seigniorage question

[EZ_E]

First a little background before I ask my question:

 

Of course, the Federal Reserve Bank (FED) was formed in 1913 during the Christmas season. Its name is actually a misnomer. It is not a federal agency whatsoever but is comprised of a number of international banks. I remember a quote from DeeDee Meyers, a former white house press secretary. She stated that the US government does not presume to dictate policy to the Federal Reserve banking system since they are not a gov't agency. So, the way things work is instead of congress taking care of business, they've delegated it to the FED. The US Treasury will print up a brand new $100 US Treasury bond and present it to the FED, who in turn will print $100 of fiat money in exchange. And since it is a promissory note , interest must be paid upon the debt. The reason why we have such an exponentially increasing national debt is because of borrowing just to pay the debt's interest and ignoring the principle. This definitely sounds like a scam to me with the bankers banking bank!

 

The constitution grants congress the power and authority to coin money and to regulate its value thereof. So, does this mean that the coinage of US coins is entirely separate from the FED (excluding distribution to the various Federal Reserve Banks)? Do we have to reimburse the Federal Reserve for coinage or is the constitution actually followed to the letter here? If so, then all profits from seigiorage actually is returned to the treasury. If not, then how does the FED get their cut?

 

I hope that I made my question clear. Thanks.

 

[mark]

I think you are off track in several ways in this post. First the Fed is not comprised of foreign banks. The United States is divided into 12 Federal Reserve districts. Each district has a regional bank. Commercial banks within the district choose whether or not to join the Federal Reserve system. (For what it's worth, large banks always join because it's cheaper to be a member and get some Fed services than to not be a member.) Each Fed regional bank has a Board of Directors. The Board of Directors nominates someone to be President of the Regional bank and the nomination must be confirmed by the Federal Reserve Boiard of Governors. (The members of the Board of Directors are elected by commercial banks that are members of the Federal Reserve system. But the only important thing the Board of Directors do is to nominate someone to be President and that person must be confirmed by the Board of Governors.) Unlike the members of the Boards of Directors, the Presidents have power because they serve on the Federal Open Market Committee (FOMC), the group that makes the nation's monetary policy.

 

The Federal Reserve is overseen by the Board of Governors, which resides in Washington DC. It is comprised of 7 people appointed by the President of the Untied States and confirmed by the U.S. Senate. Each member is appointed for a 14 year term. These 7 people all serve on the FOMC. The President of the NY Fed regional also serves on the FOMC. The Presidents of the other Fed regional banks also serve, but only 4 vote. The 4 that vote rotate from one year to the next.

 

I could go on about the FOMC, which is the group that makes the nation's monetary policy, but I think by now it's clear there are NO foreign banks involved in the Fed's structure.

 

Second, and probably more interesting, is the fact that you got the Fed's actions of purchasing government securities essentially correct. One detail was in error: The Fed does NOT buy directly government securities from the U.S. Treasury; it buys government securities in the open market the same as any other purchaser. But this "error" is trivial because whether or not the Fed buys directly from the U.S. Treasury is unimportant since the effect is identical: The Fed purchases government securities and essentially pays for them by printing money. (It's a bit more complicated, but again the complications are unimportant.) However you left hanging what happens to the interest income the Fed earns from the government securities it purchases. From the interest income the Fed pays its expenses. And then it rebates back what is left (which is the vast majority of it) to the U.S. Treasury. The U.S. Treasury keeps the government's checking account at the Federal Reserve and the Federal Reserve simply transfers its "profits" into the Treasury's checking account. And it is via this process that the U.S. government receives the seigniorage from issuing currency.

 

I could go on, but this post is already long. However, for what it's worth, I once spent 8 months at the Kansas City Fed as a visiting scholar. That was a delightful time in my life! I recall that at time there was a mall in Kansas City that had a (vastly overpriced) coin shop in it!

 

Mark

[EZ_E]

Mark,

 

Thank you for you detailed post. Obviously, you know alot more of the mechanics of the FED than I do. I'm going to look into "it" more and will post another response later on.

 

 

 

From the interest income the Fed pays its expenses. And then it rebates back what is left (which is the vast majority of it) to the U.S. Treasury. The U.S. Treasury keeps the government's checking account at the Federal Reserve and the Federal Reserve simply transfers its "profits" into the Treasury's checking account. And it is via this process that the U.S. government receives the seigniorage from issuing currency.

 

Then why are we over six trillion dollars in debt?

 

Just to put 1,000,000,000,000 into perspective: If one opened a business at the time of Christ and lost one million dollars per day up until the present time, then it would still take another six hundred years to lose one trillion dollars.

 

[jtryka]

Victor, the real problem with the debt is the annual deficit (of which the interest is just one part). Imagine if you will, borrowing to pay your monthly expenses and the following month borrowing for expenses plus the interest. The real problem is that you are borrowing to pay your monthly expenses!

[EZ_E]

Mark,

 

I asked my friend, Jon, to review our comments and to give his feedback. He has served as political advisor to Washington, is a respected author and is currently a journalist with a Washington D.C. newspaper.

 

First a little background before I ask my question:

 

Of course, the Federal Reserve Bank (FED) was formed in 1913 during the

Christmas season. Its name is actually a misnomer. It is not a federal agency

whatsoever but is comprised of a number of international banks. I remember a

quote

from DeeDee Meyers, a former white house press secretary. She stated that the

US government does not presume to dictate policy to the Federal Reserve

banking system since they are not a gov't agency. So, the way things work is

instead

of congress taking care of business, they've delegated it to the FED. The US

Treasury will print up a brand new $100 US Treasury bond and present it to the

FED, who in turn will print $100 of fiat money in exchange. And since it is a

promissory note , interest must be paid upon the debt. The reason why we have

such an exponentially increasing national debt is because of borrowing just

to pay the debt's interest and ignoring the principle. This definitely sounds

like a scam to me with the bankers banking bank!

 

The constitution grants congress the power and authority to coin money and to

regulate its value thereof. So, does this mean that the coinage of US coins

is entirely separate from the FED (excluding distribution to the various

Federal Reserve Banks)? Do we have to reimburse the Federal Reserve for coinage

or

is the constitution actually followed to the letter here? If so, then all

profits from seigiorage actually is returned to the treasury. If not, then how

does

the FED get their cut?

 

I hope that I made my question clear. Thanks.

 

In 1973 when Congress was clipping the wings of Richard Nixon, they added

some language into the explanation that was interesting because they cited the

logic used in 1913 to ignore the Constitution and grant private bankers the

right to create the nation's money supply out of nothing. Some brainy lawyer in

1908 (probably working for Morgan or Rockerfeller) decided that coining money

and printing money were two separate functions and that the right to coin money

was vested in the States since that's what the Constitution says. They

decided to delegate the other function, printing money, to private bankers. Of

course, the lawyers and politicians knew they were manipulating words and

circumventing the intent of the Founding Fathers since in 1787 all lawful money

worldwide was coin. Coin was gold or silver--a substance of wealth. Paper

money,

used only in times of war, was scrip. It was worthless and everyone knew it.

Scrip was an IOU from the government. When the war ended, the scrip was

redeemed for gold or silver. When the Jekyll Island Seven were structuring the

Federal Reserve Act, and the proposed 16th, 17th and 18 Amendments (the proposed

18th Amendment was designed to take the money system of the United States off

the gold standard) they knew fully well that specie was coin, not greenbacks.

Greenbacks have always been temporary money, not the coin of the realm.

 

 

 

I think you are off track in several ways in this post. First the Fed is not

comprised of foreign banks. The United States is divided into 12 Federal

Reserve districts. Each district has a regional bank. Commercial banks within

the

district choose whether or not to join the Federal Reserve system.

 

Don't know who wrote the piece you are debating, but the writer was

correct...and so are you. When you examine the "Ownership" of the Fed you

discover

that not only are many of America's aristocratic families "owners" so are the

major banking families in Europe--including the Rothschilds. There are

approximately 500 families worldwide that own ALL of the world's central banks.

 

(For what it's worth, large banks always join because it's cheaper to be a

member and get some Fed services than to not be a member.) Each Fed regional

bank has a Board of Directors. The Board of Directors nominates someone to be

President of the Regional bank and the nomination must be confirmed by the

Federal Reserve Boiard of Governors.

 

The Fed is a private club. Since it is the bankers who actually select the

President, its rather a unique spin that the president gets to select the man

who heads the Fed. Do you think he really does, or do you think he gets a

phone call from someone like David Rockefeller who tells him who to appoint? I

opt for the latter.

 

(The members of the Board of Directors are elected by commercial banks that

are members of the Federal Reserve system. But the only important thing the

Board of Directors do is to nominate someone to be President and that person

must be confirmed by the Board of Governors.) Unlike the members of the Boards

of

Directors, the Presidents have power because they serve on the Federal Open

Market Committee (FOMC), the group that makes the nation's monetary policy.

 

I could go on about the FOMC, which is the group that makes the nation's

monetary policy, but I think by now it's clear there are NO foreign banks

involved

in the Fed's structure.

 

The statement is completely false. Keep in mind, rich people never conduct

business in the light of day where public scrutiny can see what they are doing.

The Fed is a private bank with very private shareholders who cannot sell

their shares. There is no Fed on the stock market. Control of the Fed is based

on those shares...and the global power possessed by those who control those

shares. So while there are no foreign bankers sitting as Fed governors in the

12 regional Fed banks, believe me, an angry call from someone named Rothschild

or Schmidt, or Loeb, will cause a Fed governor to [!@#%^&^] his pants on the spot.

 

Second, and probably more interesting, the Fed does NOT buy directly

government securities from the U.S. Treasury; it buys government securities in

the

open market the same as any other purchaser.

 

Wanna buy a bridge?

 

*******************

 

Does this help? There were several interesting comments in that segment.

Most were partially true. But keep in mind, the Fed does not do its work in the

light of day for Americans to scrutinize. Nor do they compete honestly with

either National or State banks. They never have since 1790. That's why

America tried to curb their power after the first experiment. And, that's why

the

War of 1812 was fought. The bankers in Europe tried to repossess America for

breaking its pledge to them in 1780.

 

Jon Christian Ryter

Author of:

THE BAFFLED CHRISTIAN'S HANDBOOK

PRINCE ALBERT: PROPHET OF UTOPIA

WHATEVER HAPPENED TO AMERICA?

COMING SOON: DESTINY DENIED

website: www.jonchristianryter.com

Jon Christian Ryter

old website: http://hometown.aol.com/baffauthor/jonchristianryter.html

 

[jtryka]

Ok, here are a few things I discovered:

 

According to the Federal Reserve Act (rather than talk to people to get their ideas I decided to look at the law itself) Section 2:

 

3. Subscription to Stock by National Banks

 

Under regulations to be prescribed by the organization committee, every national banking association in the United States is hereby required, and every eligible bank in the United States and every trust company within the District of Columbia, is hereby authorized to signify in writing, within sixty days after the passage of this Act, its acceptance of the terms and provisions hereof. When the organization committee shall have designated the cities in which Federal reserve banks are to be organized, and fixed the geographical limits of the Federal reserve districts, every national banking association within that district shall be required within thirty days after notice from the organization committee, to subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum of the paid-up capital stock and surplus of such bank, one-sixth of the subscription to be payable on call of the organization committee or of the Board of Governors of the Federal Reserve System, one-sixth within three months and one-sixth within six months thereafter, and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System, said payments to be in gold or gold certificates.

 

8. Stock Offered to Public

 

Should the subscriptions by banks to the stock of said Federal reserve banks or any one or more of them be, in the judgment of the organization committee, insufficient to provide the amount of capital required therefor, then and in that event the said organization committee may, under conditions and regulations to be prescribed by it, offer to public subscription at par such an amount of stock in said Federal reserve banks, or any one or more of them, as said committee shall determine, subject to the same conditions as to payment and stock liability as provided for member banks.

 

9. Limitation on Amount to One Subscriber

 

No individual, copartnership, or corporation other than a member bank of its district shall be permitted to subscribe for or to hold at any time more than $25,000 par value of stock in any Federal reserve bank. Such stock shall be known as public stock and may be transferred on the books of the Federal reserve bank by the chairman of the board of directors of such bank.

 

11. Voting Rights

 

Stock not held by member banks shall not be entitled to voting power.

 

So it appears that individuals or non-bank entities may hold stock in the Fed, but it's very limited in size and has NO VOTING rights.

 

Here is some additional information from the Fed's website:

 

Who owns the Federal Reserve?

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

 

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

 

The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, 6 percent per year.

 

The earnings of the Federal Reserve System come primarily from interest received on the Reserve Banks' holdings of U.S. government securities (which are used in the conduct of monetary policy) and from fees they charge depository institutions for providing services (such as processing and clearing checks). The expenses of the System are paid from these earnings. Any net earnings are paid yearly to the U.S. Treasury. For 2002, the payment was $24.49 billion.

 

As for the composition of the board of governors:

 

How are members of the Board selected, and what are the conditions of the term of office?

The seven members of the Board of Governors of the Federal Reserve System are nominated by the President of the United States and confirmed by the U.S. Senate.

 

One term begins every two years on February 1 of even-numbered years. A member who serves a full term may not be reappointed. A member who completes an unexpired portion of a vacated term may be reappointed to a full fourteen-year term. All terms end on their statutory date regardless of the date on which the member is sworn into office.

 

The Chairman and the Vice Chairman of the Board are chosen by the President from among the sitting Governors and are confirmed by the Senate. They serve a term of four years and may be reappointed as Chairman or Vice Chairman until their terms as Governors expire. A member's term on the Board is not affected by his or her status as Chairman or Vice Chairman. Governors can also be appointed as Chairman or Vice Chairman to a term that ends after their terms as Governor expire.

 

To ensure adequate national representation on the Board, no two Governors may come from the same Federal Reserve District. There is no limit on how long a seat on the Board may remain vacant.

 

And finally, the composition of the FOMC:

 

Who are the members of the FOMC?

The Federal Open Market Committee consists of twelve voting members: the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The New York Reserve Bank president always sits on the Committee, and the other presidents serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco.

 

All of the Reserve Bank presidents, even those who are not currently voting members of the FOMC, attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options. The Committee meets eight times a year.

 

As for some of your other comments Victor, they sound rather like conspiracy theory, though probably not entirely without merit. Do the bankers/wealthy control everything? Maybe not everything, but they control a lot, but that is not different that before the Federal Reserve Act of 1913, nor is it much different that Europe at the time of Columbus, nor ancient Rome, nor ancient Greece, nor ancient Egypt. The world has operated by the "golden rule" since the beginning of time, he who controls the gold controls the rules. The thing I find interesting is the utter lack of any perceivable worth in our currency today. The Treasury issues bonds (a promise to pay a specific amount at a specific rate of interest at a specific date) while the fed uses those bonds as collateral to issue Federal Reserve notes. When those bonds come due, they are paid in what else? More FRNs! It's really quite circular!

[mark]

jtryka:

 

The stuff you found on the Fed's website is, of course, right on the money. (Pretty clever pun, huh??? ) I have a couple of comments to add. First, the Fed has never sold stock to anyone other than the banks which are required to buy it. Second, when you think of this stock, do keep in mind that it's very unlike the stock that we typically think of: The banks are required to own it as long as they are members of the Fed. If they leave Fed membership, they then are required to sell it back to the Fed at the exact same price for which they paid for it. So there is no chance of any capital gain on the stock. The stock pays 6% interest, which nowadays isn't a terrible return. But back in the inflationary 1970s and 1980s, the stock still paid 6% interest, which at the time as a truly lousy return. In other words, the amount paid as a dividend does not change.

 

EZ Z:

I simply do not know how to begin to respond to a person who claims that bankers determine the President of the United States or to a person who apparently denies the simple fact that the Fed does not buy government securities directly from the U.S. Treasury...especially when this simple fact is, as I mentioned, inconsequential. So, I think your friend and I will respectfully agree to disagree. I wish your friend a great day and I sure hope he wishes me the same!

 

Mark

[EZ_E]

Mark and Jeff,

 

I sincerely appreciate the intelligent replies. My intention was not to get into a political debate but to find an answer to my original question: How is the FED involved with seigniorage. I believe that I've gleened the answer. Once the Federal Reserve Bank distributes the coins, then they issue a check to the US Treasury for the face value amount of the shipped coins. Correct?

[jtryka]

you know, I am not really sure of the exact accounting and method of transfer. I know that member banks must transfer collateral (i.e. treasury bonds) to the fed, and then the fed will in turn send the notes and coins to the member bank. I would guess that the fed would in turn transfer that collateral to the Mint for the coins or to the BEP for notes, but that may not be the case.

[mark]

EZ_Z:

 

It's not quite as you put it. Here's an example of what happens: Suppose the Fed buys a $1,000 govermment bond from you. It pays you by printing 10 new $100 bills. As the year passes, the government pays interest on the bond--suppose it pays $50 in interest. (If you hadn't sold the bond, you would have collected this interest from the government.) From this interest the Fed pays its expenses, say $10. The remainder, $40 (=$50 in interest minus $10 in expenses) is deposited in the U.S. Treasury's checking account at the Fed. So this $10 joins all the other U.S. government revenue, such as the revenue from personal income taxes, corporate income taxes, etc.

 

So I think it is proper to think of the seigniorage as either the whole $50 in interest the Fed collects or the $40, which is the interest minus expenses and is what the Fed "rebates" back to the Treasury.

 

I always like teaching this stuff when I teach a macroeconomic class. You can probably tell that I enjoy this material because I do tend to run on and basically say

 

Mark

[EZ_E]

Mark,

 

I'm still somewhat confused. Does seigniorage apply to currency, too?

 

I am constantly reading numismatic publications and I frequently encounter comments about seigniorage. It is always stated as the profit between production costs and face value. So if a dollar coin only costs 4.7 cents to make then the seigniorage would be 95.3 cents. So how does interest on bonds relate to this?

 

Thanks for helping me wade through this, Mark.

[mark]

EZ_Z:

 

I was JUST sitting down to edit my initial response because I realized I was wrong in my definition of seigniorage. I blame my error on a 1:30 AM post after being up since 7:00 AM. I realized my error when I woke up this morning--see, I REALLY do like this stuff if I am willing to think about it so early!

 

OK, here's the correction: What have the government and the Fed together accomplished? When the government sold you the initial $1,000 bond, the government used the funds it obtained from you to pay for something, perhaps concrete for a building, the salary of a person in the military, a Social Security payment or whatever. What did it cost the government to buy this item? The cost is only $10 a year, the expenses (or costs) of the Federal Reserve. After all, the remaining part of the interest payment was rebated right back to the Treasury and so is definitely not a cost to the government. So to correct my definition in my way-too-late-in-the-day post above, a better definition of seignorage for this year is the $1,000, which equals the value of the bond and also the amount of money the Federal Reserve had to issue to buy it from you, minus the $10 in cost the Federal Reserve incurs.

 

The numbers mentioned in the numismatic (and other) press, i.e., 95.3 cents of seignorage and 4.7 cents of cost, are not totally accurate because they do not capture all the costs. But to put these numbers in the context of my example, the 4.7 cents printing cost is part of the $10 in annual costs I assumed in my example. There are other costs beyond the printing or minting cost that the popular press does not included. These costs also must be subtracted to obtain the precisely correct amount of seignorage. BUT the numbers in the press do make clear that issuing currency is surely a profitable endeavor!

 

Sorry about the confusion I created. Hopefully this post is more coherent!

 

Mark

[EZ_E]

I REALLY do like this stuff if I am willing to think about it so early!

 

 

You're a sick puppy, Mark.

 

Thanks, this latest post clears things up.