One of the constitutionally mandated duties of the State Treasurer is to direct the custody, investment and deposit of state funds. While this sounds like an awesome responsibility, the reality of the situation a bit less dramatic. The State Constitution clearly defines how state funds are to be invested and that definition falls in line with generally accepted, prudent investment principles. This role is entirely non-political and may explain why ten of the fifty states now appoint rather than elect their treasurers.

However, the next four years — the next treasurer’s term — may prove to be the most interesting in our state’s history. This has to do with structural changes in our nation’s banking system and, as a by-product, the acquisition and valuation of US Government securities. Let’s start with a bit of background.

Following World War Two, the world’s banking system was in turmoil. As the strongest bank left standing, the Federal Reserve and the US Dollar became the de facto settlement bank and settlement currency for international commerce. Japan buying oil from Saudi Arabia was settled in dollars. Australia buying champagne from France was settled in dollars. You get the idea.

This position as middleman of world trade created great economic advantage for the largest US banks — the correspondent banks that represented buyers and sellers on the world stage. One of the great benefits reaped by the US bankers was that foreign traders would often leave deposits in dollar denominated accounts in anticipation of future purchases of goods from traders of other countries. Dollar deposits were (and are) generally invested in US Treasury securities while they are held by US correspondent banks. The buying and selling of these Treasury securities creates liquidity thereby reducing the bid/offer spreads for traders and making small but consistent profits for the banks.

Why the lecture on foreign exchange? While all but a tiny amount of foreign trade occurs in US Dollars today, that amount is set to decline (perhaps drastically) in the next few years. Overzealous banking regulations enacted in the name of fighting terrorism are pushing our largest trading partners to look to other means of settling their trades. There was a time when settling large transactions outside the US banking system was a pipe-dream. However, block-chain technology is fast becoming accepted as a means of settling these transactions.

Why would this effect the State Treasurer’s office here in Missouri? Liquidity. The liquid markets in Treasury securities that the banks provide is a byproduct of all of the foreign exchange transactions that they clear. Without the liquidity that the banks provide, our state’s cost of buying and selling Treasury securities goes up. And, it goes without saying that the reduced demand by foreign traders for Treasury securities will do nothing to help the value of those securities already held by the state.

When you go to the polls this November, ask yourself if your choice of candidates for State Treasurer is up to the challenge.