Seigniorage and the Bank of England: How It’s Calculated

    by Conall Boyle

    It was J K Galbraith who said: “The process by which banks create money is so simple the mind is repelled. Where something so important is involved a deeper mystery seems only decent.”

    Well, it looks like the folks at the Bank of England (BoE) have done it! What at first seemed to be a simple matter of ‘seigniorage’ – profit made from the production, by the state, of the coins and bank notes of the realm – turns out to be a deeper mystery indeed.

    Looking at the Annual Report and Accounts from the BoE for 2006 seems to produce a simple answer: On p.110, the Profit on Bank Note Issue remitted to Treasury in 2006 is given as £1,698mn (£1,743 less £45mn expenses). On p.112 in the same Report the Total Note Issue is given as:

    2006 £36,914mn

    2005 £35,416mn

    Increase: £1,498mn

    So its Profit=£1,698mn,

    Change in Note Issue = £1,498mn.

    Just a small difference of £200mn, perhaps explainable by some anomalies, like coin issue, or Scottish, Northern Irish or Channel Islands bank note Issue. So in my innocence I asked (in a letter 16th Feb 2007) why the £200mn difference?

    The reply from the Public Information & Enquiries Group of the BoE (having been passed on from the Monetary and Financial Statistics Section of the Bank who apparently couldn’t answer this: why ever not?) on 16th March was:

    The profit of issue paid over to HM-Treasury (£1,698mn in the 2006 Accounts) represents the sum earned throughout the financial year from the investment of the assets (assets holdings are shown in the Statement of Assets on page 110) which back the note issue, less expenses.

    The change in notes in circulation, together with notes held in the Banking Department, (£1,500mn in the 2006 Accounts) is equal to the change in the value of the assets held rather than the profit made on those assets.

    I hope this is helpful.

    Diane Davies

    This somewhat obscure answer set me off on a hunt to find out more. Since the BoE seem determined to avoid an explicit link between changes in note issue and ‘profit’ paid to HM Treasury, what were the facts?

    How has note issue changed year by year, and how correspondingly has ‘profit’ changed too? (I use ‘profit’ in quotes because it should more properly be called seigniorage; yet another ‘deeper mystery’ by the BoE?)

    To obtain the data for this I had to delve into each of the Annual Reports, as far back as available. The website only shows the last six years, but BoE kindly and promptly supplied me with Reports back to 1980.

    First of all: Seigniorage? That’s the profit made by the Crown from issuing new money. It still applies to the Issue of Bank notes in the UK, or so it would seem: Immediately below is a graph which shows how this nice little earner paid out over the years 1980-2006:

    So there it is. Seigniorage. To double-check where it comes from, let’s have a look at the change in the note issue. We should expect these two – Change in Note Issue and Profit on Note Issue – to march in step. But here is where the Galbraithian mystery starts to deepen.

    My first question was: What is the Total Note Issue by the BoE? See first diagram below.

    So how about the Change in Note Issue – taking year-on-year differences from the previous series? See diagram below.

    These values are all over the place!

    During 2005 it seems that the number of BoE banknotes in circulation actually fell. You might think that this means that HM Treasury would have to pay the Bank for its ‘loss’. Not so. Comparing the Profit (Seigniorage) paid out by the BoE with the Change in Notes in circulation shows that the Bank always pays the Government, even when note issue is negative.

    So whatever method of defining seigniorage is used by the Bank of England, it bears no relation to changes in note issue, as we see from the diagram immediately below.

    Returning to the Delphic comment by my correspondent at the BoE, that “The profit…represents the sum earned throughout the financial year from the investment of the assets…which back the note issue, less expenses.”

    Profit on investments? A bit more rummaging through the notes in the Report suggested that the ‘investment’ was a hypothetical one, equivalent to the Total Note Issue, and the earnings were to be calculated from the Bank’s Base Rate (latterly called Repo Rate).

    Average annual Bank Rate changed during the period 1980-2006 like this:

    Multiplying up the Total Note Issue times Bank Rate, and comparing it with ‘Profit paid’ shows, below:

    AhHa! A very close fit. So now we know.

    Seigniorage for the BoE is based on the Total Note Issue, multiplied up by the Average Bank Rate during that year.

    A very obscure method of arriving at a simple calculation! Lucky indeed was the Chancellor in 1991 (Norman Lamont) who received a seigniorage cheque for £2.5 billion. Gordon Brown’s seigniorage payout in 2003 was less than half that – £1.2bn, despite a Budget twice as large in money terms, and an increase in note issue five times greater in that year!

    So in an obscure way, seigniorage exists, and results in a small payout to the Treasury.

    Small, because it is about 1/4% (quarter per cent) of the Budget total. The word itself ‘Seigniorage’ has even turned up in a BoE publication (Andrews & Janssen – but only in a technical addendum): “Seigniorage (is)…earned on the amount of notes and coin in circulation outside the Bank of England” and adds (in an even more obscure footnote) “Seigniorage accruing to the Bank of England may be paid to the government as profit or in taxation, or may be retained by the Bank…”

    CONCLUSION: We now know for sure that a form of seigniorage exists and is practiced by the Bank of England in relation to the issue of notes and coins. The method used to calculate the amount of seigniorage seems to be deliberately obscure, designed to hide the simple reality of what is going on. The securities held by the BoE are entirely mythical, and the payout is conjured out of thin air at an arbitrary rate of interest.

    But why begrudge the central bankers their little charade!

    One policy conclusion we can draw from this is that using cash – our own Government’s money – is more than a patriotic duty. It helps the public finances! The more we conduct our transactions in cash – either notes or coins – the more the public finances will gain, so long as the present system remains unchanged.

    I suggest a campaign: “Pay less tax. Use our own money, the one with the Queen’s head on it, for as many transactions as possible. Don’t use cheques, transfers or especially don’t use credit cards.”

    If the same principle of seigniorage were to be applied to all of our money, including that created by private banks, then the Chancellor could rake in about £80 billion per year (taking the total of M3 or M4, around £1,550bn at 5.25%, the current bank rate).

    M3 used to be considered the best definition of ‘broad money’, including all banking deposits. M4 adds to M3 some Building Society deposits and is now considered the main target for money supply. This would be equal to about 17% of the total of government expenditure.


    J K Galbraith, Money: Whence it came, where it went, (London: Penguin Books, 1995, 2ed), p.18.

    Bank of England Annual Report and Accounts for 2000 to 2006 are at
    Earlier Reports can be obtained from the BoE.

    Also from the BoE website: Peter Andrews and Norbert Janssen, Publication of narrow money data: the implications of money market reform, Bank of England Quarterly Bulletin: Autumn 2005.

    Willem H. Buiter, Seigniorage, Discussion Papers 2007-8, March 1, 2007. Buiter is Professor of European Political Economy, European Institute, London School of Economics and Political Science – from LSE Economics website. He was one of the Monetary Policy Committee external appointments.

    Purchase back issues of Alistair McConnachie’s Prosperity money reform journal here