From: "Perry E. Metzger" <perry@piermont.com>
Date: Mon, 8 Apr 1996 04:53:32 +0800
To: cypherpunks@toad.com
Subject: Re: e$ Signorage
Message-ID: <199604071620.MAA14286@jekyll.piermont.com>
MIME-Version: 1.0
Content-Type: text/plain



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

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