Re: Seigniorage in Australia

From: William F Hummel (wfhummel_at_comcast.net)
Date: 08/19/04 

Date: Thu, 19 Aug 2004 16:51:04 GMT

On 19 Aug 2004 04:09:08 -0700, william_b_ryan@hotmail.com (Bill Ryan)
wrote:

>So, the Fed's Webmaster is less competent than I
>thought. I have acknowledged that this "modern"
>concept of seigniorage is bankers' ideology and an
>inversion of language in the Orwellian sense.
>http://www.geocities.com/socredus/compendium/orwell.txt
>
>The excerpt below is from a document entitled, "The
>Location of U.S. Currency: How Much is Abroad?"
>Hummel tellingly and significantly fails to include
>the footnote referenced to the very first sentence:
>
>"1. Seigniorage is defined as the government's gain
>from converting valuable metal into more valuable
>coins. We use the term here in the looser sense that
>includes the central bank's income from issuing paper
>currency."
>
>The document becomes more understandable if the term
>"Orwellian" is substituted for "looser." This
>"looser" definition is Orwellian in several respects.
>It infers that the central bank gains "income" from
>the issuance of paper currency. The truth is that
>the central bank is merely exchanging already
>existing deposit liabilities for note liabilities.
>
>The commercial bank withdraws a portion of its
>deposit credits at the central bank in the form of
>notes, which it places in its vault, available to be
>supplied to its own depositors on demand.
>
>The differential between assets and liabilities
>changes neither for the commercial nor the central
>bank through this transaction. Nor does the
>differential change for either bank when notes are
>supplied on demand to the public.
>
>There is therefore no "profit" as the term has been
>defined for several centuries in double-entry
>accounting.
>
>There is therefore nothing gained by the central bank
>that is available to be "rebated" to government from
>the process of issuing currency.
>-
In all of Ryan's twisting and squirming, do we see an admission of
error by him. No, that would be too much to expect. What we see
instead is continued irrelevancies, and such silliness as "banker's
ideology", "inversion of language in the Orwellian sense", and an
appeal to an archaic dictionary definition of seigniorage that refers
to the days of feudal lords. Economists now widely use the term as
defined in the statements by central banks as noted.

It's true the Fed does not gain income by selling notes to banks. I
explained why in my article at http://wfhummel.net/seigniorage.html.
But the sale itself was never claimed as to how seigniorage accrues.
Ryan ignores how the Fed does gain income, namely in the process that
results in the public acquiring the notes. As the public withdraws
notes from their accounts, banks lose reserves. The Fed must
replenish those reserves or endanger the liquidity of the banking
system. Obviously it replenishes reserves, and does so by buying
Treasury securities from the public.

The net result is that the Fed gains interest-earning Treasury
securities in exchange for providing non-interest-bearing notes to the
public via the banking system. In fact, the interest earned on those
securities is the primary source of income to the Fed. But that is
not the end of the story on note seigniorage.

The Fed refunds most of its net income to the Treasury. As a result,
the Treasury get nearly interest-free loans on the securities held by
the Fed. That means an increase in notes held by the public reduces
the interest payments due on the Treasury's debt. Thus the Treasury
can tax less for the same spending, so the real beneficiary of note
seigniorage is the tax payer.

Now let's take a look at coin seigniorage. That follows the classic
definition. The Treasury sells coins at face value to the Fed, and
gets a credit in its account at the Fed when it delivers the coins.
The difference between their face value and the cost of producing the
coins is profit to the Treasury. However that profit accrues to the
tax payer in the exactly same way as in note seigniorage, namely as a
reduction in taxes.

In the big picture, it really doesn't matter whether seigniorage
arises in the classical sense from coins or in the modern sense from
notes issued by the Fed. The tax payer is the beneficiary.

Relevant Pages

  • Re: Seigniorage, Who, What, Why
    ... >Treasury, not the U.S. Government. ... not Treasury. ... >commercial bank credit simply puts government in the ... Seigniorage simply takes a different form in a modern credit ...
    (sci.econ)
  • Re: Seigniorage, Who, What, Why
    ... Correcting billions to millions in the seigniorage example below: ... Taxes are paid to the United States ... not Treasury. ... >>commercial bank credit simply puts government in the ...
    (sci.econ)
  • Re: Seigniorage, Who, What, Why
    ... For example, the Bank ... >defines seigniorage from notes as ... >the BOC's securities portfolio. ... >a note liability for a deposit liability at the Bank ...
    (sci.econ)
  • Re: Seigniorage in Australia
    ... >"When a commercial bank requires additional notes to ... >from the RBA. ... seigniorage at the at the Federal Reserve similar to what I quoted ... from the Bank of Canada, the Reserve Bank of New Zealand, and the ...
    (sci.econ)
  • Who Benefits from Seigniorage?
    ... Who Benefits from Seigniorage? ... the State treasury, known as seigniorage. ... In the U.S. today the monetary base is created by ... Cash withdrawals from banks are a drain on their ...
    (rec.collecting.coins)