William Hummel_

The Case for a Single National Depository

If there are any big brother issues, they are no different from the existing system.


On Jan 07 08:25 AM bosun.j wrote:

> BAD IDEA! Big brother issues far outweigh and *possible* benefits.
> IMHO.

What Is the Monetary Base?

In the paragraph you quote, I was referring to the private sector as a whole rather than to members of the private sector. I agree the wording could have been clearer.

Obviously individuals looking for a return on their excess funds will buy whatever securities they think best meet their needs. However if there is an excess in the aggregate, buying financial instruments within the private sector will simply move money around without changing the total. The only way the total can be reduced is when some buy Treasuries.

On Jan 03 12:17 AM mohbull wrote:

> I'm finding this to be a greatly enlightening article. I thank you.
> I do have a problem with this statement though:
>
> "If the private sector holds more base money than it needs, it will
> normally use the excess to purchase interest-earning Treasury securities,
> since base money earns no interest.Thus the Treasury will always
> be able to recapture its deficit spending through the sale of securities,
> since it can pay whatever interest the market demands."
>
>
> There are mnay other interest-bearing vehicles and no need for the
> public to plow extra cash particularly into Treasuries!

Who Benefits from Seigniorage?

The 6% interest payment applies to what the bank paid for the stock it must hold. For example a bank with total assets of $12 billion should have a net worth of about $1 billion. It would pay in 3% of $1 billion ($30 million) for the stock. That means the bank would receive 6% on $30 million per year ($1.8 million) from its Federal Reserve bank. That's only .015% of its assets. Banks typically earn about 1% on assets.

The money to pay the interest comes from the Fed itself, which simply credits the bank's account at the Fed with a deposit of that amount.



On Dec 28 11:27 PM pbf123 wrote:

> But where is the 6% generated? 6% on the amount of money they have, even just 3% is a large amount.

Who Benefits from Seigniorage?

Banks are required to provide notes on demand to depositors. The banks acquire notes from the Fed in exchange for debits to their Fed deposits. The Fed, the banks, and the depositors all break even, simply swapping one form of money for another.

Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 3 percent of their capital and surplus. They receive a 6 percent annual dividend on their stock. However the stock does not carry with it the control and financial interest that is normal for the common stock of a for-profit organization. It offers no opportunity for capital gain and may not be sold or pledged as collateral for loans. The stock is merely a legal obligation that goes along with membership. For more detail visit wfhummel.net/fedovervi....





On Dec 28 01:51 PM pbf123 wrote:

> Who benefits when the FED provides notes on demand to the banks (at
> no interest, actually paying interest to the banks currently from
> my understanding) who in turn DO NOT provide notes on demand to individuals/depositors...
> Is this a breakdown in how the FED was meant to work? Also, where
> does the money for the 6% dividend paid to FED Reserve Shareholders
> (Banks) get generated from, and how does it affect the balance sheet?

Who Benefits from Seigniorage?

Correcting a typo in my previous response:

The repatriated dollars will return to the vaults of the Fed as banks acquire them, and trade them to the Fed for reserve deposits they can sell in the Fed funds market. The Fed will have to soak up the excess reserves to maintain control of the Fed funds rate, which it does by selling its own Treasuries to the public.

With no change in the target Fed funds rate, bank lending rates will remain essentially unchanged. Consequently the public demand for bank loans will remain unchanged leaving the money supply unchanged to first order. Thus there should be no inflationary pressure caused by a large inflow of repatriated cash.

Who Benefits from Seigniorage?

The repatriated dollars will return to the vaults of the Fed as banks acquire them, and trade them to the Fed for reserve deposits they can sell in the Fed funds market. The Fed will have to soak up the excess reserves to maintain control of the Fed funds rate, which it does by selling its own Treasuries to the public.

With no change in the target Fed funds rate, bank lending rates will not remain essentially unchanged. Consequently the public demand for bank loans will remain unchanged leaving the money supply unchanged to first order. Thus there should be no inflationary pressure caused by a large inflow of repatriated cash.



On Dec 28 11:49 AM John Lounsbury wrote:

> 2. "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 beneficiary is the U.S. private sector as a whole." However, if the dollar is replaced by some other currency as the world's dominant means of exchange, these ex-patriate dollars will come home because they will no longer have their former usefulness overseas. This would be a new surge (or at least a pulse) in our domestic money supply and add to inflationary pressures.

The Importance of Eurodollars

You are right. I have proposed the adoption of a 100% reserve system and shown how it might be implemented. It can be seen at wfhummel.net/reformpla....


On Dec 26 11:57 AM flow5 wrote:

> Kudos, super, amazing:
>
> I guess your the guru, no one else has stepped up to the plate.

>
>
> but your not going to get away with calling commercial banks "financial
> intermediaries" ... the only time a CB is an intermediary is when
> there is a 100% reserve ratio applied to all of it's deposits. Then
> the bank's funds originate from "outside" the institution, instead
> of through the creation of new money.

What Causes Inflation

You are right. In the 1960-1980 period both inflation and M1 correlated positively, although the money growth rate lagged behind the inflation growth rate significantly. After that period the correlation actually became negative. Inflation dropped while M1 rose slightly. See wfhummel.net/inflation....

In the 1970s when oil prices quadrupled, M1 grew at its highest rate ever. I don't know how you can conclude "In NO nation did oil prices cause inflation when M1 was under control." M1 is created by the public itself. It simply reflects the amount of liquid assets needed to make payments. The Fed doesn't control M1. When prices rise, M1 normally rises too.



On Dec 25 11:11 AM GeorgeS wrote:

> Good article. But when I researched this in the 1970s, every nation
> I looked at had an exact correlation between M1 and inflation. In
> Canada when inflation was 15%, M1 was increasing at 12%. That was
> from printing money for deficits faster than your 3% growth rate.
> I'm not sure about your US figures. In NO nation did oil prices cause
> inflation when M1 was under control.
> I keep hoping, but want confirmation, that the govt is now financing
> by printing money, if the amount of money is deflating. That fits
> Keynesianism doesn't it? Another thing - doesn't this make Keynes
> a monetarist?

What Causes Inflation

No, Friedman said "money is everywhere and always a MONETARY PHENOMENON." That has a quite different meaning, namely that money and inflation are correlated. It does not imply that money causes inflation.


On Dec 25 09:23 AM Sigmund wrote:

> As Dr. Friedman said, and I paraphrase; 'money is everywhere and always the cause of inflation'. Your explanation gets it wrong.

What Causes Inflation

Yes, demand is very low because we are caught in a deflationary trap in which simply increasing the monetary base has little positive effect. There is little that can be done at present through monetary policy. A Keynesian fiscal policy is about the only way the economic slump can be turned around.


On Dec 25 08:32 AM patio wrote:

> "The demand for credit arises mainly out of the desire to finance
> (1) new enterprise, (2) consumer spending, or (3) speculative investment.
> Let's briefly examine how each of these affects the money supply
> and prices"
>
> I see no demand in any of these areas, for a long time to come.

>
> And where demand exists, the banks are back to very tight criteria
> to qualify for credit, as it should be.

What Causes Inflation

Banks create the money supply used by the public, not the Fed. The Fed has greatly expanded the monetary base since August, most of which sits idle as excess bank reserves on deposit at the Fed. There is no inflationary pressure from those reserves. Not until banks begin to lend freely again will there be any inflationary pressure. The current problem is how to get out of the deflationary spiral.


On Dec 25 09:21 AM Dave Wrixon wrote:

> Yes, but in the current environment, money supply is being rapidly
> expanded by the Fed at a time when consumer demand is imploding.
> By your own argument that can only result in a huge increase in inflation
> in the medium-term. Of course in the longer-term that inflation will
> be reined back in, but what all this means is that means to growth
> is that it is collapsing in the short-term, stability will return
> over the medium term, but the long term prospects are very subdued.
> In other words the Binge Drinker that has been making Merry will
> stop being violently sick, will feel a bit better after taking medication,
> but will have a prolonged hangover.

What Exactly Is the Money Supply?

The fault-line of monetarism is that it presumes to know cause and effect. Money drives prices is an axiom needing no proof. It is true that the general price level and the amount of credit money outstanding are correlated, but correlation says nothing about causation.

The monetarist view applies to a cash economy, but there are no such economies today except in primitive societies. Bank credit normally arises as a result of a decision to buy, e.g. home loans, auto loans, etc. Those decision are not driven by the existence of too much credit money, although very low interest rates can grease the sale. Therefore it is up to the Fed to control the interest rate levels to prevent easy credit money from being the cause of price increases. When it fails to do so, price inflation most often occurs in assets, seldom in consumer goods and services.



On Dec 24 08:20 AM GeorgeS wrote:

> You are trying to strike at the heart of monetarism. Monetarism is a truism, and there can't be doubt that adding money increases general demand.

What Exactly Is the Money Supply?

In a modern credit money economy, the money supply increases or decreases as a function of prices rather than vice versa for the most part.


On Dec 19 07:59 AM GeorgeS wrote:

> Surely increasing money increases demand and then prices.
> Thanks for some fuller knowledge here.
> I suppose the govt is paying for more of its deficit now by printing
> money instead of borrowing, to keep the money supply steady.

What Exactly Is the Money Supply?

You yourself affect the three Ms whenever you pay with a credit card. Indeed the Ms are changing every second of the day, and the consumers, not the banks or the Fed are doing it.


On Dec 19 10:08 AM BLITZ wrote:

> Thanks, I couldn't remember what those 3ms stood for and it sounds
> as if the total money supply is still in reality unknown.

What Exactly Is the Money Supply?

The money supply as defined by the Fed, the three Ms, is so incomplete that the Fed itself doesn't use those aggregates any more as indicators of future inflation.

On Dec 19 06:48 AM Alan von Altendorf wrote:

> Unknowable. Can't even see it in Statistical Abstract of the US as
> a tabular series. Banks don't have balance sheets. Jeez.