation. Each bank note generates only a few cents in interest annually. But, with roughly $90 billion worth of bank notes in circulation, it adds up.

Recently, we’ve sent an average of about $1 billion to the government each year.

Content Type(s): Explainers
Topic(s): Bank notes