Re: e$ Signorage

I misdirected this yesterday. Yes, its relevant: it answers the
contention that ecash somehow lowers government seignorage income.

------- Forwarded Message

To: James Gleick <gleick@around.com>
cc: cypherpunk@toad.com
Subject: Re: e$ Signorage 
From: "Perry E. Metzger" <perry@jekyll.piermont.com>


James Gleick writes:
> >> It's not obvious, but it's true, that the Fed collects the "float"
> >> on dollar bills you carry in your pocket,
> >
> >Oh, really? From whom? First I've heard of this.
> 
> Then you're learning something new.

Oh, really? Don't teach grampaw to suck eggs.

> On the contrary. The Federal Reserve holds Government securities
> corresponding to the dollar value of currency in circulation.

Ah, no. Sorry.

The Fed does indeed monetize debt, but 1) that isn't related to
seignorage, and 2) all new money is monetized debt, and it makes no
difference whether it is held in paper or bank accounts or anything
else.

> It earns interest income on this amount, and returns this income to
> the Treasury. This is called seigniorage. It amounts this year to
> something over $20 billion.  This is a very real issue. To the
> extent that electronic money replaces currency (reduces the amount
> in circulation), it will cost the Treasury seigniorage- -and the
> Government is acutely aware of this. Whether the beneficiaries are
> consumers, banks, or other issuers of digital cash will depend on
> the system.

Again, you really don't know what you are talking about.

The vast bulk of the money in the field is not currency. Most of it is
in the form of bank deposits and is circulated through bank mechanisms
like checks and such.

When the Fed wants to expand the money supply, it buys government debt
on the open market, paying for it with nothing at all other than
changing numbers in the Fed's computers. This is how debt is
monetized. The bulk of that money never becomes dollar bills, and
whether it is circulated via checks or ecash or direct deposit or
whatever makes no difference to the amount of fake interest earned. I
say "fake interest" because it isn't real income to the government at
all.

The amount of currency in circulation is dependant purely on demand by
consumers, via banks, for currency. When banks want dollar bills, they
ask the Fed -- they hand the fed electronic money and the fed gives
them back dollar bills. The amount of currency, however, has nothing
to do with the amount of bonds being held -- whether the monetized
debt is held in bank accounts, in dollar bills, or in ecash makes
absolutely no difference.

Again, you just don't know what you are talking about. E-Cash has no
impact on the fake interest earned by the fed, which is not seignorage
to begin with.


Perry

------- End of Forwarded Message

> Date: Sun, 07 Apr 1996 12:20:11 -0400
> From: Perry E. Metzger <perry@piermont.com>
> 
> whatever makes no difference to the amount of fake interest earned. I
> say "fake interest" because it isn't real income to the government at
> all.

    When the Fed buys government bonds, the interest income goes to the 
owners of the Federal Reserve Bank. The Federal Resreve Bank is _not_ a 
government agency - it is privately owned by the member banks..

Alan Horowitz writes:
> > Date: Sun, 07 Apr 1996 12:20:11 -0400
> > From: Perry E. Metzger <perry@piermont.com>
> > 
> > whatever makes no difference to the amount of fake interest earned. I
> > say "fake interest" because it isn't real income to the government at
> > all.
> 
>     When the Fed buys government bonds, the interest income goes to the 
> owners of the Federal Reserve Bank.

Nope, sorry. Some of the interest is used to fund the Fed overhead
itself -- salaries, heat, electricity and the like. The rest is
"returned" to the treasury (actually, it was never paid out in the
first place and it was all funny money to begin with.)

> The Federal Resreve Bank is _not_ a 
> government agency - it is privately owned by the member banks..

Also false. All of the board of governors of the Fed are government
appointees. In some theoretical sense the Fed isn't part of the
government, but in all practical terms it is. Greenspan has to worry
about whether Bill Clinton is going to reappoint him and congress will
reconfirm him, not about whether the member banks think he's doing a
good job.

The myth that the fed is a private entity is an enduring one in
conspiracy theory circles, but its trivial to check that it isn't the
case.

Perry

The Board of Governors of the Federal Reserve Bank is a government agency.
Everyone else in the Fed - really the various regional Feds - are not
government employees. Perry explicitly mentions that there are overhead
expenses that detract from the profit - videlicet, the US Treasury doesn't
pay the operating expenses of the Fed. Therefor, the profits do not go to
the US TReasury. Certainly, the Board is in total control of the picture.
And the Treasury doesn't need the profits. HEck, somewhere around here,
I've got a quote of a Fed Regional President from the 1940's, in which he
says that the govt doesn't need revenues beyond the current interest
payable. TEchnically correct, but politically incorrect. Although, some of
us may live to see such a scenario.  It's happened to lots of countries,
and the sky didn't fall down. People just got sloshed downward on the
real-income-in-constant-dollars scale, via the mechanism of inflation.
This is not a Conspiracy Theory (tm), this is history. 

We've already experienced a massive loss of affluence in this country 
since October 1973, and it didn't cause a revolution. That's why people 
like Greenspan make the big bucks.