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Economic History III: Seigniorage, Paying the Bills

Click here to be taken to Part I if you haven’t read the introduction.

There are several ways a government can finance its spending. One such method is to enact taxes upon the benefactors of the government’s services through both personal and business taxes, another is to sell government bonds to the public, and a third is to create money. Another term for printing money is seigniorage.

When the government prints a lot of money, they’re basically imposing an inflation tax upon all holders of currency. Due to the increased money supply, prices rise as money loses its value. A concise way of stating it is that this resulting inflation is like a tax on holding money (Mankiw, P.93).

Seigniorage accounts, on average, for less than 3% of America’s government revenue as opposed to other countries, especially those experiencing hyperinflation:

Source: Reid

But America didn’t always have private investors climbing over each other to loan the country money or purchase its bonds.  The 1775 Continental Congress found itself in dire straits as it explored different options for financing the Revolution. The French government, who was not particularly fond of Great Britain at the time, had lent some money to Congress, and some states had responded to the Congress’ requisitions upon the states, but even combined, this amount was not nearly sufficient (Woods).

John Witherspoon, a New Jersey clergyman and an official signee of the Declaration of the Independence, said this of the effects of the paper money in America, “For two or three years, we constantly saw and were informed of creditors running away from their debtors, and the debtors pursuing them in triumph, and paying them without mercy” (Woods). This is funny in retrospect, but one can only imagine the chaos of the time as people experienced their money losing value overnight. If only those creditors had held variable interest rates.

Wrap your mind around the actual amounts of newly issued continental currency over the years:

1775 $6 million
1776 $19 million
1777 $13 million
1778 $63 million
1779 $125 million

The continental dollar became nearly worthless as a result of this increased supply. It was thanks to Alexander Hamilton that Congress passed the Mint Act of 1792, which established gold and silver as the basis for the new system of commodity money (Mankiw, P.93). To read more about Alexander Hamilton, click here.

Sources:

  1. Mankiw, Gregory. Macroeconomics.
  2. Reid http://www.jstor.org/stable/pdfplus/2601207.pdf
  3. Woods, Thomas. http://mises.org/daily/2340
 
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Posted by on April 5, 2011 in Economic History

 

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Small Business 101: Part I, Business Structures

If you haven’t already, please read the introduction to this series!

Now, I realize that covering business structures might seem an unorthodox place to begin, but you’re just going to have to trust that there’s a method to my madness. Before you jump into writing business plans, designing business cards, and taking out ads on Facebook, you’re going to want to think about a few things. The following is a list of the different types of business structures you will want to decide between to get you jumpstarted on your brainstorming.

So you have an idea for a business and want to make it official. Or maybe you’re just a little low on self-esteem and feel that tacking “Founder and CEO of Urban Watermelon Innovations” or “Director of Kerblunking at Yachtswoman Industries,” onto your resume might just do the trick and impress some important people. Either way, it’s probably time to start filling out that paper work, right?

Wrong.

Before we go all Rambo on our paperwork, we should probably decide on the right business structure for you. This is important because the business entity you establish determines which income tax return form you have to file, though that’s only where the distinctions begin. So, what are your options?

If you recall from my introduction, I’m going to approach this as if I intend to start my own consulting firm in entertainment and technology. Let’s say, for examples sake, that I plan on entering into this with several friends and we all want to share in the responsibility, profits, and losses. While we shouldn’t make any rash decisions now without a decent business plan, I can rule out a sole proprietorship.

As you can see in the above, incorporating your business has a lot of benefits, but since my business is not already established and with any structure or any foreseeable revenue stream, the disadvantages seem to definitely outweigh the pros.

If you already have a small business which you want to incorporate, talk to a lawyer and consider receiving counsel from an accountant as well.

I don’t see my future company as having shareholders anytime soon, so we’ll tentatively keep an LLC in mind as we continue towards the next step: writing an effective business plan, the topic of my next post.

Thanks for reading and feel free to comment with any feedback or questions you might have from what we’ve covered thus far.

 
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Posted by on January 12, 2011 in Small Business 101

 

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