Who Benefits from Seigniorage?
Arizona Coin Collector
http://seekingalpha.com/article/112393-who-benefits-from-seigniorage
Who Benefits from Seigniorage?
by: William Hummel
December 28, 2008
During the era of metal-based money, the monetary
base consisted of precious metals produced by the
public and converted into coins by the State. The
difference between the face value of the coins
versus the cost of acquiring the metals and
minting them generated a financial benefit for
the State treasury, known as seigniorage.
The Monetary Base Today
In the U.S. today the monetary base is created by
the Fed when it buys Treasury securities from the
public and simply credits the sellers' banks with
reserve deposits at the Fed. The Fed must supply
reserves as needed to balance supply and demand
at its target Fed funds rate.
Cash withdrawals from banks are a drain on their
reserves, which the Fed must replenish or lose
control of the Fed funds rate. A net withdrawal
of cash from banks causes a continuing demand for
additional base money from the Fed. Under normal
conditions, that is the principal reason for the
growth of Treasury securities in the Fed's
portfolio.
Seigniorage in a Fiat Money System
The Fed thus acquires Treasury securities equal
to the amount of base money it creates. The
interest paid by the Treasury on those securities
is the main source of income for the Fed. The Fed
keeps enough to cover its expenses and refunds
the balance to the Treasury. On average, over 90
percent of the interest paid by the Treasury on
those securities is refunded by the Fed. Thus for
all practical purposes, the Treasury securities
held by the Fed are retired.
Retiring outstanding Treasury securities in that
way eliminates a cost to the Treasury. That is
the way in which seigniorage in a fiat money
system differs from the classical view of
seigniorage. The value of the seigniorage is
approximately equal to the face value of the
securities held by the Fed, which in turn is
equal to the monetary base created through open
market operations. The monetary base can also
be increased through lending by the Fed, but
that has no seigniorage benefit for the Treasury.
How the Issue of Notes Affect Seigniorage
The Bureau of Engraving and Printing in the
Treasury produces all notes for the Fed. The
Fed buys the notes at cost, and pays by
crediting the Treasury's account at the Fed.
The Fed provides notes on demand to banks at
face value, debiting their accounts at the Fed
in payment. Banks provide notes on demand to
depositors, debiting their individual accounts
in payment. Conversely depositors can return
notes to their banks and regain credits in
their accounts. Likewise banks can return notes
to the Fed and regain credits in their Fed
accounts.
Since the Fed buys notes at cost and sells them
to banks at face value, it would seem that
seigniorage from notes accrues to the Fed.
However until the notes are sold to banks, they
are not a part of the monetary base, but only
engraved pieces of paper stored in the vaults of
the Fed. As the Fed sells and redeems notes, it
simply swaps liabilities on its balance sheet.
The asset side of the balance sheet remains
unchanged, and the Fed gains nothing from the
"sale" of notes to banks. The more notes
withdrawn, the greater the seigniorage benefit
to the Treasury.
How the Issue of Coins Affects Seigniorage
The U.S. Mint, a bureau of the Treasury, produces
all coins. It sells them to the Fed at face
value for credit in its account at the Fed. The
difference between the face value of the coins
and the cost of their production is seigniorage
for Treasury, which accrues at the time of sale
to the Fed.
Coins held by the Fed are carried on its balance
sheet as assets. Those assets vanish when sold
to the private sector. The Fed sells the coins to
banks at face value, who in turn sell them to the
public at face value. This peculiar distinction
between coins and notes is a hold-over from the
days when the monetary base was precious metal
Who Really Benefits from Seigniorage?
The notion that the Treasury is a beneficiary of
seigniorage is an illusion. As the late economist
Herb Stein observed, "The government is no one,
there is nobody here but us people." Rather it
is a temporary assemblage of citizens who
determine how the government should spend and
tax. However the government must spend at least
as much as it acquires from taxes and the sale
of securities. Otherwise it would drain the
monetary base and stifle the economy.
In a modern fiat money system, the Treasury has
no need for balances in excess of its near term
obligations. If its balances increase due to
seigniorage, it will have to be returned to the
private sector, either through reduced taxes or
increased spending. Thus the private sector is
the ultimate beneficiary.
What about Federal Reserve notes that are bought
by foreign interests for use overseas? If the
notes never return, they represent a large gift
of seigniorage to the U.S. Again the beneficary
is the U.S. private sector as a whole.
..
Mike Marotta
wrote:
> FROM:http://seekingalpha.com/article/112393-who-benefits-from-seigniorage
I trust that no one here was mislead by these falsehoods. There is so
much wrong that it hard to know where to begin or how to address each
of the many aspects of the individual errors.
Some examples of denominated ancient coins are known, the Roman
denarii with X are the best examples. Early Roman bronzes had three
or four dots show their fractions of 12. Little silver fractions from
Kolophon with TH and TE are accepted to have been tetartemorion (1/4
obol). Those examples are all exceptions o the broad rule that for
about 2000 years from the invention of coinage until 1575, coins did
not carry a unit of account on them. They were always worth their
weight. Nothing more or less. The minter made money (seignorage) by
giving back less in silver than he took in. You deliver a 12-ounce
pound of silver and you get back something less than 2880 silver
pennies. The reason you would do that is that your 2800 pennies have
much greater utlity than three candelsticks, a broken chalice, and two
strings of sleighbells.
In 1575 for the year 1576, Henry III of France issued the 1/4 ecu
gold. That opened the gates to a flood of sins. Now the issuer could
declare any coin of any size or composition to have any value. In 200
years, the British "pound" sterling was reduced to about 3-1/2
ounces. Once silver pennies, were reduced to big coppers, then to
small. (For the complete story with special attention to Spain from
the Muslims to the Hapsburgs, see Murray Rothbard's _What Has
Government Done to Our Money_.)
There is another side to the coin.
For one thing prosperity, trade, and industrialism increased the value
of money as more goods and services were created, thus, it took less
money to buy more: copper could replace silver for beef and bread and
beer -- as well buttons, beeswax and books.
For another, there is a disutitlity to actually circulating precious
metals. Wearing them down makes coins worth less. The British Royal
Mint of the 1690s and then the Bank of England of the 1820s ate tons
of losses, taking in old, worn coins and exchanging them by count for
new. The best solution -- see Fractional Money by Neil Carothers --
is to have durable media, say in cupro-nickel, but backed 100% on
demand in precious metal.
> However the government must spend at least
> as much as it acquires from taxes and the sale
> of securities. Otherwise it would drain the
> monetary base and stifle the economy.
That is total nonsense. If there were less money in circulation, each
piece would have greater value. So, if the govenment became a "sink"
for money, draining the supply would not stifle the economy but would
be a true stimulus to savings and investment.
Moreover, the difference between government and other activities is
that businesses create values that people want and pay for because
acquiring those values is a net gain in utility. Government produces
nothing. It creates nothing. What few enterrprises is has run at a
dead loss, truly draining the economy. The US Postal Service has been
something of an exception, being nonetheless still something of a
legal monopoly.
> In a modern fiat money system, the Treasury has
> no need for balances in excess of its near term
> obligations. If its balances increase due to
> seigniorage, it will have to be returned to the
> private sector, either through reduced taxes or
> increased spending. Thus the private sector is
> the ultimate beneficiary.
How does the Treasury return its profits to the private sector? Do we
all get something? In what proportion? The statement is nonsense.
Would we all not benefit more from a paydown of the Federal deficit
and public debt?
> What about Federal Reserve notes that are bought
> by foreign interests for use overseas? If the
> notes never return, they represent a large gift
> of seigniorage to the U.S. Again the beneficary
> is the U.S. private sector as a whole.
If the chickens never come home to roost ... if the piper never
demands to be paid...
But the game cannot go on forever. Those dollars must come home --
and we should be glad that they do because the best possible use for a
US Dollar is to buy something made in the USA. Dollars overseas come
home to pay for exports. More of those would be good, too.
Notice, also that this "gift of seignorage" originally accruing to the
Treasury and the FRB now comes to "the U.S.... the U.S. private sector
as a whole." Is that by the magic of modern economics, or by the
legerdemain of glib writing?
Mike M.
Michael E. Marotta
"Austrian"
Mike Marotta
> Who Benefits from Seigniorage?
> by: William Hummel
> notes never return, they represent a large gift
> of seigniorage to the U.S. Again the beneficary
> is the U.S. private sector as a whole.
So, why isn't Robert Mugabe the ruler of the world?
Wouldn't this system have made Zimbabwe -- and before her, Serbia and
Turkey and Weimar Germany -- the leader of the free world, with
gazillions of seignorage wealth to fund a George Jetson utopia?
Mike M.
Michael E. Marotta
"Jane! Jane! How do you stop this thing?!"
mazorj
"Mike Marotta" <mer...@torchlake.com> wrote in message
news:03415da9-d211-4ede...@a12g2000pro.googlegroups.com...
So no ancient ruler ever debased his currency? That's certainly
"classic" seigniorage, just as modern base-metal coinage is another
variety of this form of seigniorage.
> In 1575 for the year 1576, Henry III of France issued the 1/4 ecu
> gold. That opened the gates to a flood of sins. Now the issuer could
> declare any coin of any size or composition to have any value.
Within limits, ancient rulers could do that by replacing gold/silver
content with base metal, which had the same effect.
> In 200
> years, the British "pound" sterling was reduced to about 3-1/2
> ounces. Once silver pennies, were reduced to big coppers, then to
> small. (For the complete story with special attention to Spain from
> the Muslims to the Hapsburgs, see Murray Rothbard's _What Has
> Government Done to Our Money_.)
>
> There is another side to the coin.
>
> For one thing prosperity, trade, and industrialism increased the
> value
> of money as more goods and services were created, thus, it took less
> money to buy more: copper could replace silver for beef and bread
> and
> beer -- as well buttons, beeswax and books.
True, but if the money supply is not increased commensurate with
production, it can become too valuable to use for ordinary trade of
goods and services. See next comment.
> For another, there is a disutitlity to actually circulating precious
> metals. Wearing them down makes coins worth less. The British
> Royal
> Mint of the 1690s and then the Bank of England of the 1820s ate tons
> of losses, taking in old, worn coins and exchanging them by count
> for
> new. The best solution -- see Fractional Money by Neil Carothers --
> is to have durable media, say in cupro-nickel, but backed 100% on
> demand in precious metal.
What do you do when the market value of gold and silver gyrate wildly
as they occasionally (and lately) have done? Constantly shrink and
expand the circulating coinage? That's hardly practical, which is one
of the reasons why they were de-coupled in modern coinage.
>> However the government must spend at least
>> as much as it acquires from taxes and the sale
>> of securities. Otherwise it would drain the
>> monetary base and stifle the economy.
>
> That is total nonsense. If there were less money in circulation,
> each
> piece would have greater value. So, if the govenment became a "sink"
> for money, draining the supply would not stifle the economy but
> would
> be a true stimulus to savings and investment.
Not true for the major components of any economy, which require the
purchase of goods and services. Which requires money. When money is
scarce, it tends to be hoarded (either as investments or under the
mattress) rather than spent on goods and services. Having to resort
to payment in kind ("my pig for your blacksmithing services") is not
as easy or efficient as money payment. So a low money supply is a
drag on any economy; and having the government act as a "money sink"
lowers the supply.
> Moreover, the difference between government and other activities is
> that businesses create values that people want and pay for because
> acquiring those values is a net gain in utility. Government
> produces
> nothing. It creates nothing.
Utter nonsense. It provides services that are demanded, voted for,
and paid for by voters. Most of these can be feasibly and/or
effectively and/or efficiently provided only by government. So in
that sense, government is "creating" something out of nothing for the
economy, just as any service provider does. It also produces some
goods, such as the money that, as previously noted, we all need for an
efficient economy.
> What few enterrprises is has run at a dead loss,
Well, duh. In general it's pointless for government to make a profit;
and since except for user fees, government services do not generate
revenue, of course they're going to operate at a "dead loss" by
standard bookkeeping methods. And for the record, Fanny and Freddie
ran at nice profits back before they were cut loose to ruin themselves
through greed.
> truly draining the economy.
A dollar spent by government contributes as much production to the
economy as one spent by the private sector. The money doesn't
disappear down a black hole. It's spent for goods and services
produced by itself and by private contractors to meet the government's
needs in the course of meeting our demands. True, it's forcibly
extracted from taxpayers after their democratically elected
representatives approve the expenditures and taxes, but those
taxpayers either would have paid elsewhere for the services that could
have been provided by private sector - priced to include the profit
margin that government doesn't collect (which helps offset any
inefficiencies) - or they would have to do without the services that
can only be feasibly and/or effectively and/or efficiently provided by
government.
The principal difference between public and private spending in the
economy is what the money is spent on, and even that is limited.
Without government and taxes, we'd still spend a fair chunk of our
suddenly free-up wealth to buy whatever services private industry can
provide in place of government. The rest gets spent on cars and TVs
and other personal interests. That's nice for retailers and our
consumer lifestyles but we would lose law enforcement, a judiciary,
national defense, much of the basic scientific research that doesn't
make sense for industry to fund, free K-12 education, and all the
other services that we wouldn't have without taxes and government.
With government, the money instead pays for all those services that we
say we want from government. So when we give the money to government
instead of spending it on ourselves, we do without a new car or TV but
we do benefit in countless more important areas.
> The US Postal Service has been
> something of an exception, being nonetheless still something of a
> legal monopoly.
>
>> In a modern fiat money system, the Treasury has
>> no need for balances in excess of its near term
>> obligations. If its balances increase due to
>> seigniorage, it will have to be returned to the
>> private sector, either through reduced taxes or
>> increased spending. Thus the private sector is
>> the ultimate beneficiary.
>
> How does the Treasury return its profits to the private sector? Do
> we
> all get something? In what proportion? The statement is nonsense.
> Would we all not benefit more from a paydown of the Federal deficit
> and public debt?
How about "not collecting the additional taxes that would be necessary
if they weren't offset by seigniorage"? That was pretty clear from
the article.
>> What about Federal Reserve notes that are bought
>> by foreign interests for use overseas? If the
>> notes never return, they represent a large gift
>> of seigniorage to the U.S. Again the beneficary
>> is the U.S. private sector as a whole.
>
> If the chickens never come home to roost ... if the piper never
> demands to be paid...
> But the game cannot go on forever. Those dollars must come home --
> and we should be glad that they do because the best possible use for
> a
> US Dollar is to buy something made in the USA. Dollars overseas
> come
> home to pay for exports. More of those would be good, too.
>
> Notice, also that this "gift of seignorage" originally accruing to
> the
> Treasury and the FRB now comes to "the U.S.... the U.S. private
> sector
> as a whole." Is that by the magic of modern economics, or by the
> legerdemain of glib writing?
How about "not collecting the additional taxes 'from the private
sector' that would be necessary if they weren't offset by
seigniorage"? That was pretty clear from the article.
mazorj
On Dec 28, 7:32 am, "Arizona Coin Collector" <nos...@nospam.com>
wrote:
> FROM:http://seekingalpha.com/article/112393-who-benefits-from-seigniorage
> Who Benefits from Seigniorage?
> by: William Hummel
> If the
> notes never return, they represent a large gift
> of seigniorage to the U.S. Again the beneficary
> is the U.S. private sector as a whole.
> So, why isn't Robert Mugabe the ruler of the world?
>
> Wouldn't this system have made Zimbabwe -- and before her, Serbia
> and
Turkey and Weimar Germany -- the leader of the free world, with
gazillions of seignorage wealth to fund a George Jetson utopia?
Because we're talking about valuable U.S. Treasury notes sold abroad
in moderate volume as opposed to internally circulating worthless
currency notes cranked out as fast as the printing presses can run.
Duh.
mazorj
"mazorj" <maz...@verizon.net> wrote in message
news:wAW5l.1599$Es4....@nwrddc01.gnilink.net...
Mike Marotta
have a free-market Austrian or laissez-faire viewpoint and you have a
centerist keynesian or neo-classical perspective. The "facts" are
easy enough for us to agree on, usually. We disagree on what they
_mean_. In other words, based on your theories or based on mine, how
should people _act_?
Therefore, I ask you: How do you act at a coin show? Do you follow a
free market laissez faire Austrian model, or do you apply your
monetarian governmentalist perspective to explain the "free" admission
and "free" souvenirs and "free" magazines and "free" educational
presentations?
The problem that I have with neo-classicism is that the theories do
not apply well to the very hobby of buying and selling money.
Mike M.
Michael E. Marotta
"That's my chair and this is my table."
RWF
> Because we're talking about valuable U.S. Treasury notes sold abroad
> in moderate volume as opposed to internally circulating worthless
> currency notes cranked out as fast as the printing presses can run.
> Duh.
You mean valuable T-Notes that are being cranked out as fast as the
printing presses can run to fund the trillion $ + bailout?
mazorj
> Mazorj, you and I could go back and forth on this to little avail.
> I
> have a free-market Austrian or laissez-faire viewpoint and you have
> a
> centerist keynesian or neo-classical perspective. The "facts" are
> easy enough for us to agree on, usually. We disagree on what they
> _mean_. In other words, based on your theories or based on mine,
> how
> should people _act_?
You're trying to make this a discussion of transactional economics?
My main point went more to the original term for the subject,
"political economy," in order to refute your tired, simplistic
libertarian/laissez faire argument that "Government produces nothing.
It creates nothing." Care to respond to my refutation with more than
a bump and run?
> Therefore, I ask you: How do you act at a coin show? Do you follow
> a
> free market laissez faire Austrian model, or do you apply your
> monetarian governmentalist perspective to explain the "free"
> admission
> and "free" souvenirs and "free" magazines and "free" educational
> presentations?
Again with the transactional angle? Silly question, since a coin show
is not a national economy. And you don't have to be a laissez faire
or libertarian type to understand TANSTAAFL. Everything has a cost.
The problem with classical economic theories is that most don't
adequately account for human behavior. For example, recent research
shows that in transactions, people often don't make what appears to be
the coldly rational choice. In a similar fashion, human behavior and
values intervene when it comes to making public policy. Everyone
except the most radical laissez faire libertarian accepts to a greater
or lesser degree that when it comes to certain social issues and
imperatives, we're better off if we bite the bullet and accept the
cost of some inefficiency in markets in order to gain some greater
benefit. Such as regulating the trade of equities, protecting
consumer bank deposits, and ensuring the safety of drugs, to name but
a few of the service *contributions* that government makes to markets
and the economy. (Yes, contributions. How much of a market do you
think there'd be for stocks or banking services or drugs if people
didn't have any confidence in these? We'd still have them but they'd
be cottage industries for those who are rich and smart enough to
protect themselves from predatory providers or too dumb to do so.
They wouldn't be major, integral parts of the economy.)
However, if you insist on the transactional aspects, do you have any
response to my observations on your comments about how (coinage) money
supply affects consumer market transactions? Or my observations about
the role of debased coinage, in response to your partly wrong and
largely irrelevant discourse on ancient coining? You kinda let all
that slide by too with your introductory bump and run.
> The problem that I have with neo-classicism is that the theories do
> not apply well to the very hobby of buying and selling money.
A hobby or even a business or an industry is not a national economy.
Transactions are part of the working machinery of an economy but they
are not the economy. Even the Austrians knew that.
"Roßert G. Schaffrath"
> The problem with classical economic theories is that most don't
> adequately account for human behavior. For example, recent research
> shows that in transactions, people often don't make what appears to be
> the coldly rational choice. In a similar fashion, human behavior and
> values intervene when it comes to making public policy.
I have been a believer in this for ages since I took economics in
college. I find it hard to call Economics a science as it is difficult
to reproduce the results from any experiment. The "human factor" throws
in so much variability that it really is more art and magic than
science. Even with the current bailout, the theory was that throwing
money into the banks will make them behave a certain way when in fact
they did not. Throw $600 checks at people and they will spend it was
the theory yet most of us (me included) put it in the bank for future use.
mazorj
""Roßert G. Schaffrath"" <rscha...@yahoo.com> wrote in message
news:495b6cb9$0$4878$607e...@cv.net...
It's a social science, not a hard science, but you can do repeatable
experiments in social sciences with small groups or limited sets of
individuals. And economic theories are useful approximations to
explain certain phenomena such as the effect of supply/demand on
pricing. Unfortunately, the gist of Shaw's quip that "If all the
economists in the world were laid end to end, they wouldn't reach any
conclusion" still applies.
The problem is that in their desire to make economics more of a "hard"
science, economists have tended to cling to a clinical view of the
world. Part of that means that in general, it is assumed that people
behave as predictable, coldly rational robots. Greed is the one and
only human factor allowed into the models. Otherwise their theories
would be of limited usefulness (which is in fact the case).
The other consequence of a world view that ignores the messy
ambiguities of human behavior and values is that when the models are
applied to public policy, not only do the Human Economic Units refuse
to behave as predicted, but the policies derived from Ivory Tower
theories are coldly inhumane. For example, transferring production to
a more efficient site (as in shipping production overseas) makes
perfect sense in the models but totally ignores the human costs for
those who are put out of work. Claims about the inefficiencies and
value of having government provide services ignore the fact that
sometimes the most efficient method is not in the best interest of a
society. (There's that coldly rational greed-based world view again!
"Maximizing our gain by maximizing efficiency and output should be our
only goal in public policy.") Sometimes the society decides through
its political process that public policies should trade off some
efficiency to provide other benefits such as regulating for
safety/security, or some relief or countermeasures for the effects of
bad economic developments. The discipline originally was called
political economy for a reason. Economists may make theories and
models, but society makes the (political) public policy that governs
the economic issues.
Not all economists ignore the human effects, but the ones that do have
learned to anticipate this criticism by doing a pre-emptive bump and
run. I've lost count of the interviews I've heard where some
economist defended his Ivory Tower analysis with words along the lines
of "Yes, it's terrible that millions of workers and their families
will be affected but it can't be helped, they will find other work,
and in the long run we'll all be better off." Except for the few who
are able to get an equivalent job elsewhere or retrain for a decent
occupation, "other work" usually has meant settling for a crappy
dead-end job. (And we never hear how this is an inefficient use - a
waste! - of skilled workers! Isn't that an economic mortal sin?)
Moreover, as Keynes noted, in the long run we all are dead.
It's not an either/or. Public policy should be informed and guided by
the science, but the real goal is to strike the best balance between
theory and practice.