Re: Seigniorage, Who, What, Why

From: Bill Ryan (william_b_ryan_at_hotmail.com)
Date: 08/23/04 

Date: 22 Aug 2004 22:24:49 -0700

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.
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[Reply] The ratio of notes to deposits has nothing
to do with the amount of "seigniorage" resulting from
notes held by the public because there is no
"seigniorage" to government resulting from notes held
by the public. The notes are non-interest earning
note obligations of the Federal Reserve. They get
into circulation in exchange on demand for
non-interest earning deposit obligations of the
Federal Reserve. Both are interchangeable forms of
Federal Reserve credit. Deposits are transformable
into notes at the local bank. Notes may be
transformed into deposits by taking them to the local
bank.
-

Seigniorage from notes is simply a function of the
value of notes outstanding, not the ratio of notes to
deposits.
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[Reply] The amount of its profit that it "rebates"
to Treasury is a function of Federal Reserve policy.
Most of its profit is in fact attributable to
earnings on its portfolio of Treasury securities. It
could diversify its portfolio into privately issued
and foreign securities, as it did before the 1940s.
If it did so, it may or it may not continue to
"rebate" profit. Prior to 1947 it "rebated" nothing.
-

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.
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[Reply] The usual method is for the Fed to replenish
vault cash from its own inventory, or by ordering it
for the cost of printing from Treasury. Whether or
not vault cash is counted toward required reserves is
entirely a matter of Federal Reserve policy.
-

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aggregate reserves by the amount withdrawn.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.
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[Reply] The Federal Reserve could simply reduce its
reserve requirements sufficiently, then no bank would
be short. By this Moslerian illogic, and more to the
point, there can no "seigniorage" in economies like
Canada that have eliminated reserve requirements. If
you live by definitions, you must die by definitions.
The contradictions will get you inevitably, sooner or
later. At any rate, the argument is irrelevant
because the trend is not for the public to increase
but to decrease its "net holding of cash."
-

The Fed has no choice but to provide those reserves
if it intends to control the Fed funds rate.
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[Reply] The Fed funds rate is supposedly an
indication of the demand for reserves. That demand
could be controlled through manipulation of the
required reserve ratio rather than "open market"
operations, as it once was. But there is no need to
supply reserves to cover cash withdrawals if the
ratio of currency to deposits is decreasing in an
economy where more and more transactions are
conducted through deposit transfers rather than cash.
-

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.
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[Reply] Okay, by this logic, since the public is
actually decreasing its proportionate holding of
cash, and moving toward the "cashless" economy, the
process must be leading not "to" but away from note
"seigniorage." But the argument is specious in
either direction.
-

Poor confused Ryan. Reducing the required reserve
ratio will decrease, not increase, aggregate reserves
in the banking system.
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[Reply] Hummel is again arguing from arbitrary
definition. Since reserves are "defined" to be those
required by the regulators to be kept on deposit at
the designated reserve bank, reducing the requirement
will "decrease" the quantity of reserves. Of course!

The fact is the required reserve ratio has nothing to
do with determining the quantity of reserves (central
bank or "high powered" money) in the system. It is a
regulatory requirement imposed on banks that can be
adjusted up or down to achieve their policy
objectives.

If the ratio is 20%, the banks are required to keep
an amount equal to 20% of their deposit liabilities
in the form of central bank credit on deposit at the
designated reserve bank. Deposits at other banks do
not count. The greater the ratio, the lesser the
ability of the banks to expand deposits through
loans. Reducing the ratio increases the funds
available to the banks to conduct their transactions
as they see fit. But prudent bankers will presumably
continue to keep reserves in the amounts and in the
depository institutions they individually deem
appropriate.

Reserves (in the non-regulatory sense) are merely
deposits that banks keep in other financial
institutions, redeemable in central bank credit on
demand, plus cash in their vaults. The net reserves
of the theoretically closed economy as a whole are
equivalent to the quantity of central bank credit in
circulation.
-

>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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[Reply] I remember first Canada, then Australia,
then the United States. Obscure webpages selectively
quoted, buried deep in websites. Was there a fourth?
I readily admit it is the international bankers'
party line, taken straight from the financial lexicon
of "Newspeak." Yes, meanings can be "broadened" to
deceive. Hummel is an ample demonstration of someone
capable of doing that, however ineptly.
See:
http://www.geocities.com/socredus/compendium/orwell.txt

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