A Monetary Aggregate That Matters

A Monetary Aggregate That Matters

http://www.911citizenswatch.org/modu...rder=0&thold=0

William Bergman -- September 16, 2005

In the old days, financial market participants waited with bated breath for the weekly money supply reports from the Federal Reserve. Scores of analysts would dissect trends in the monetary aggregates like bees on honey, divining insights from the financial entrails. Today, the Federal Reserve still reports on the money supply. Some people still watch the numbers closely, but by and large, the money data are off the radar screen. In the 1980s, historical relationships among the monetary aggregates, the price level and interest rates broke down for a variety of reasons, along with assessments and predictions based on those relationships. Today, analysts try to read other tea leaves, and the Federal Reserve’s money supply reports are off the front pages.

Under the radar screen, however, money still matters. Here’s one way that could be, well, pretty darn important.

“Follow the Money”
“Follow the Money” is a longstanding and still-valuable guide to the fundamentals of investigating crimes. Yet four years after one of the worst crimes in human history — the events of September 11, 2001 — there are some fundamental questions relating to money flows that haven’t been asked or addressed, at least publicly.

A few basic terms . . .
To set the stage for understanding why these questions may matter, some background and definitions may be useful. There are three basic monetary aggregates reported by the Federal Reserve – M1, M2, and M3. The M1 aggregate is the narrowest of the three, and includes currency in circulation and demand deposits. Moving to M2 and M3 means including a progressively broader variety of things deemed to be ‘money,’ such as savings deposits and retail money funds (in M2) and things like jumbo CDs and Eurodollars (in M3). M1 is a narrow aggregate; another narrow aggregate to which people sometimes refer is the monetary base, consisting of currency in circulation and reserves ‘held’ by depository institutions at the central bank.

So M1 and the monetary base share a common element — currency in circulation. Currency refers to Federal Reserve Notes, the things that say “In God We Trust” and “This Note Is Legal Tender for All Debts, Public and Private.” There are one dollar bills, five dollar bills, and other denominations, including (importantly) 100 dollar bills. Currency is ‘in circulation’ if it is outside the banking system – outside the vaults of the Fed, outside bank vaults, outside ATMs, and outside armored carriers.

There's a lot of it out there
There’s a lot of this stuff out there; in the latest data there is over $700 billion in currency in circulation. That comes to roughly $3,000 for every person in the United States. It implies that every family of four has about $12,000 in their wallets and piggy banks. Something doesn’t add up here, of course, and there are good (and bad) reasons why. Federal Reserve currency is used throughout the world. Even then, $700 billion sounds like a lot of money, and it is — it suggests that everyone in the world is walking around with $100 in their wallet. A careful estimate has suggested that over two-thirds of U.S. currency circulates outside the U.S., but even if this holds, it still implies that everyone in the U.S. is holding about $1,000 in Federal Reserve Notes while everyone in the rest of the world has about $80.

Again, something doesn’t add up here, and for good (and bad) reasons. Federal Reserve Notes are a trusted store of value, at least relative to other fiat currencies, and many people around the world hold them not only for use in transactions but also as a relatively safe investment vehicle. U.S. currency is also widely used in the underground economy, where money laundering law and regulation theoretically attempt to keep things above board, and to facilitate criminal investigations after a crime occurs

Pools of cash
How does currency enter circulation, more fundamentally? As noted above, M1 includes both currency in circulation and demand deposits (checking accounts). If a person withdraws cash from a checking account, M1 does not change, at first blush, but the ratio of currency to demand deposits will increase. These bills enter circulation in a step-by-step process that begins before the withdrawal. First, bills are printed (by the Bureau of Engraving and Printing, within the Treasury Department). They are then shipped to the 12 Federal Reserve Banks, who have vaults with substantial amounts of cash. The Reserve Banks each have cash departments that continually take money in and ship money out. The Reserve Banks take cash in not only after ordering it from the Bureau of Engraving and Printing, but also from armored carriers shipping money being deposited by banks with accounts at the Federal Reserve Banks. In turn, the Federal Reserve Banks regularly scrutinize incoming currency for fitness (and counterfeits), and ship money out in turn to order from depository institutions. These institutions may include those participating in the Federal Reserve’s “Extended Custodial Inventory” program, which the Federal Reserve says it has developed in order improve the international distribution of U.S. currency.

Historically, during times of crisis in banking systems or in world affairs, the ratio of currency to M1 and other aggregates has tended to increase. At times when uncertainty or perceived risk about bank solvency rises, people would withdraw currency in bank runs to try to get the good stuff. Roughly similarly, the phrase “wartime hoarding” gained linguistic currency to refer to a variety of reasons why, during wars, Federal Reserve currency gained greater circulation relative to other forms of money.

Growth rate spikes in history
The Federal Reserve-reported data on currency in circulation dates to 1947. If you compute the growth rate for each month, you can find (in the ‘seasonally adjusted’ data) the three fastest-growing months. The fastest growing month for the currency in the 700 months since 1947 was in

-- December 1999 — right before Y2K. This makes some sense, as many people were concerned about the quality of their electronic bank deposits. In addition, however, note that there were significant “millennium” terrorist threats arising at that time.

-- The second fastest-growing month for currency in circulation was January 1991 — the onset of U.S. affirmative military action in Gulf War I and, perhaps very importantly, an important enforcement month in the Bank of Credit and Commerce International money laundering scandal.

-- The third fastest-growing month for currency in circulation since 1947 was August 2001. It’s not like July 2001 was weak, either — there was a significantly above-average increase in July 2001 as well. In the ‘non-seasonally-adjusted’ numbers (data that are not statistically adjusted for within-year seasonal trends), the increase in currency in circulation from June to August 2001 is the largest single June-August increase since 1947.

The pre-9/11 spike
Much of the July-August 2001 surge in currency (over $5 billion above-average) seems to have been in the $100 denomination. Did ‘wartime hoarding’ play a role in the surge in currency in July and August 2001?

Under money laundering and other laws, assets can be seized in the banking system after a crime. Given what we have only recently come to appreciate were significant intelligence warnings of a terrorist attack in mid-2001, a plausible question arises whether anyone concerned about possible asset seizures after a terrorist attack could have been trying to liquidate their bank accounts before the attack. (For that matter, given that January 1991 was a critical enforcement month in the BCCI scandal, a similar question arises whether attempts to withdraw currency prior to the possibility of an asset freeze played an important role in the above-noted spike in currency growth in January 1991.)

It should quickly be noted that in July and August 2001, a banking crisis was brewing in Argentina, where U.S. dollars were widely used. This may provide a relatively benign explanation for the surge in currency at the time. However a valid question remains whether a form of ‘wartime hoarding’ was also at work, in the U.S. or in other countries, including Argentina. The money trail could provide important clues about people aware of, if not responsible for, the attacks.

Did the Fed know?
Along this line of questioning, it may be useful to note that the Board of Governors of the Federal Reserve issued supervisory letters to the 12 Reserve Banks in the weeks after September 11, 2001 urging scrutiny of suspicious activity reports in tracking terrorism activity and financing. The Board issued a similar letter, albeit one that did not refer explicitly to terrorism, on August 2, 2001. Terrorism and terrorist financing were known to be part of the realm of ‘suspicious activity,’ however. A plausible question arises whether the August 2, 2001 letter was related to intelligence of a heightened terrorist threat, and if so, whether and how well that intelligence was incorporated in any Federal Reserve or Justice Department investigation of the surge in currency growth arising in July and August 2001.

Follow the money? The August 2, 2001 supervisory letter and the surge in currency growth in July and August 2001 go unmentioned in the final report of the 9/11 Commission, the staff monograph on terrorist financing that followed one month after the ‘final’ report of the 9/11 Commission, or in the publicly-available portion of the 2002 Congressional Joint Inquiry. For that matter, these questions, which seem material, haven’t really been addressed anywhere.

More unanswered questions
Sadly, questions about money flows are not the only ones that haven’t been addressed. Citizens (including victim family members) have been waiting too long for their government representatives and what seems to be a similarly bought-off Fourth Estate to address many important questions about events leading up to September 11, 2001. Questions pointing to darker possible truths have been raised by bright and courageous people too often labeled as loopy conspiracy theorists. For many caring people the performance of the 9/11 Commission was basically miserable, at best. The unanswered questions are critical and worth trying to answer, and the questions about money flows in July and August 2001 — which may have benign explanations — remain among them.

*Bill Bergman has researched economics and financial markets for over twenty years, working in investment banking, equity analysis, economic research and financial market policy analysis. He earned an M.B.A. as well as an M.A. in Public Policy from the University of Chicago in 1990. He worked with the Federal Reserve Bank of Chicago for 13 years and then spent a year with the American Institute for Economic Research — most recently leading their summer fellowship program.

My understanding is that Mr. Bergman was let go (effectively fired) not long after he asked higher ups at the Fed in D.C. what it was that led them to issue their August 2nd letter? This just following an effective promotion to a new position, one that led him to pose and attempt to try to answer this question. -Editor