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History of the National Debt

A country’s national debt is the money owed by the government to third parties. When a country runs for consecutive years at a deficit (which means it is spending more money than it is earning), the debt grows and has to be financed by loans, as it is in the case for a corporation or an individual. The U.S. national debt has fluctuated very significantly throughout history. It focuses attention because it is an important indicator of how the country is doing.

A Costly Independence

Quite ironically, the United States was in debt even before it became a country. By gaining its independence through war, America had already begun financing military actions – thus incurring debt that was effective as soon as the nation was born. Early U.S. governments therefore endeavored to reduce or even eradicate the debt, which proved impossible; that is, debt is a natural part of running a business or a country and is necessary to fund investments.

Debt

The Louisiana Purchase is a perfect example. Such allowed the U.S. to achieve unity as a country and acquire vast expanses of precious land that now contribute to the grandeur of the country. And yet it required tremendous amounts of capital that was attainable only through borrowing.

Additionally, a country inevitably ends up engaging in very costly and non revenue-generating activities. The U.S. Civil War was one of those unforeseen events that ended up draining the government’s coffers while feeding the mounting national debt. The symbolic mark of $1 billion was reached due in large part to said internal conflict.

Twentieth Century – Wealth and Wars

Following the Industrial Revolution, the U.S. had become an economically very powerful country and entered the 20th century in a very comfortable position financially and with a reasonable level of indebtedness. But the U.S.’s involvement in World War I required enormous amounts to be invested in the Army, which caused the debt to skyrocket between 1914 and 1918.

Due to its strong economy, the United States has been able to reduce its national debt in between wars. That said, it always dramatically increased again every time a new conflict broke out. World War II and the Vietnam War in particular hit the national debt pretty hard.

In more recent times, the U.S.’s debt level has been harder to control. During the 1980s the infamous trillion mark was reached and largely surpassed. Although the 1990s saw a much more stable evolution of the national debt, growth started again in the early 2000s. It is estimated that it will continue at an unfortunately steady pace in the coming years, but its reduction remains a major focus for the current administration.

National Debt

Funding the National Debt

The United States has been funding its national debt through the issuance of a series of debt instruments. Those are diverse but essentially consist of bonds issued by the government with various maturity dates and interest rates. They are issued to American and foreign populations and corporations. The U.K., Japan and China, for example, hold significant amounts of U.S. bonds. The American government is used to selling bonds and bills to the public, sometimes appealing to its residents’ patriotism in times of war and offering low-yield but yet very safe investment options.

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History of International Monetary Fund

The economic crisis that the world is experiencing today is nothing compared to the Great Depression experienced in the 1930s, an economic depression that served as the basis of the establishment of the International Monetary Fund (IMF). During this time several countries tried to save their failing economies by creating a barrier between them and other foreign countries. But instead of salvaging what they had, this led to further economic depression.

History

In July 1944, 45 delegates from different countries met for the United Nations Monetary and Financial Conference. This conference led to the conception of the International Monetary Fund (IMF). The 45 representatives agreed to create an international institution that would oversee the monetary systems of all countries, particularly the exchange rates and international balance of payments. By following the macroeconomic policies of its members, the organization aimed to stabilize the world’s financial system and sustain development of its member countries. The basis of the structuring was to avoid repetition of the selfish policies that led to the Great Depression. This agreement is known as the Bretton Woods agreement, as it occurred in Bretton Woods, New Hampshire, in the United States.

International Monetary Fund

However, it was not until Dec. 27, 1945, that the International Monetary Fund was formally organized. The first 29 member countries signed the Articles of Agreement, and today the constitutional purpose of the institution remains the same. On March 1, 1947, the IMF officially started its operation.

One of the financial policies of IMF was the par value system, known as the Bretton Wood system. This was in place until 1971 when the U.S. President suspended the conversion of the dollar into gold. Major currencies during this time began to float, as countries were free to decide the form of exchange agreement. The transition was good until the price of oil started to increase. To help respond to the soaring price, the IMF set up its two oil facilities.

To help its poor country members, the institution set up a Trust Fund to provide a financing scheme. The first country to borrow money from the IMF was France in 1948, just a year after the establishment of the organization. In December 1987 the Enhanced Structural Adjustment Facility replaced the Structural Adjustment Facility launched in March 1986. However, the institution noted difficulty in paying for the poorer country members. To solve the problem, the IMF collaborated with the World Bank in 1990 to ensure that poor countries can manage their international debt.

International Monetary Fund

There are now 186 member countries. The membership expanded in the 1950s and 1960s when more countries attained independence. In 1989 the fall of the Berlin Wall and in 1991 the disbanding of the Soviet Union caused the IMF to truly become a universal institution. Membership from African countries rapidly increased. The member countries participated actively in the IMF and benefitted from its financial policies and assistance.

Camille Gutt of Belgium served as the very first Managing Director of the IMF. Today Dominique Strauss-Kahn of France manages the institution. He began serving on Nov. 1, 2007, and his term will end after five years. The main headquarters are located in Washington, D.C.

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History of Bank of America

Bank of America is the largest bank in the United States in terms of assets (and among the largest banks in terms of market capitalization). It originated in California and expanded – through organic growth and mergers – to become a truly global institution with a presence in 150 countries and an unrivaled U.S. network. Bank of America has put a lot of emphasis on developing its brand and diversity: its activities range from personal banking to investment and securities management.

Early Stages – Becoming Bank Of America

The Bank of America saga began in 1904 when Amadeo Giannini, an Italian-American from California, decided to create a specialized bank called Bank of Italy. The San Francisco-based bank was founded in order to provide financial services specifically to immigrants who encountered difficulties due to their foreigner status. The massive earthquake that hit San Francisco in 1906 turned out to have a silver lining for Bank of Italy: having been able to salvage most of its assets, the bank was able to stay in business – which helped build its reputation of reliability.

Bank of America

In the wake of the great 1906 disaster, Giannini decided to expand throughout the whole of California, partly in an effort to spread the bank’s risks in the future. In 1927, in a move that would turn out to be a very important one, Bank of Italy joined forces with the Los Angeles-based Bank of America.

Countrywide Expansion

Bank of America spent most of the 20th century growing within its home state of California and diversifying its activities. Federal regulation prohibited Bank of America from expanding into the rest of the country until the 1980s. That change in legislation is what allowed Bank of America to become the bank it is today. The bank’s move outside California materialized with the acquisition of Seattle-based Seafirst Corporation.

Bank of America Branch

That decade, however, was not a good one for Bank of America, which hit a rough patch financially due to a series of bad investments combined with the stock market crash of 1987. The then 80-year-old bank eventually rebounded, though, and picked up its acquisition efforts through the 1990s with mergers with West Coast- and Midwest-based banks. The most important merger took place in 1997 with the acquisition of NationsBank Corporation of Charlotte, North Carolina, where Bank of America is now headquartered. Bank of America has since kept building a large and diverse network to make the former Bank of Italy the biggest bank in the country.

2009 Financial Crisis – Merrill Lynch

Bank of America was badly shaken up by the financial crisis of 2008, due in part to its exposure to asset-backed securities in general and sub-primes in particular. The bank took part in the financial “bailout” program launched by the U.S. government and its stock plunged. Toward the end of 2008, in the midst some of the biggest financial turmoil in recent history, a once-in-a-lifetime opportunity presented itself: Bank of America was in a position to take over one of the most prestigious investment banks in the world, Merrill Lynch. The deal went through and saved Merrill Lynch from its probable demise.

Bank of America has a quite unusual history, dotted with bold moves and unlikely turns of fate. It takes pride in its rich past and continued success.

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History of DJIA (Dow Jones Industrial Average)

The Dow Jones Industrial Average (DJIA) is one of America’s oldest stock market indexes and lists 30 companies that together are held representative of the health of the industrial stocks, and allows investors to chart the progress of individual stocks or groupings of stocks against a weighted average. The DJIA is assessed regularly and defunct or unrepresentative companies replaced with new entrants.

Charles Henry Dow

Charles Henry Dow

The DJIA owes its conception to Charles Henry Dow, who along with Edward Jones and Charles Bergstresser founded Dow Jones and Company, the parent company of the DJIA. Charles Dow founded the Wall Street Journal, a daily broadsheet published in New York from 1882. By 1884 Dow Jones was publishing a list of twelve railroad stocks and averaging their closing prices to indicate the overall health of the sector. That index is today known as the Dow Jones Transportation Index and is the direct predecessor of the DJIA.

By 1896 Charles Dow had recognized a need for industrial stocks to be listed, despite a general lack of faith in industrial stocks at the time. It was a bold move, not well understood by the market since most investors of the day were more interested in bonds from major railroad companies, the transport sector being seen as the engine of American economic growth. Industrial companies often struggled to raise funds so the creation of the DJIA was a welcome development for owners of industrial stock.

Dow’s original DJIA consisted of only 12 stocks, of which only one, General Electric, has survived the 110 years the DJIA has been published to remain in the index. The other eleven companies in the original DJIA included American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling and Cattle Feeding, Laclede Gas, National Lead, Tennessee Coal and Iron, North American, U.S. Leather, and U.S. Rubber. Of these eleven, only Laclede Gas is still in business under its original name.

May 26th 1896 was the first date of publishing the DJIA by Dow Jones & Co, with the first average being rated at $40.94. A couple of months later the DJIA had dropped to just $28.48, its lowest result ever in the history of the DJIA. To the end of 1896 the Dow Jones Industrial Average maintained a fairly consistent average of $35-$36, although not as high as it opening average, this was still considered a good start to the DJIA since it reflected the general state of industrial stocks. Transportation however remained the darling of the stock market with the Dow Jone Transportation Average reaching $50 by years end, a disappointing result given the index contained 20 of America’s railroads.

It took ten years for the DJIA to reach its first milestone, closing at $100.25 on January 12th 1906, but it was nearly 20 years until $200 was reached. Between 1896 and 1916 several changes occurred with regular frequency to the DJIA, and by October 1916 very few of the original 12 stocks were left in the index, at the same time industrial stocks were more popular than transport stocks or bonds and it was time to revamp the index.

The published index on October 4th included 20 stocks, all of which were common stocks, and included new industrials such as American Telephone and Telegraph, Goodrich, Studebaker, Westinghouse, and Western Union. American Sugar, General Electric, and U.S. Rubber were the only companies still listed of the original 12 in the revamped index of 20 industrials.

In 1928, the Dow Jones Industrial Average was once again increased in the number of stocks covered, this time to 30, a number that has been maintained upto the present time. The 1920s were time of great development, often called the ‘roaring twenties’, a time when the index climbed to nealry $400 between 1927 and 1929, and sadly a time that resulted in the great crash of 1929, followed by the recession years of the 1930s. The DJIA closed at its second lowest point ever on July 8th 1932 at just $41.22, not far from the opening price in 1896, and a fall of nearly 90% from since the previous high of $381.17 back on September 3rd 1929.

Down Jones 1928 Chart

A criticism of the DJIA has been the lack of relevance despite being the most visible stock market index, with commentators observing that the dependence on stock prices takes no account of the relative sizes or market capitalization of companies represented in the index. The DJIA is often compared with S&P 500, an index that is adjusted by market value rather than simply price weighted.

Strangely, the Dow Jones Industrial Index has never been seen to represent highs or lows in popular culture, with Kennedy’s assassination, the Arab Oil embargo, and the first Iraq war seeing bullish rallying of the index, and by contrast the moon landing coming in the midst of a bear market and another record drop in the DJIA. Significant closing milestones of the period also saw great celebrations in the NYSE and at Dow Jones with the index reaching 1,000 on November 14th 1972, and then 2,000 on January 8th 1987. By October 19th of 1987, a day known as Black Monday, the DJIa experienced its worst drop ever, falling 22.6 percent.

By July 2007 the DJIA hit 14,000 on two decades of economic growth and financial market bullishness, but by 2008-2009, in the midst of the global financial crisis this had fallen to a little over 8000, with many analysts expecting the index to find a new equilibrium below 8,000 by mid 2009.

Bear vs Bull

As an interesting aside, Ford Motor Co has never been listed in the Dow Jones Industrial Average, whereas General Motors and Chrysler have been, and in 2009 Ford was the only one of the big three American motor companies expected to survive the economic crisis whilst GM and Chrysler were both expected to file bankruptcy proceedings despite multi-billion dollar stimulus from the US government.

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History of Electronic Money

Electronic money is a fairly recent invention in the history of money and commerce, and typically means that currency with real value, and which can be exchanged for traditional cash, is instead entirely digital (or virtual). Electronic money only exists in digital format, and can be primarily based on the Internet or on smart cards that maintain a record of their stored value. Transactions carried out electronically are also known as electronic money. Other names for electronic money include e-money, digital cash, digital money, digital currency, or electronic cash.

Electronic Money

The age of he computer has made possible the creation of electronic money, and began back in the 1960s when IBM and American Airlines jointly created a system kown as SABRE (Semi-Automatic Busines Research Environment) which allowed offices of American Airlines to be fitted with terminals connected to telephone lines that would allow agencies to directly check flight times, seat availability, and then electronically make reservations that could be paid for using a system of credits.

By the 1970s banks in the US and Europe had started using mainframe computers to track transactions between branches and other banks, a system that proved particularly successful across international boundaries when currency exchange was needed. Initially, any transactions that had been initiated but not cleared were effectively in limbo, and as computer use spread within corporations, tracking funds that were processed electronically became an important financial consideration.

Consumer uptake of electronic money first started to be noticed in France with the introduction of the Minitel service in 1982 that operated in a similar way to pre-Internet bulletin boards. Countries like the UK and the US had developed basic teletext services that allowed televisions to display text such as program guides, weather, game show results, or news directly onto the television screen, with users keying in page numbers on their TV remote control to access pages. The teletext system was a simple one way service, and whilst it was useful, it didn’t allow users to query data.

The French Minitel service by contrast used a dumb terminal with built in modem and since the service operated over standard telephone lines and the terminals were equipped with full AZERTY keyboards, it was possible for subscribers to type messages, or search queries, a fundamental difference from teletext services. The French Minitel terminals were given away free to over 9 million households encouraging French business entrepreneurs to offer Minitel shops such as travel agencies, flower delivery, As Seen on TV, music catalogs and more. Payment could be made using credit card or charged to the telephone account, marking the first use of electronic money in the consumer market.

Minitel

Minitel

A slightly similar service had been launched in the UK in 1979 named Prestel but supported equipment was expensive and a Prestel based retail service didn’t develop with the exception of package tour travel agencies who would provide quotes but still required customers to call and arrange payment over the phone. In 1983, a service known as Homelink started withthe support of the Bank of Scotland and Nottingham Building Society where account holders could subscribe to a special Prestel service that allowed online banking, and marks the first recorded use of electronic money.

In the US, similar services to the French Minitel and the UK Prestel existed, but without dedicated hardware, users would own their own micro-computers and modems and pay to dial into a local bulletin board service such as Compuserve or TheSource, however transactions for products and services were not offered until 1989 when US grocery delivery company Peapod was founded in Evanston, Illinois and sold a dial-up disk with software allowing customers to order and pay for groceries that the company would later deliver.

1991 saw the introduction of the Internet in the consumer market with the disbanding of the Arpanet network, and the creation of the NSFNET backbone formed by IBM, MCI, and Merit. CERN also released Tim Berners-Lee’s HTML specification that allowed easier display of Internet data. It wasn’t long until America Online took advantage of the new Internet and then in 1992, started offering retail services directly to their subscribers who could pay using a credit card, and firmly ushering in the era of electronic money. 1-800-Flowers was one of the first AOL retail partners.

In 1994, and taking a lind leap of faith that the Internet would help their business, Pizza Hut adopted the same model used by Peapod, and thus allowing online pizza ordering, with a choice of payments, credit card vie he Internet, or in person on delivery. The same year J.C. Penney start their first website offering a department store on the Internet, sales are slow but company shareholders are happy to see the corporation taking the initiative.

The late 1990s were a pivotal moment for electronic money as Amazon.com is launched in 1995, and then in 1998 PayPal is formed to make it easy for consumers to spend money online without risk of their credit card number being stolen. PayPal’s innovation was to offer a virtual account for consumers that could be topped up using a credit card or wire transfer, and then an email address used to send and receive funds. The services offered by PayPal marked the true beginning of electronic money as being distrinctly different from traditional over the phone and online credit card processing.

Paypal Logo

Further developments in the electronic money industry saw PayPal’s model copied by other providers, along with new ideas for securing customer funds using the gold standard or silver, platinum, or palladium, yet still offering the flexibility of sending and receiving payments with an email address. Virtual currency backed by precious metals can be exchanged for any supported currency, but is typically tracked as direct comparison of the price the precious metal is fetching in the international precious metal markets. Webmoney, e-gold, and eLibertyReserve have become the biggest gold backed electronic money providers.

Electronic money virtual wallets provided by major corporations such as Verisign started to become available, encouraging an explosive growth in ecommerce. The first years of the new millenium saw the creation a number of cryptographic techniques for the prevention of personal data, and strong growth in the use of electronic money as a primary medium for payments and transactions. In the US, most banks began offering online banking facilities connected to payments options that allowed utilities and credit cards to be paid using any public computer.

Credit Card Detail

Private currencies also proliferated around the same time, originally spurred by the demand for some form or marketplace within networked games such as World of Warcraft and Second Life. Private currencies are sometimes redeemable for real world currencies at a fixed rate pegged to the dollar or other major currency. Since those times, private currencies have developed in many forums and webmaster services as a means of offering advertising amongst members, the most famous of these perhaps being Entrecard, a service where users visit other blogs and are paid in Entrecard Credits, which become redeemable for cash once a reserve level has been met.

In the offline world, perhaps the most successful electronic money has been facilitated with stored value cards that are denominated in local currency. The United States Military designed a stored value card known as Eagle Cash that provided an advance on a soldier’s earnings and could be used in base shops and canteens by simply presenting the chip side of the card for swiping. In Hong Kong, a stored value card originally designed to make subway ticket purchases quicker has become a defacto cash card now accepted by a majority of retailers and utilities in the city.

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