Public Finance
By: Bryant Martin
Martin Publishing Corp.
Dec. 12, 2003
Today we hear and read the current affairs of “budget”, “debt”, “surplus” and “deficit” being discussed in the news. On closer reflection, we find most Americans have no basic understanding of these concepts—they have no mental framework in mind about what the broad terms of public finance should or ought to be, based on a sturdy elementary understanding of public-finance essentials.
I will lay out for the reader a foundation for these concepts, putting them in their broadest forms. This will enable each reader to supplement these broad forms with specific alterations and preferences, based on each reader's personal preferences in many other areas of life, such as politics, risk taking, sound judgement, and the rôle of government.
Finance–Public
That branch of the science of economics that treats of public revenue and expenditure. This is to say, all of the monies coming into the hands of the government, and all monies that the government spends or pledges to be spent.
Government expenditures are first placed into two broad forms:
- Ordinary—those placed in the annual budget, and
- Extraordinary—those of which the returns or benefits are spread over a number of years.
Governments aim to meet ordinary expenditures with ordinary revenues and extraordinary expenditures with extraordinary revenues, which, in practice, is difficult owing to the uncertain distinction between projects, such as new ships and public buildings, which might be classed as items of extraordinary revenue, or included among the regular running expenses.
The sources of ordinary public revenue are real domains, business enterprises, dues and taxes. Extraordinary revenue comes from loans, obtained from the lending public, or from domestic or world banks, and they are classed as forced or voluntary. 
- Forced loans are exemplified by legal tender paper money which the government creditors are obliged to accept at its face value.
- Voluntary loans are negotiated through bonds offered by the government for sale with its promise to pay.
Finance Currency–U. S. Dollar
The finance currency of the United States is the U. S. Dollar. Only the central bank of the United States is permitted to issue it, and private individuals and banks cannot add nor subtract from its pool. Holders of dollars can choose to hold or hoard dollars, or they may choose to circulate them in exchange for goods and services. The effect of holding dollars outside of circulation is that of shortening the dollar supply available to the rest of the economy. The effect of exchanging dollars in trade is that of stimulation. When dollars become short in supply, their value rises. When dollars are circulated in trade, other financial ramifications come into effect, such as taxes and the elevation of commercial affairs. This elevation of activity is thought of as general stimulation and is considered good for the overall economic system.
Over time, the holders of a currency have found a balance of careful spending, together with a calculated degree of sideline savings, to be a prudent mixture. Saving enables the holders to proceed with the purchase of bargains, should they appear, and it permits them to continue operations should the normal income supply become interrupted through illness or general economic failure.
"If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs."
Thomas Jefferson
THE national banking system of the United States consists of twelve regional banks and their branches, the national banks, which are required by law to be stockholders in the Federal Reserve banks, as well as such state-chartered banking institutions as may comply with the requirements for membership. The system was created by act of Congress, Dec. 23, 1913. The operations are coordinated under the authority of a central board at Washington, DC. The main objectives of the system are the establishment of a centralized system of unified bank reserves with rediscount arrangements designed for the relief of hard-pressed banks, and for the furnishing of an elastic currency. The system also supplies an efficient nationwide system of check collection and a genuine discount market.
Regional reserve banks are at Boston, MA; New York, NY; Philadelphia, PA; Cleveland, OH; Richmond, VA; Atlanta, GA; Chicago,IL; St. Louis, MO; Minneapolis, MN; Kansas City, KS; Dallas, TX; San Francisco, CA.
The Federal Reserve, the central bank of the United States, is responsible for the adjustable supply of pool dollars, beyond the bounds of what savers may take from that pool. If today there are exactly 10 dollars in circulation throughout the economy, and the treasury adds another 5 dollars, then the final dollar supply has increased by 33.3 percent, but everything that the 10 dollars used to represent, in terms of value, is now represented in 15 dollars. This means that, without material growth in the value or quantity of commodities, the issuance of currency cheapens the value of each dollar extant.
Decisions made concerning the supply of money are known as monetary policy of the system. It is different from economic policy, as we shall later see. The Federal Reserve does not care if the holders of dollars choose to hoard them attempting to gain wealth. It has a ready solution. It will circulate more dollars until the supply is again good. The new release makes the value of hoarded dollars fall, and held dollars are also released by savers into circulation, rather than facing further loss on paper. These two actions increase the dollar pool.
Wealthy individuals and others are free to form banks for dollars to be held on deposit. The bank is then managed with an economic policy and with stated goals and purposes. A common bank goal may be to enable business enterprise, or to lend money for extraordinary purchases, such as for cars and homes. Banks carry out policy by making loans. To equalize the risk apparent in lending money that may never be repaid, interest is added to loan principal. Enough interest is added to pay for bank management, as well as a surplus to bank shareholders. The tabulation of a bank's loan income, after expenses, are its profits. Banks compete for lending profits, and this competition helps to keep bank management good and lending rates attractive.
From the generations of the Fuggers', to the Bauer sons' rise to the English House of Lords, to the predominance of the banking “sign of the Red Shield,” the interests of controling wealth have not followed along national boundaries or allegiances. The sovereignty that is followed is unfettered access to the streets of commerce and lending. It is a desired function of a nation's banking system to tie bank commitments to the national purposes of the central government, although this goal is never fully achieved.
Growth, Real and False–Inflation
There are two broad types of inflation:
- Monetary Inflation—that which is caused by a government's monetary policy regarding the amount of currency to issue, and
- Price Inflation—that which the members of the economic system force on the economy by their setting of the prices for which the commodities trade
If one assumes that a commodity, raw material, finished product or service, is in limited supply, the laws of supply and demand work to set commodity prices. When supply increases through the greater availability of a commodity, especially in the face of steady demand, real growth is achieved.
In other words, say a business used to make and sell 100 doughnuts for 25 cents a piece, and the following year it produces and sells 150 doughnuts for about the same price; it has a solid and real growth of 50 doughnuts. Its income has risen from $25 to $37.50 in one year.
But suppose that conditions went flat and demand remained unchanged. It would do no good to produce more doughnuts to be thrown out. The operator then finds the business stuck at a 100-doughnut level. Tiring of this, he considers, we will correct the lack of growth by increasing the doughnut price, even though our manufacturing costs are stable. We will sell each doughnut for 39 cents, and when we've sold 100 we'll be where we want to be, showing business growth. If the customers bear this insult, the owner has the same growth as in the first example, but he has demonstrated no real production growth. This is known as false growth or price inflation. There are no additional doughnut sales, but the business income has risen and profits are at an all-time high.
What happens if the first doughnut operator learns that the second has done this? Should he likewise increase his doughnut price beyond 25 cents over all his 150 doughnuts? Suppose they are of a common interest and begin to act in unison to set the doughnut price higher than need be?
Further, suppose the raw sugar and flour suppliers observe that the doughnut sellers have a more profitable industry than do the suppliers. They could see their way clear to approach the doughnut makers with cost increases designed to equalize rewards.
Price inflation is particularly debilitating because it becomes an energetic upward spiral of commodity prices, but it actually benefits no one greatly. All the supposed gains made from it are quickly lost to higher expenses. As well, dollar supplies are not inclined to remain steady to offset price inflation, such that the 39 cent doughnut can be bargained back to the former 25-cent price. They normally reflect the price changes as a mirror, except that pool of dollars again becomes short, causing the government to invoke monetary policy and release new dollars to relieve the squeeze.
The cheapening dollars become less attractive to the doughnut makers, and they begin to reason they'll need more dollars just to remain constant in their earnings. This adds another upward price pressure on the doughnut.
Inter-Economic Trade
As if matters weren't already complicated enough within our local economic system, with its class divisions and interest groups vying for improvement, there enters a new group of business persons who have reasoned that they can do well by introducing goods from far abroad into the local mix; and, as well, by shipping part of the local production abroad for consumption by the wealthy of that far-away system. They begin to develop and exploit the possibilities of foreign trade through the facilities of new importing and exporting activities. If they can find a foreign system that is at a great disparity with the local system, it terms of its views about certain constants such as the meaning of a day's work or the quality of materials found or made there, they will be able to profit greatly in exploiting the disparity.
If a local apple has taste "C" and price "C", in terms of satisfaction, but the foreign apple can come in, after transport, with a taste "A" and a price "A", all the local choice objectives are satisfied, as the local consumer sees that he likes the foreign apple's taste better, and he can purchase it for less than he pays for local apples. Forgetting any obligation he may have felt toward his local apple growers, such as kinship or community obligation, he decides to forsake them and to obtain the foreign apples, no matter whom else may be benefitted or harmed. He reasons, if I am satisfied, what happens to others as the result of my apple choice is not my concern.
Market preference comes at bearable cost, socially, as locals learn to fight back pangs of guilt in their new-found satisfaction. For any person that toleration can one day come to an abrupt end. If the import and export traders market a trade disparity directly against any consumer or profession, no longer will income stream from the assaulted business. Foreign weavers can, for instance, geared up with suitable looms, running them round the clock with low-cost labor and high-grade yarn, to ruin and close worldwide competition. The harmed may cry out in indignation, hoping aid will come to outlaw the losing of local mills to such transition. When local mills are forced to close, prices rapidly adjust to less-competitive market values.
Is the US Dollar about to fall from its position as the international medium for foreign exchange? Consider the possibilities as the dollar vacillates in the policies of the last three years. America's Selective Strong Dollar Policy
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