The Founding of the Fed

After Alexander Hamilton spearheaded a movement advocating the creation of a central bank, the First Bank of the United States was established in 1791. The First Bank of the United States had a capital stock of $10 million, $2 million of which was subscribed by the federal government, while the remainder was subscribed by private individuals. Five of the 25 directors were appointed by the U.S. government, while the 20 others were chosen by the private investors in the Bank. The First Bank of the United States was headquartered in Philadelphia, but had branches in other major cities. The Bank performed the basic banking functions of accepting deposits, issuing bank notes, making loans and purchasing securities. It was a nationwide bank and was in fact the largest corporation in the United States. As a result of its influence, the Bank was of considerable use to both American commerce and the federal government. However, the Bank's influence was frightening to many people. The Bank's charter ran for twenty years, and when it expired in 1811, a proposal to renew the charter failed by the margin of a single vote in each house of Congress. Chaos quickly ensued, brought on by the War of 1812 and by the lack of a central regulating mechanism over banking and credit.

1816: THE SECOND BANK OF THE UNITED STATES The situation deteriorated to such an extent that in 1816, a bill to charter a Second Bank of the United States was introduced in Congress. This bill narrowly passed both houses and was signed into law by President James Madison. Henry Clay, Speaker of the House, cited the "force of circumstance and the lights of experience" as reasons for this realization of the importance of a central bank to the U.S. economy. The Second Bank of the United States was similar to the first, except that it was much larger; its capital was not $10 million, but $35 million. As with the First Bank of the United States, the charter was to run for 20 years, one-fifth of the stock was owned by the federal government and one-fifth of the directors were appointed by the President. This bank was also similar to its predecessor in that it wielded immense power. Many citizens, politicians and businessmen perceived it as a menace to both themselves and U.S. democracy. One notable opponent was President Andrew Jackson, who, in 1829, when the charter still had seven years to run, made clear his opposition to the Bank and to the renewal of its charter. Jackson's argument rested on his belief that "such a concentration of power in the hands of a few men irresponsible to the people" was dangerous. This attack on the Bank's power drew public support, and when the charter of the Second Bank of the United States expired in 1836, it was not renewed. For the next quarter century, America's central banking was carried on by a myriad of state-chartered banks with no federal regulation. The difficulties brought about by this lack of a central banking authority hurt the stability of the American economy. There were often violent fluctuations in the volume of bank notes issued by banks and in the amount of demand deposits that the banks held. Bank notes, issued by the individual banks, varied widely in reliability. Finally, inadequate bank capital, risky loans and insufficient reserves against bank notes and demand deposits hampered the banking system. To its detriment, the American public had again opposed the idea of a central bank, and the country's need for such an entity was more apparent than ever before.

THE NATIONAL BANKING ACT OF 1863 The National Banking Act of 1863 (along with its revisions of 1864 and 1865) sought to add clarity and security to the banking system by introducing and promoting currency notes issued by nationally chartered banks, rather than state-chartered ones. The legislation created the Office of the Comptroller of the Currency, which issued national banking charters and examined the subsequent banks. These banks were now subject to stringent capital requirements and were required to collateralize currency notes with holdings of United States government securities. Other provisions in the legislation helped improved the banking system by providing more oversight and a more robust currency in circulation. Ultimately, the national banking legislation of the 1860s proved inadequate due to the absence of a central banking structure. The inability of the banking system to expand or contract currency in circulation or provide a mechanism to move reserves throughout the system led to wild gyrations in the economy from boom to bust cycles. As America's industrial economy grew and became more complex toward the end of the 19th century, the weaknesses in the banking system became critical. The boom and bust cycles created by an inelastic currency and immobile reserves led to frequent financial panics, which triggered economic depressions. The most severe depression at that point in U.S. history came in 1893 and left a legacy of economic uncertainty.

EARLY 1900'S: THE CREATION OF THE FEDERAL RESERVE SYSTEM In 1907, a severe financial panic jolted Wall Street and forced several banks into failure. This panic, however, did not trigger a broad financial collapse. Yet the simultaneous occurrence of general prosperity with a crisis in the nation's financial centers persuaded many Americans that their banking structure was sadly out of date and in need of major reform. In 1908, the Congress created the National Monetary Commission. This Commission, led by Nelson W. Aldrich and composed of members of the House of Representatives and the Senate, was charged with making a comprehensive study of the necessary and desirable changes to the banking system of the United States. The resulting plan called for a National Reserve Association, which would be dominated by the banking industry. This plan was treated with great skepticism and received very little public support. In 1912, the House Banking and Currency Committee held hearings to examine the control of the banking and financial resources of the nation. The Committee concluded that America's banking and financial system were in the hands of a "money trust." The Committee's report defined a "money trust" as "an established and well defined identity and community of interest between a few leaders of finance . . .which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men." The public's awareness of a monopoly on the banking system was crucial in leading to America's financial reform. Another key event leading to America's financial reform was the election of Woodrow Wilson as President in 1912. Wilson and his Secretary of State William Jennings Bryan, forcefully opposed "any plan which concentrates control in the hands of the banks." On December 26, 1912, the Glass-Willis proposal was submitted to President-elect Wilson. Instead of suggesting the creation of a central bank, the proposal called for the creation of twenty or more privately controlled regional reserve banks, which would hold a portion of member banks' reserves, perform other central banking functions and issue currency against commercial assets and gold. Wilson approved of this idea, but also insisted upon the creation of a central board to control and coordinate the work of the regional reserve banks.

THE FEDERAL RESERVE ACT OF 1913

The Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.  The Act provided for a Reserve Bank Organization Committee that would designate no less than eight but no more than twelve cities to be Federal Reserve cities, and would then divide the nation into districts, each district to contain one Federal Reserve City.

THE DILEMMA OF THE NEW YORK FED The controversies evident in the writing of the Federal Reserve Act were carried over into the selection of the Federal Reserve cities. New York was at the center of this controversy. There was no doubt that New York would receive a Federal Reserve Bank, but the size of the bank to be established there was a highly contentious issue. The city's foremost financiers, such as J.P Morgan, argued that the New York Fed should be of commanding importance, so that it would receive due recognition from the central banks of Europe. The New York Fed that the financiers desired would have approximately half of the capitalization of the entire system. However, many throughout the country feared that a Federal Reserve Bank of such magnitude would dwarf everything else in the system and would accord far too much power to the New York District. Treasury Secretary William McAdoo and Agriculture Secretary David F. Houston shared this opinion and a belief that the European central banks should deal with the Federal Reserve System as a whole, rather than with just one of its parts. On April 2, 1914, the Reserve Bank Organization Committee announced its decision, and twelve Federal Reserve banks were established to cover various districts throughout the country. Those opposed to the establishment of an overwhelmingly powerful New York Fed prevailed in their desire that its scope and influence should be limited. Initially, this bank's influence was restricted to New York State. Nonetheless, with over $20,000,000 in capital stock, the New York Bank had nearly four times the capitalization of the smallest banks in the system, such as Atlanta and Minneapolis. As a result, it was impossible to prevent the New York Fed from being the largest and most dominant bank in the system. However, it was considerably smaller than the New York banking community had wanted.

1914: NEW YORK FED OPENS FOR BUSINESS The New York Fed opened for business under the leadership of Benjamin Strong, previously president of the Bankers Trust Company, on November 16, 1914. The initial staff consisted of seven officers and 85 clerks, many on loan from local banks. Mr. Strong recalled the starting days at the Bank in a speech: "It may be said that…the Bank's equipment consisted of little more than a copy of the Federal Reserve Act." During its first day of operation, the Bank took in $100 million from 211 member banks; made two rediscounts; and received its first shipment of Federal Reserve Notes. The Bank's staff grew rapidly during the early years, necessitating the need for a new home. Land was bought on a city block encompassing Liberty Street, Maiden Lane, William Street and Nassau Street. A public competition was held and the architectural firm of York & Sawyer submitted the winning design reminiscent of the palaces in Florence, Italy. The Bank's vaults, located 86 feet below street level, were built on Manhattan's bedrock. In 1924, the Fed moved into its new home. By 1927, the vault contained ten percent of the world's entire store of monetary gold.

East Rutherford Operations Center (EROC)

In 1992, the Bank opened an office in East Rutherford, New Jersey to accommodate currency and check processing operations and conduct electronic payments.

Buffalo Branch

In 1919, the Bank opened a branch in the city of Buffalo to serve institutions located in the ten (later increased to 14) westernmost counties of New York State. The Buffalo branch was closed in October 2008.

Utica Office

In 1976, the Bank opened a regional office in Utica, New York. The Utica office provides commercial check processing and check adjustment services to financial institutions and Federal Reserve offices throughout the country. The Utica branch was closed in March 2008.

Russia faces foreign exchange dilemma

Monetary policy constrained in battle against inflation

Russia’s central bank last week switched the pattern of its foreign exchange interventions, in a move that analysts say should fend off speculators buying rubles on the cheap.

The bank began interventions whose volume is based on the state of the forex market, estimates of balance of payment data and the progress of federal budget implementation.

These will supplement its existing operations that limit the ruble’s volatility against the two-currency (euro and dollar) basket, the bank said in a press release. The move is part of the “shift to inflation targeting”, the bank said.

The first intervention, of several hundred million dollars, was completed on Wednesday, the central bank’s first deputy chairman, Aleksei Uliukaev, told Interfax news agency.

Analysts said that the bank was probably motivated by a desire to fend off speculative pressure. In early May, three big international banks – Deutsche, Goldman Sachs and Dresdner Kleinwort – urged the market to buy cheap rubles before the Russian authorities took measures to curb inflation.

“This is a positive move. We believe the central bank is attempting to discourage speculative inflows”, Olga Naydenova, analyst at Alfa Bank in Moscow, told Emerging Markets.

The move was “a sign that the bank is unlikely to resort to currency appreciation to control inflation: we believe this has become an ineffective tool.”

The central bank’s adjustment to forex intervention policy came against a background of unresolved debates on monetary policy – and specifically, on how to calm inflation on one hand and avoid a liquidity crisis on the other.

In recent months, most observers reckon that measures to maintain liquidity have prevailed, even though public statements by prime minister Vladimir Putin and others have focused on the inflation danger.

Larry Brainard, chief economist at Trusted Sources consultancy, writes in Emerging Markets today: “The policy dilemma is this: in the longer run, low inflation is essential for financial stability, but it is not clear how the Central Bank can get from here to there, especially in the context of today’s global financial crisis” (pages 10-11).

Finance minister Aleksei Kudrin pledged earlier this year to contain inflation at 8.5% - but last week the ministry of economic development and trade upgraded its inflation forecast for 2008 from 8-9.5% to 9-10%.

There is little support among senior Russian leaders for ruble appreciation as a means to combat inflation, and most economists agree. As for whether this week’s moves may signal possible ruble appreciation in future, observers are divided.

Deutsche Bank economist Yaroslav Lissovolik wrote in a research note that the main reason for the move is “to fend off speculative pressures, perhaps by allowing the ruble sometimes to weaken versus the dual currency basket”.

He added: “At this stage we are inclined to treat the Central Bank’s statements as favourable for ruble appreciation, in view of the reference to inflation targeting and the implications for exchange rate flexibility.”

Others disagree. Naydeynova at Alfa Bank, who sees ruble appreciation as unlikely, said: “In our view, the most likely anti-inflationary measure is an increase in obligatory reserves.”

Economists at Troika Dialog pointed out that money markets’ volatility has dropped in 2008, “which should help the Bank target money supply growth more effectively. This is a prerequisite for inflation targeting.”

The Great American Debt Debacle And Why I Like Sunpower (SPWRA)

It is difficult to read a newspaper or watch cable news or a business channel without being deluged with stories about the debt ceiling and sovereign debt problems in Europe. Even the concept of raising the debt ceiling evokes the image of a desperate call by a credit card holder on the ropes asking the bank to increase his credit line so he can survive a little bit longer. And then we hear the chants of America's coming fall from greatness, usually peppered by references to the Federal Reserve, fiat currency, and Greece.
This fear-soaked environment has led to a market that is climbing a wall of worry that looks very much like that great wall in China. In fact, this is an investment environment that is really without recent parallel.  Perhaps it can be related to the low valuations that prevailed in the aftermath of the last credit crisis that we had in this country, the one that led to The Great Depression. Velocity of money is at historic lows, unemployment is stubbornly high, and equity prices on some of the greatest companies in the world remain far below where they should be given their strong earnings, increased competitiveness and fortress-like balance sheets. It is clear that fear is ascendant and it will be a while until investors begin taking on additional risk.
At Beckerman, we think that the most probable future is one in which American companies continue to innovate, producing the most desired products and increasing their capital efficiency.  We also see a continuing global recovery that will grind through the problems of sovereign debt and commodity shocks. While we feel that many of the businesses that will lead the way over the next decade will be based in the US, we are keenly aware that there are great companies in every market. We have made it our business to find those companies, using proprietary methods that value businesses using an intermediate time horizon and employing methodologies that factor in macro and sector-specific growth trends. Using these methods, we continue to find businesses that trade at a fraction of their value. One example is SunPower (NASDAQ: SPWRA), which was added to our Flexible Valueportfolio on April 21, 2011.
SunPower has set itself apart in a fractured solar industry by doing what American companies do best, deploying highly directed research and development in search of ever more efficient Solar PV (photovoltaic) solutions. Sun Power has the most efficient solar panels in the world, converting sunlight to electricity at 22.4% efficiency compared to 9% to 14% for most other panels. Sun Power also distinguishes itself with its vertically integrated, modular product line that allows them to compete with even low cost Chinese manufacturers.
SunPower continues to announce key contracts, such as the 711 Mega Watt deal with California Edison and the continued expansion of its supplier agreement with Japan's Toshiba. But, what really won us over were its financial results.  SunPower's average revenue grew over the last three years while the industry generally struggled with declining revenues. Their net margins of 7.1% and ROE of 9.88% (TTM Data as of 7/7/11) are similarly impressive.
Yahoo Finance shows analysts expect earnings to grow about 27% per year for the next five years.
Based on all of this, we feel that this company deserves a premium valuation, yet we were able to accumulate our position in late April at a ttm P/E of approximately 10.
Soon after we added this position, Sun Power received a tender offer for 60% of the company at $23 per share from Total, the European energy giant. Total felt that they needed a high quality, integrated solution in the Solar PV (photovoltaic) segment. This matchup leaves Sun Power in a promising position with access to low cost capital and access to the massive customer base that Total serves. With this deal, we feel that an already promising future has become all the more so. Despite this, SunPower still trades at a modest P/E multiple.
SunPower and similar innovative American companies are a central part of Beckerman's Flexible Value strategy. We remain focused on great businesses and we will continue to be opportunistic in allocating capital to those businesses when prices are attractive. There will always be some good news and some bad news in the headlines. We refuse to let that distract us from our strategy. Great companies have always been the greatest creators of wealth in modern economies, and we don't foresee that changing.

Oil Prices Slump on U.S. Demand Concerns

West Texas Intermediate light sweet crude oil for September delivery was falling $1.06 to $98.53 and the September Brent crude contract was sliding 73 cents to $117.55 as the debate between Democrat and Republican lawmakersover raising the U.S. debt ceiling continues.

President Barack Obama, in a televised address late Monday, said a breakdown in talks over raising the country's $14.3 trillion borrowing limit could seriously hurt the U.S. economy. The deadline for reaching a deal to raise the country's debt ceiling is Aug. 2.

"These prices reflect concerns that the conflict over how to handle the U.S. debt limit and the threat of a de facto bankruptcy could hit demand in the world's biggest oil consuming country, the U.S.," said Commerzbank commodity research analyst Carsten Fritsch of the lower oil futures prices.

JBC Energy Research Center analysts think there's a strong possibility that ratings agencies will downgrade the U.S. credit rating from AAA to AA.

"We think this is going to happen, reflecting not only the relatively dire state of the U.S. economy but also the inability of the political system to cope with the current situation in a responsible manner," said JBC analysts, who added that the rapid decline of the dollar suggests the broader market shares these expectations.

Fritsch notes that oil is no longer benefiting from any further slide in the U.S. dollar at this point.

Also weighing on WTI prices Wednesday was the American Petroleum Institute's report on Tuesday showing a surprising increase in U.S. crude stocks of almost 4 million barrels last week.

"The main reason for this was a surge in crude imports, and refinery utilization was also somewhat lower," said Fritsch. "There is no shortage of oil at the moment, so prices are open to correction once the effect of the weaker U.S. dollar has faded."

At 10:30 am, the Department of Energy publishes its weekly oil inventory report; analysts expect the DOE will report an increase in inventory levels for the first time in nine weeks.

Natural gas futures for September delivery were edging 3 cents higher to $4.365 per million British thermal units on the possibility of a tropical storm formation passing through the Yucatan channel, bound for the Gulf of Mexico -- a major area of natural gas production and reserves.

According to Matt Smith, energy analyst at Summit Energy, there is an 80% chance of this happening.

"This is not concerning prices too much at this early stage, providing a minor bullish influence, as is weather, with continuing temperatures above the norm across much of the U.S., both now and for the next couple of weeks."

Smith says there are some bouts of excessive heat expected over the next few days, but nothing that will lead to a strong rally, given the supply U.S. natural gas glut.

Oil and gas stocks were mostly heading lower in premarket trading Wednesday. Marathon Oil(MRO_) was falling 1% to $32. Chevron(CVX_) was lower by 0.5% to $106.99,BP(BP_) was falling 1.1% to $45.67, Royal Dutch Shell(RDS.A_) was falling 0.7% to $74.62, Occidental Petroleum(OXY_) was down 0.4% to $104.43, Chesapeake Energy(CHK_) was down 0.6% to $33.90 and Petrohawk Energy(HK_) was flat at $38.32.

Tullow Oil Rises in 1st Ghana Bourse Listing in 2-1/2 Years

July 27 (Bloomberg) -- Tullow Oil Plc, the London-based explorer with the most licenses in Africa, advanced in its first day of trading on the Ghana Stock Exchange.

The stock, which listed at 31 cedis, climbed to 31.05 cedis by 10:04 a.m. in the capital, Accra.

The debut is the West African nation bourse’s first since November 2008, Elizabeth Mate-Koli, head of listing at the exchange, said by phone yesterday. The company sold 3.5 million shares at 31 cedis each, raising 109.5 million cedis ($73 million), Tullow said on July 21.

Tullow, which also trades in the U.K. and Ireland, operates Ghana’s Jubilee oil field, West Africa’s biggest discovery of crude from an offshore field in a decade. Daily output from the field is expected to climb to 120,000 barrels per day by August or September from 80,000 barrels now, according to Tullow.