JayRs Blog

We can study the effect our money supply has on our economy by looking at the dollar in relation to other currencies. According to the calculations of x-rates.com, in January of this year a Euro was equal to $1.32 American. By December that same Euro was worth $1.50. Now let’s look at American verses Australian Dollars. In January 2009, an Australian Dollar was worth $0.67 American, now in December of the same year one Australian Dollar is worth $0.92 American. How does this news relate to the money supply here in the United States?

First let’s do a quick review on what constitutes the money supply. The Federal Reserve puts our money in categories according to liquidity:

• M1 — cash in public circulation, travelers checks and money in checking accounts.
• M2 — all of the above plus savings accounts, CD’s of less than $100,000, and retail money market deposits
• M3 — all of the above plus big CD’s (over $100,000), institutional money market, International Monetary Fund balances, and U.S. dollars held by Americans at foreign branches of U.S. banks and those dollars in banks in the United Kingdom and Canada

The Federal Reserve released its latest Money Stock Measures report on M1 and M2 December 3, 2009. In the 12 months between October 2008 and October 2009 M1 is up 13.5% to $1.6739 trillion while M2 is up 5.4% amounting to $8.3601 trillion.

Remember, it takes a while for inflation to catch up with an increase in the money supply; between one and two years as a rule.

You can find the Federal Reserve’s latest Money Stock Measures report at: http://www.federalreserve.gov/releases/h6/Current/

United States Federal Reserve Statistical Release. (2009, December 3), Money Stock Measures, Retrieved December 6, 2009 from http://www.federalreserve.gov/releases/h6/Current/

x-rates.com – Exchange Rates, Retrieved December 6, 2009 from http://x-rates.com

Alexander Hamilton presented his first ‘Report on the Public Credit’ on January 9, 1790. In it he outlined his plan for producing a stable self sustaining Federal government. Hamilton began his report by pointing out “That exigencies are to be expected to occur, in the affairs of nations, in which there will be a necessity for borrowing”(Hamilton, First Report, 1790). Wars were expensive and even the richest nations found it necessary to borrow to support them. For a nation “be able to borrow upon good terms, it is essential that the credit of a nation should be well established”(Hamilton, First Report, 1790). How, asked Hamilton, was this to be accomplished? His answer was good faith. Hamilton insisted that the Federal government would be respected for adhering strictly to the letter of its contracts.

Public debt, he said, “was the price of liberty.” The best way to bolster faith in credit of the United States was to make prompt interest payments on the existing debt. Hamilton’s goal was never to pay off the nation’s debt but to use it. He said:

“It is a well known fact, that, in countries in which the national debt is properly funded, and a object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt, are there equivalent to payments in specie; or, in other word, stock, in the principal transactions of business, passes current as specie”(Hamilton, First Report, p. 49, 1790).

The point Hamilton wanted to make was that public debt has the effect of creating more money in circulation and this abundance of money will keep interest rates low and loans easy to obtain on favorable terms. It is important to remember his use of the word ‘properly’ as too much debt will have the effect of too much money being printed; inflation. In order for this phenomenon to continue, Hamilton insisted the Federal Government treat securities held domestically with the same respect it accorded debt held by foreign governments. Hamilton further held that it was the duty of the Federal Government to assume the debts incurred by the states during the war for Independence. Many members of Congress held that since debt instruments issued during the Revolutionary War by the individual States having been bought up by speculators at a great discount, that he Federal Government assuming these debts after the war was not obligated to pay full value. Hamilton pointed out that no one would be interested in buying future debt if this happened. Congress voted to adopt Hamilton’s plan and on January 1, 1791 assumed all debts incurred by the States during the Revolutionary War. There still remained the problem of how to fund the new government.

In his second report, dated December 13, 1790, Hamilton recommend the Whiskey Tax. Hamilton calculated that the interest, including back interest owed by the States at the time the debts were assumed would cost over $800,000 per year. Hamilton also released another report on the same date on the importance of establishing a national bank. In this report, Hamilton pointed out these advantages to having a public bank, first, “the augmentation of the active or productive capital of a country… and secondly “greater facility to the Government, in obtaining pecuniary aids, especially in sudden emergencies, and thirdly, the facilitating of the payment of taxes”(Hamilton, Report on the National Bank, p. 68, 1790). The bank was to be capitalized at $10 million with shares purchased by individuals or foreign governments. 75 percent of the purchase price could be made through the public debt at 6 percent interest. This measure was adopted over the strenuous objects of the Republicans lead by Thomas Jefferson. The opposition felt there was nothing in the constitution supporting a national bank. There was also opposition to the Whiskey Tax.

The Whiskey Tax was very unpopular with everyone but the large distillers in the eastern states who saw it as a way to gain an advantage over their smaller counterparts. Large producers of Whiskey were able to pay a flat fee while small producers were required to pay by the gallon. In the rural areas it was difficult for farmers to get their crops to market. They often distilled their surplus grain and used the resulting liquor for barter and sale. The farmers in western Pennsylvania refused to pay the tax. Washington wrote,

“whereas, by a law of the United States entitled “An act to provide for calling forth the militia to execute the laws of the union, suppress insurrections, and repel invasions, … it shall be lawful for the President of the United States to call forth the militia of such state … And if the militia of the state shall refuse or be insufficient to suppress the same it shall be lawful for the President, if the legislature of the United States shall not be in session, to call forth or employ such numbers of the militia of any other state or states most convenient thereto as may be necessary; and use the militia so to” [for up to 30 days] (Washington, Para. 4, 1791).

In 1794 George Washington lead Federal Troops to quell the rebellion thereby establishing the Federal Government’s right to levy taxes and to enforce their collection. The Whiskey Tax was eventually repealed. In the late 1790′s a direct property tax was enacted. This tax too was repealed after Thomas Jefferson was elected in 1802. From this time until the Civil War the government was received its funding primarily through the sale of public land and the collection of customs duties.

The American Civil War marked the beginning of a new era and from that point forward the history of the United States Treasury is largely the history of taxation.

In part three we will learn how both sides financed the American Civil War.

Hamilton, Alexander, First report on the public credit, Select documents illustrative of the history of the United States 1776-1861, The Macmillan Company, New York, 1898. Retrieved June 18, 2009 from ‘Google Books’ at http://books.google.com/books?id=8DZ1AAAAMAAJ&pg=PA46&lpg=PA46&dq=hamilton%27s+first+report&source=bl&ots=uEXpZzajOH&sig=eSB7ETdGz87hZG4bQgMvbQZhPM0&hl=en&ei=3cw8SqSdK5OKswPy5KzkCg&sa=X&oi=book_result&ct=result&resnum=5

Hamilton, Alexander, Report on a national bank, Select documents illustrative of the history of the United States 1776-1861, The Macmillan Company, New York, 1898. Retrieved June 18, 2009 from ‘Google Books’ at http://books.google.com/books?id=8DZ1AAAAMAAJ&pg=PA46&lpg=PA46&dq=hamilton%27s+first+report&source=bl&ots=uEXpZzajOH&sig=eSB7ETdGz87hZG4bQgMvbQZhPM0&hl=en&ei=3cw8SqSdK5OKswPy5KzkCg&sa=X&oi=book_result&ct=result&resnum=5

Washington, George, Whiskey rebellion proclamation, Claypoole’s Daily Advertiser, August 11, 1794, Retrieved June 18, 2009 from the Archiving Early America website at http://www.earlyamerica.com/earlyamerica/milestones/whiskey/text.html

Inflation is the decrease in the buying power of the dollar. Deflation has the opposite effect. According to the US Inflation Calculator website the inflation rate currently stands at – 0.7%. The rate of inflation is calculated by comparing changes to personal consumption expenditures (money spent on goods and services) or the Consumer Price Index (CPI) (prices paid by city dwellers for a particular shopping cart full goods). The Bureau of Labor Statistics produces the CPI. The CPI stood at +.2% in April. The next figures are due out Wednesday June 17^th, 2009. By either measure on thing is for sure, inflation is very low.

There has been a lot of news lately about the prodigious amounts of money the Treasury is producing. Counting securities, there is over $1 trillion more dollars in the money supply than there was at the beginning of the year. Why hasn’t this had an effect on the rate of inflation?

The economy is suffering from a large down turn. This slowing economy is producing a decrease in the demand for money and such a decrease will produce a drop in the value of money (inflation). This situation produces an abundance in the supply of money. Interest rates will rise as an inducement for people to invest which will slow the demand for money even further producing further inflationary pressure.

The government has dumped money into the supply at a rate ten times larger than ever before. Inflation will follow and it may take years to abate. The Federal Reserve could begin to combat this problem by selling its Treasury assets thereby taking money out of circulation. The Feds are not likely to follow this course because it would prove counter productive to the Treasury’s intention to issue $2 trillion in bonds this year. As these bonds saturate the market their value will drop and bond prices will sink. Sorry to be so gloomy folks but facts are facts and I’m still in watch and see mode.

June Money Supply

The June money supply is as follows:

Now and Future calls the change in the M3 equal to a 6% annual increase. This demonstrates an increase of about $1 trillion dollars so far this year. During the month of June, we will be looking into the ramifacations of this rapid increase.

Colonies in Revolution

Our Treasury existed before our Federal Government. Wars are expensive and the Revolutionary War had to be paid for somehow. In June of 1775 while the first battles were fresh in people’s minds, the Continental Congress decided to issue $2 million in paper money. On July 29, 1775 the Congress appointed two treasurers, Michael Hillegas and George Clymer. Michael Hillegas remained Treasurer until 1789. National debt continued to mount. The Continental Congress stipulated that each colony contribute to its funds but the congress had no power to tax.

The Treasury was further defined in February of 1776 when a Treasury Committee was formed and an Auditor General and clerks were hired. The Treasury Office was functional by July 4, 1776 allowing the United States to borrow from European nations. The new government was empowered to borrow but not able to tax. Supporting the army was costly. For example, James Burrell requested $1.5 million for payments to the troops for January and February 1780 (Saffell, 1894, p. 55). Over $240 million Continental Dollars were in circulation by 1781. “By May 1781, the dollar collapsed at a rate of from 500 to 1000 to 1 against hard currency” (Department of the Treasury Brochure, 2006, p. 4). The phrase “not worth a continental” is still in use today. (Can you see where I’m going with this?)
Subsequently, Robert Morris was appointed Superintendent of Finance. He put together a staff that included a Treasurer, Comptroller and, many feel most important, auditors. Things began to stabilize under Morris and his system stayed in place throughout the Articles of Confederation years.

The First Congress and Alexander Hamilton

A constitutional convention took place in Philadelphia in 1787 and by November 1789 enough states had ratified the new constitution that it became law. The United States became the federal government we know today. The first 10 amendments, known as the Bill of Rights, were not added until 1791. The first Congress under this constitution set up the Department of the Treasury with a Secretary, Comptroller, Auditor, Treasurer, and a Register. Alexander Hamilton became the first Secretary of the Treasury on September 11, 1789. Hamilton was a very influential figure during the Revolutionary War and was instrumental in helping to draft the new constitution. During the convention, Hamilton’s plan known as the British Plan, called for a legislature based on the English Parliament and a virtual abandonment of individual states. Under his plan state governors would have been appointed by the federal legislature (Mount, 2008). The majority attending the Constitutional Convention distrusted centralized government and produced a constitution enumerating the Federal powers and reserving everything else to individual states or to the people.

Hamilton also recognized the efficiency of the British financial system and as Secretary of the Treasury worked to give the fledgling United States of America the same degree of stability. Hamilton’s Treasury inherited $75 million in debt run up during the Revolutionary War. Sentiment in the first Congress leaned toward repudiating or discounting payment of this debt. Congress called for a report on the public debt from the Treasury.

 In part two we will look at Hamilton’s reports and the affect they have had on the Treasury to this day

References:

Department of the Treasury, Brochure, Office of the Curator Department of the Treasury, Washington D.C., 2006, Retrieved May 31, 2009 from: http://www.ustreas.gov/education/history/brochure/brochure.pdf

Mount, Steve, Constitutional Topic: The Constitutional Convention, U.S. Constitution Online, 2008 Retrieved June 1, 2009 from http://www.usconstitution.net/consttop_ccon.html

Saffell, W.T.R , Records of the Revolutionary War, Charles C. Saffell, Baltimore, 1894, Retrieved June 2, 2009 from Google Books at: http://books.google.com/books?id=Bq649tf5BQEC&pg=PA54&lpg=PA54&dq=revolutionary+war+treasury&source=bl&ots=8TA-zovIZ-&sig=rT9p0d-d-Xkda_W_2AEnphQSsN0&hl=en&ei=sEklSufQH5COtgOno9WbBg&sa=X&oi=book_result&ct=result&resnum=5#PPP9,M1

Cities, towns, and special districts can seek protection under Chapter 9 of the Bankruptcy Code. Chapter 9 was developed through legislation written during the Great Depression. There is no provision in this code for the liquidation and distribution of assets because that would be a direct violation of the Tenth Amendment to the Constitution of the United States.

Eligibility

In order to be eligible, the municipality must be a political subdivision or public agency. In addition, the municipality must be authorized to be a debtor, insolvent, desire to effect a plan to adjust its debts, and must act in good faith or attempt to act in good faith with its creditors. The first step is to compile a list of creditors. If the petition is granted, an automatic stay stops all collection actions. If the creditor does not appear on the list of creditors they must file proof of their claim during this period.

Treatment of Bondholders

NOTE: Until this year, bond holders were protected by contract law and generally have never had to worry about preference liability. Recent precedents with the auto makers could have an impact on future Chapter 9 cases.

Orange County California Chapter 9 Bankruptcy

Orange County, California’s filing is considered the most famous Chapter 9 bankruptcy. County Treasurer, Robert Citron held his elected position for over 20 years. By 1994 several municipalities had joined Orange County in an investment pool. Tax revenue was a large component of the funds invested in the pool. The system provided little oversight or controls. Interest rates remained low during the early 1990′s and Citron leveraged the pool’s existing investments as collateral on reverse purchase agreements. He also made investments in derivatives based on the interest rate yield curve, then interest rates began to rise. By December, the fund had lost 20% and creditors began calling for their collateral and selling the securities off. The county Board of Supervisors declared bankruptcy on December 6, 1994. The bankruptcy stopped the actions of creditors. Securities were sold off and the funds reinvested in safer vehicles. The county ended up losing over $1.6 billion and emerged from bankruptcy protection after 18 months.

Chapter 9 provides an opportunity for municipalities to reorganize and avoid dissolving (disincorporation).

The next article will cover recent efforts at Municipal Dissolution.

U.S. Courts – bankruptcy basics, Administrative office of the U. S. Courts. Retrieved May 31, 2009 from http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter9.html

Case study: Orange County, 2001, Sungard Ambit ERisk, Retrieved May 31, 2009 from: http://www.erisk.com/learning/casestudes/orangecounty.asp

The Department of Commerce’ Bureau of Economic Analysis today released preliminary numbers for United States Gross Domestic Product for the first quarter of 2009.  Some of the important numbers are:

• Real gross national product, which is composed of the goods and services produced by the labor and property of United States residents, q1 GDP decreased 5.8% compared to a decrease of 5.6% in q4 2008
• Current-dollar GDP measures the market value of U.S. goods and services. Curent-dollar GDP  decreased 3.1%. Last quarter the decrease was 5.8%
• Corporate profits from current production were up in the first quarter, 42.6 billion as opposed to a drastic decrease last quarter of $250 billion
• Corporate taxes were up $31.6 billion as opposed to a decrease in q4 2008 of $120 billion

Get the details at Bureau of Economic Analysis website: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Well, lets start with an index. An index is a measure of change which is calculated from a base period and reflects positive or negative percentage of change from that period. Consumer Confidence is measured by the Conference Board, a not-for-profit organization of management professionals. The conference board produces a large amount of valuable statistical data for their members. Most of the Conference Board’s data is for members only but they release a few numbers to the general public. One of the statistics they track is the Consumer Confidence Index. The data for this index is collected from 5000 U.S. Households and published by the Conference Board monthly. You can find the latest Consumer Confidence numbers at the Conference Board’s Website

There are seasonal patterns to almost everything. For example, here in Southern California, fresh sweet corn is available only at specific times of the year while, green grapes can go for anywhere between $1.25 and $3.99 per pound, depending on the time of the year. Someone is growing those grapes at every time of the year but the cost varies due to the distance from the farm to my local supermarket. These examples highlight two of the main problems encountered in seasonal adjustment. Inflation can be another important consideration.

In statistical analysis seasonal fluctuations are considered to be noise so their influences are minimized. Econometric research (the combination of an economic theory with statistics) uses observed data to test economic relationships. Ask an economist any question and he can reply, ‘supply and demand, of course’. Supply and demand can vary with the seasons.

There is no single formula for these adjustments. Each of the components of the Federal Reserve’s M1 and M2 monetary aggregates are adjusted separately then summed. All seasonal adjustments are based on some arbitrary formula so the Federal Reserve also publishes unadjusted data in each report. For those with the desire to delve into the theory of seasonality I recommend ‘Rational Seasonality’ by Travis D. Nesmith who sits on the Board of Governors of the Federal Reserve System.

Reference:

Nesmith, Travis D, November 28, 2006, Rational Seasonality, Economics discussion series, Retrieved May 26, 2009 from http://www.federalreserve.gov/pubs/feds/2007/200704/index.html

In the early stages of World War II gold reserves jumped to an all time high. The Federal Reserve’s reaction was to increase the reserve requirements of its member banks. FOMC officials disagreed about making open market purchases through the end of the 1930′s. For example, George Harrison, President of the Federal Reserve Bank of New York considered open market purchases as unwarranted and urged his colleagues to resist the Treasury’s requests. The United States entered the war in late 1941 and the Federal Reserve chose interest rates as its primary means of control.

Continue reading History of the Federal Reserve pt. 3