Who Profits When Money Is Made? Whoever Gets to Make It

Money has a face value, meaning what it can be exchanged for, and a production cost, meaning what it took to make. Where the face value exceeds the cost, issuing money generates a profit for the issuer equal to the difference, and that profit is the subject here. A coin costing eight pence in metal and manufacture and issued as a pound yields ninety two pence to whoever issued it, immediately and with no further obligation. Banknotes make the gap far larger, since the paper costs a few pence whatever is printed on it. The profit is real and appears in government accounts.

The same basic idea appears in several guises:

• •Coins, where the metal is worth less than the face value
• •Notes, where the printing cost is trivial against the value
• •Charging a fee for turning somebody's metal into coin
• •Reducing the precious metal in a coin while keeping its value
• •Central bank profits from holding interest-paying assets against notes issued
• •Currency held abroad, where notes may never be redeemed at all

The temptation to widen the gap deliberately has produced a recurring pattern across two thousand years. Roman emperors reduced the silver content of the denarius repeatedly, from almost pure silver to a few per cent over about two centuries, funding armies and driving prices up steeply. Medieval and early modern rulers called in coin and reissued it lighter, which was profitable and deeply unpopular, and the practice was one of the grievances that produced constitutional limits on royal finance. The modern version is printing rather than clipping, and the mechanism is identical, with governments unable to borrow or tax enough creating money instead. Hyperinflations in the 1920s and since all follow that route.

A coin whose metal is worth roughly its face value generates almost no profit for the issuer, so the historical preference for silver and gold needs explaining. The reason is that a coin circulating beyond the reach of the issuing authority must be accepted by people with no way of enforcing anything, and metal content that anybody can weigh and test provides that assurance where a promise cannot. The stamp on such a coin certifies weight and purity rather than creating value. Token coinage, worth more than its metal, works only where an authority is strong enough to guarantee acceptance and to punish forgery, which is why it became general only comparatively recently.

The revenue remains significant and produces some unexpected consequences. The United States earns a substantial return because a large share of its hundred dollar notes circulate permanently outside the country, functioning as a store of value in unstable economies, and those notes are effectively an interest-free loan that may never be called in. Adopting another country's currency outright means surrendering this revenue to that country's central bank, which is a real cost of the decision. Currency unions must decide how to divide it among members. And the arrival of digital central bank money raises the question directly, since notes that nobody uses generate nothing.

Issuing money that costs less to make than it is worth hands the difference to the issuer, which is real revenue appearing in government accounts. Roman silver reduction, medieval recoinage and modern printing are the same mechanism widened deliberately, and all three raised prices. The revenue explains why holding a currency abroad benefits its issuer and why adopting another country's money has a cost.