Re: Seigniorage, Who, What, Why

From: Bill Ryan (william_b_ryan_at_hotmail.com)
Date: 08/13/04 

Date: 12 Aug 2004 18:37:33 -0700

William F Hummel <wfhummel@comcast.net> wrote in message news:<qc7lh0hrsm87eagk43fvnvimblb2jfe34o@4ax.com>...
> Read http://wfhummel.net/seigniorage.html and you will find out where
> seigniorage goes.
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Hummel: Since the State accepts only Fed liabilities
in payment of taxes, its liabilities are in effect
tax credits with no tangible backing.
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False premise. The "State" accepts checks drawn on
commercial banks in payment of taxes.
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Hummel: Their wide acceptance as a medium of
exchange is based on the power of the State to
enforce tax collection.
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Nope.
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Hummel: The cost of producing Fed liabilities is
very small, which means that seigniorage from issuing
them is potentially quite large.
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That would be true if the government spent them into
circulation. But they are lent into circulation by
banks.
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Hummel: The Fed offers notes on demand to banks at
face value, debiting their accounts at the Fed in
payment.
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Thereby exchanging one asset for another of equal
value.
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Hummel: Since a bank's vault cash is part of its
reserves, the net withdrawal of cash reduces
aggregate banking system reserves. In order to
maintain control of the Fed funds rate, the Fed must
replenish those reserves. It does so by buying
Treasury securities in the open market, a process
known as monetizing the debt.
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Here, Mr. "Argue from Arbitrary Definition" Hummel
follows his modus operandi. The purpose of reserves
(other than to impose regulatory authority) is to
settle transactions between banks. The hypothetical
net withdrawal of cash from banks does not affect the
interbank relationships whatsoever. But more
importantly, the ratio of cash to transactions is
generally decreasing, not increasing. If we are to
take self-taught crank Hummel's argument seriously,
it should work in reverse. Since the ratio of cash
to transactions is decreasing, not increasing, it is
the Fed that is paying "seigniorage" to the public.
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Hummel: [The Fed] rebates all of its income after
expenses to the Treasury.
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Nope. Before 1947, nothing was rebated. Since 1947,
not "all" but ninety percent (90%) of its self-
calculated "profit" is "rebated."

The vast bulk of Fed directed profits (effective
interest) to Wall Street are left out of the
calculation: the huge profits on the Fed's churning
of U. S. Government securities made by the select
group of dealers licensed to conduct the Fed's "open
market" operations.
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Hummel: As monopoly supplier of bank reserves, the
State must therefore compensate by either reducing
tax revenues or increasing other spending.
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Here, this rather ignorant economics groupie reveals
his "Moslerist" credentials. Aping his mentor,
Warren Mosler, contrary to facts in the real world,
he conflates "government" with "the state" to make
his specious case. It is not "the State" but the Fed
that is the monopoly supplier of bank reserves,
inasmuch as the Fed is the central bank in the
fractional reserve system. It is government, not the
Fed that taxes. The Fed, of course, as corporate
entity, spends in offset to its revenues--as does
every corporate entity, including government, and for
that matter, General Motors.
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