https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extr
ID: 1118230 • Letter: H
Question
https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htm1c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer
Please type the answer here not hand written . Thank you https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htm
1c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer
Please type the answer here not hand written . Thank you
1c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer 1c) Friedman states: “The reason they do it through a currency board instead of through direct dollarization is very clear. In the first place, it enables them to get what economists call 'seigniorage.' When the Federal Reserve Board issues dollars, essentially it’s borrowing money at a zero interest rate. People who hold those dollars are, in effect, lending resources to the US government and therefore the US government is benefiting by the interest that could be earned on those funds. That's what's called ‘seigniorage,’ in fact, it's called 'seigniorage' because it refers to the benefit the seignior or the lord got from issuing money or from stamping his picture on coins.” Explain more clearly how seigniorage and zero-interest “borrowing” works, and why it can be achieved via currency board, and not via dollarization. Your explanation should be as simple as possible, yet clear and correct. [Maximum 5 reasonably concise sentences are allowed in your answer
Please type the answer here not hand written . Thank you
Explanation / Answer
Solution:
Seigniorage is defined as the government's revenue from the creation of money, which is usually ensured by a monopoly.
Regarding the revenue from Seigniorage the analysis is restricted to that part of the money stock which is issued by the legal authorities. This part of the monetary stock will be referred to as currency including not only coins but all kinds of money issued by the government, independent of their physical material. Thus, despite the fact that the government may issue paper, gold coins or anything else, if it is issued by the local authority it will be referred to as
currency. Thus all currency is money, but not all money is currency. Seigniorage can therefore be
defined as the revenue from the provision of the national currency Zero interest rates encourage aggregate growth in scale of the macro-economy to ecologically unsustainable, as well as uneconomic, levels. Zero interest rates also neglect risk of loss, while encouraging microeconomic misallocation to stupid projects. At the same time, it redistributes income inequitably. Does all this make you think that something might be screwy with the policy of zero interest rates? Economists pride themselves on their knowledge of advanced mathematics, but they don’t seem to mind the fact that their policies imply dividing by zero!
It is a bad idea to manipulate the interest rate as a policy variable—it has too many side effects cutting in too many different directions, especially in a fractional reserve monetary system. Better to control the money supply directly by moving to a full reserve banking system. We should abolish the Fed, let the Treasury directly control the money supply, constrained by avoiding inflation, not by a budget. An entity that can create money does not face a budget constraint, and has no need to borrow. But it does have a price-index constraint, and must be disciplined by avoidance of inflation (or deflation). As long as the public wants to hold more money, the Treasury can keep creating and spending it. When the public wants to hold more real goods and less money, they will exchange money for goods driving the price index up, which is the signal to the Treasury to stop issuing money, and if necessary to withdraw some. Money, in a full reserve banking system, becomes non interest-bearing government debt rather than interest-bearing private debt. Seigniorage (profit from creating token money at negligible cost and receiving its face value in exchange) will go entirely to the government, not largely to private banks. Also, banks no longer have the extortionary power to crash the entire payments system that fractional reserves gives them. The interest rate, like other prices, can take care of itself, determined by supply and demand.
Thus When dollar is printed , the Government is the borrower and the public, who hold dollars, are the lenders. The Government does not pay interest on the dollars printed, so it is a zero-interest loan. A currency board is essential because if Hong Kong were to use U.S. dollar without printing its own currency. In this case, if 7.8 Hong Kong dollars equals one U.S. dollar, a currency board will hold one dollar for every 7.8 Hong Kong dollars in use and invest the U.S. dollars held in Government bonds and securities and earn interest.
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