Re: Seigniorage, Who, What, Why
From: William F Hummel (wfhummel_at_comcast.net)
Date: 08/16/04
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Date: Mon, 16 Aug 2004 04:33:34 GMT
On 15 Aug 2004 19:32:03 -0700, william_b_ryan@hotmail.com (Bill Ryan)
wrote:
>As explained in my article, Fed notes in circulation
>results in seigniorage for the Treasury equal to the
>total interest paid on the Treasury securities in the
>Fed's portfolio, less the Treasury's cost of
>producing the notes and the Fed's cost of
>distribution. The seigniorage accrues incrementally.
>--------------------------------
>------------------------
>But the Fed could just as easily purchase General
>Motors (and other private sector) securities through
>its "open market" operations to inject "high powered
>money" or reserves into the system, as it did before
>the 1930s reforms, and some central banks still do.
>The Fed would "earn" interest on the General Motors
>securities that would be "rebated" to the Treasury.
>The effect in terms of federal government revenue
>would be exactly the same. Who then would be
>accruing the "seigniorage"?
The seigniorage would accrue to the Treasury of course. It makes no
difference what interest-earning assets the Fed purchases.
Not surprisingly, Ryan completely misses the point. The reason the
Fed "injects" reserves is to replenish reserves lost to the withdrawal
of notes from banks by depositors. Thus note seigniorage is exactly
as explained in my article on seigniorage, and applies even if the Fed
bought General motors securities rather than Treasury securities from
the public.
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