Re: Seigniorage in Australia

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

Date: Sat, 21 Aug 2004 23:16:37 GMT

On 20 Aug 2004 23:50:44 -0700, william_b_ryan@hotmail.com (Bill Ryan)
wrote:
>
>[Hummel] The Fed must replenish those reserves or endanger the
>liquidity of the banking system.
>----------------------------------
>-----------------------------
>[Reply] Nothing to replenish inasmuch as the trend
>for more than the last half-century has been for the
>public to increasingly conduct transactions with bank
>deposits rather than currency.
>-
Clearly Ryan does not understand the role of reserves in the banking
system. Banking transactions between depositors have no effect on
aggregate reserves. However withdrawals of cash by depositors will
reduce aggregate reserves by the amount withdrawn. Thus if the public
increases its net holding of cash, at least one bank will be short of
reserves needed to meet its reserve requirements. That will result in
upward pressure on the interbank lending rate of reserves (Fed funds
rate). The Fed has no choice but to provide those reserves if it
intends to control the Fed funds rate. It does so by buying
securities from the public. That means the value of interest-earning
securities the Fed holds is essentially equal to the value of notes
circulation.

Ryan still hasn't explained why he thinks the ratio of bank deposits
to notes outstanding is relevant to the amount of seigniorage.
Perhaps that's because he hasn't discovered a rationale for that claim
yet.

>Obviously it replenishes reserves, and does so by
>buying Treasury securities from the public.
>----------------------------------
>-----------------------------
>[Reply] "Obviously," there is no need to "replenish"
>reserves that do not need to be "replenished." The
>Moslerist argument that you propounds is a bit more deceptively
>convoluted than this, however.

Again, as the public increases its holding of cash, bank reserves are
drawn down and must be replenished. That's what begins the process
leading to note seigniorage.
>
>The "securities" that the Fed purchases from the
>public are Treasury securities, since only interest
>earned on Treasury securities can logically be
>"rebated" to Treasury. But there is no law or
>regulation that requires the Fed to purchase Treasury
>securities in deference to private or foreign
>securities.

This is simply a smoke screen. It matters not whether the Fed buys
Treasury securities or private sector securities. In either case, the
interest earned on the securities is income to the Fed which is
largely rebated to the Treasury, and therefore becomes seigniorage for
the Treasury.
>
>There are several other ways that the Fed could
>increase reserves, or it could simply reduce the
>required reserve ratio. The Fed once (before the
>1940s when presumably there was no "seigniorage")
>purchased a basket of privately issued securities, as
>several foreign central banks still do.

Poor confused Ryan. Reducing the required reserve ratio will
decrease, not increase, aggregate reserves in the banking system. And
the Fed itself would attend to that reduction on its own initiative by
selling some of its securities to the public.
>
>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 taxpayer is the beneficiary.
>----------------------------------
>-----------------------------
>[Reply] Yes, according to bankers' propaganda. I
>prefer the more meaningful tern "newspeak sense" to
>your "modern sense." See:
>http://www.geocities.com/socredus/compendium/orwell.txt
>
>In reality, the beneficiaries of the "seigniorage"
>are the bankers and their colleagues on Wall Street.

There are many kinds of seigniorage if we want to broaden the meaning
of the term. However we are talking about seigniorage on notes, and
how it evolves. Four central banks have been quoted in this thread
showing how monetary economists use the term "seigniorage" today with
respect to notes in circulation. And it has nothing to do with feudal
lords and gold coins.

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