A banknote, since it is redeemable, counts as a government liability, and the Federal Reserve has to back it by buying securities, which earn interest. According to the Fed, there are now about eight billion dollar bills in circulation, so that interest income is considerable. Coins do not yield such income.Huh? I always thought the purchase of securities (e.g. Treasury bonds) was just the Fed's vehicle to increase the quantity of money. From that perspective, whether you're issuing coins or bills is irrelevant. And what, exactly, is a banknote "redeemable" for? The USD is fiat money, i.e. "legal tender because we said so." Am I missing something here?
Wednesday, February 14, 2007
Anyone know something about monetary policy?
Okay, so I'm a former econ major (albeit not a very attentive one), and I'm confused. The NYT has an article on the issuing of dollar coins, and the fact that they won't be successful until the dollar bill is withdrawn. The article includes this (to me) confusing note: