The Bank of England misunderstood how seigniorage raises the currency’s value because it approached the issue in terms of nominal values, not real ones. With a 5% seigniorage, a £1 coin is still
nominally worth £1, but its
real value rises. Imagine that a normal, debased £1 coin contains £0.97 worth of silver, but a newly-minted one contains £1.00 of silver. By melting down the new coin, selling it for bullion, and exchanging that bullion for an ordinary coin, merchants could make £0.03 in profit. But with a 5% seigniorage, it’s no longer worth melting down a coin that costs £1.05 but only contains £1.00 worth of silver. Much like the Bank of Amsterdam charged fees in exchange for holding people’s bullion securely, which raised the value of bank money, the mint is creating £0.05 in value (and earning the same amount in revenue) in exchange for the value it is creating by providing currency.