Re: Seigniorage in Australia

From: William F Hummel (wfhummel_at_comcast.net)
Date: 08/21/04 

Date: Sat, 21 Aug 2004 18:36:15 GMT

On 20 Aug 2004 23:50:44 -0700, william_b_ryan@hotmail.com (Bill Ryan)
wrote:

>[Hummel] 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.
>----------------------------------
>-----------------------------
>[Ryan] Only if the ratio of notes to deposits is
>increasing. The trend for more than the last half-
>century is for the ratio to decrease. We are
>becoming a "cashless" society. Or didn't you know?
>-
The ratio of notes to deposits has NOTHING to do with the amount of
seigniorage resulting from notes held by the public. Ryan claimed
once before that the ratio determined seigniorage. He is just as
wrong now as he was then.

Seigniorage from notes is simply a function of the value of notes
outstanding, not the ratio of notes to deposits. The value of notes
outstanding is closely matched by the value of the securities in the
Fed's portfolio because as the public acquires notes, the Fed buys
securities to replenish the reserves (vault cash) lost in the banking
system. Over 90% of the interest income on those securities is
rebated to the Treasury, which means the Treasury borrows nearly
interest-free on those securities.

In effect the Treasury gets an income stream equal to the amount
rebated by the Fed on the securities it holds. That allows the
Federal government to either tax less for the same amount of spending
or to increase the amount of spending for the same tax revenues. It
is therefore the public that benefits from the seigniorage.
>
>The Fed must replenish those reserves or endanger the
>liquidity of the banking system.
>----------------------------------
>-----------------------------
>[Reply] The decreasing ratio of notes to deposits
>means the necessity to maintain reserves to meet the
>demand of the public to convert deposits into
>currency is DECREASING.
>-
Wrong. The necessity to maintain reserves is governed by statutory
law, and applies only to checkable deposits. The total reserves in
the banking system depends only on the required reserve ratio
(currently 10%) and the total of checkable deposits. Total deposits
can vary all over the map without affecting how much reserves are held
by banks.

The required reserve ratio is set by the Fed. Prior to 1992, it was
12%. When the change from 12% to 10% was made, the Fed simultaneously
soaked up what would have been excess reserves in the banking system
by selling Treasury securities to the public. If the Fed had
increased rather than decreased the required reserve ratio, it would
have injected the additional reserves required by buying Treasury
securities from the public. For more details, see
http://wfhummel.net/moneymultiplier.html

Relevant Pages

  • Re: Seigniorage in Australia
    ... >public to increasingly conduct transactions with bank ... Clearly Ryan does not understand the role of reserves in the banking ... securities the Fed holds is essentially equal to the value of notes ... >buying Treasury securities from the public. ...
    (sci.econ)
  • Re: Seigniorage in Australia
    ... the amount of seigniorage resulting from notes held ... ratio determined seigniorage. ... The ratio of notes to deposits has nothing ... not vault cash is counted toward required reserves is ...
    (sci.econ)
  • Re: Seigniorage, Who, What, Why
    ... the amount of seigniorage resulting from notes held ... ratio determined seigniorage. ... The ratio of notes to deposits has nothing ... not vault cash is counted toward required reserves is ...
    (sci.econ)
  • Re: Seigniorage, Who, What, Why
    ... >Not surprisingly, Ryan completely misses the ... >reserves is to replenish reserves lost to ... seigniorage because there would still be a need for reserves to back ... only to the extent it can be converted into central bank liabilities. ...
    (sci.econ)
  • Fed Open Market Operations
    ... supplying just enough reserves to meet the demand at its target rate. ... government securities in the secondary market to add or drain banking ... balances at the Fed, checking system float, foreign central bank ... the dealer is debited. ...
    (sci.econ)
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