At the Bank of Canada, we cover 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.
How seigniorage is calculated
Here’s how seigniorage works.
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.
Cost of bank notes
Say 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):
So, the annual cost of putting a note into circulation, and replacing it when it’s worn, would be 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:
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 billions of dollars’ worth of bank notes in circulation, it adds up.