Money and Banking

Money
Money: anything customarily used as a medium of
exchange and a measure of value
3 characteristics
As a means of exchange
As a unit of measure or value and
As a medium for storing value over time

Can be both private and official

Private money: usually a basket of currencies, can also be rare metal,
or other commodity easily transferable and reasonably nonspoilable
Only for making payments between private parties who agree in advance to its
use

Official money: unit of exchange issued by a government agency (MoF,

DoT) or government-controlled financial institution (central bank)
Can be used to pay debts of any kind, public or private.
Some special types (SDRs) only used by governments/ to governments

Money contd
The value of money
Value of property and services is measured by
money
The value of official money is nominally constant
Contract to purchase a widget for 10 units of X = 10X
10X does not change, even if purchasing power/value
changes

Nominalism
Some states have minimized the impact in severe
cases
Germany, Argentina, Belgium Uruagay
If other party fails to pay in a timely fashion
US, Italy and UK revaluation is NOT allowed

Money contd
The value of money (contd)
Nominalism (contd)
Possible to avoid in special case where
currency delivered as a commodity
Rare coin
Richard v AUB foreign currency case

Money contd
The choice of money
Money of account defines amount of obligation
Money of payment money used to pay that
obligation
Ill sell you it for 10USD (money of account) so give
me 210,000VND (money of payment)

In contracts, parties should determine the

above, PLUS place of payment
Most countries allow foreign money obligation to be
satisfied by payment in local currency at place of
payment

Money contd
The choice of money (contd)
Place of payment
Absent selection of the parties, courts will
determine place of payment domestic laws vary
Ex. UN Convention of Contracts for International Sale of
Goods
Place of payment is place of delivery
If not named, then sellers place of business

Parties to a contract should name all three

Allows courts of those nations to resolve disputes
over interpretation or performance of contract
Example: case 6-1 Argentina

Money contd
Maintaining monetary value
How does seller ensure that he will receive a
fair price for the product?
Inflation (seller) Deflation (buyer)
Maintenance of value clause
Price adjusted by inflation rate

Designating money of account in stable currency

usually US dollar, EU euro, J yen, UK pound

Use of currency basket

Selected group of currencies whose weighted average is
used to define amount of obligation
Can be ad hoc or official basket like IMFs SDR

International Monetary Fund

Origin of the IMF
Established by UN meeting in July 1944
Bretton Woods Conference

Purpose to deal with

Difficulties of currency exchange
Other Depression-era economic policies
Protectionist tariffs and other aggressive trade
policies

International Monetary Fund

contd
Origin of the IMF (contd)
International monetary system set of
rules and procedures which different
national currencies are exchanged for
each other in world trade
1st: gold standard: gold coins of
standard specifications
2nd: gold bullion standard: requirement
of states to buy/sell gold with paper
currency at a fixed price

International Monetary Fund

contd
Origin of the IMF (contd)
Two main problems
Currency inconvertibility
Lack of standard for determining value of national
currencies
Collapse of the gold bullion standard

IMF made overseer of member states

monetary and exchange rate policies,
guardian of a code of conduct
and now surveillance,
and technical support

International Monetary Fund

contd
IMF quotas
To become a member, state must contribute
a certain sum of money or quota
subscription
Quota based on relative size of member states
economy
Expressed as SDR

Quota purposes
Pool of funds IMF may use to lend to members
Determine how much a state may borrow
Determines members voting rights

International Monetary Fund

contd
IMF quotas (contd)
Quota determined by
IMF staff using formulas considering
GDP, current account transactions, variability of
current receipts, official reserves

Adjusted by comparison to comparable

existing members
Negotiations with applicant state
Final approval by Executive Board then
Board of Governors (see below)

International Monetary Fund

contd
Organization of the IMF
Board of Governors highest authority
Governor/alternate representing each member
Meet once a year,
Voting by mail/other means throughout the year

Executive Board
24 directors, managing director
Meet at least 3x week

Managing Director/head of staff

appointed by Executive Board

International Monetary Fund

contd
IMF operations obligates members
to observe code of conduct
Keep other members informed of its
currency exchange arrangements
Refrain from placing restrictions on
currency exchange
Pursue economic policies to increase its
national wealth (and other member
states)

International Monetary Fund

contd
IMF operations (contd)
Compliance with code essentially voluntary
IMF can exert moral pressure
Can declare not eligible to borrow money
Can be expelled

IMF responsible for

Supervising currency exchange
Lending money to support members
currency/economy
Providing auxiliary services to assist members

Currency Exchange
Currency exchange obligations of IMF member
states
History
IMF par value system declared value

Second Amendment
Other than gold
Pegged to other currencies, SDR or other currency
basket
Or float

Some requirements
Not to manipulate, must collaborate with IMF,
If floating, must intervene to support currency

Currency Exchange contd

Enforcement of exchange control
regulations of IMF member states
Exchange contracts contrary to exchange
control regulations are unenforceable
Prevents one member from frustrating control of
another member
Deters private persons from violating exchange
controls

Can be used:
As a defense, as a cause of action (by a member,
by a person)

Currency Exchange contd

Enforcement of exchange control
regulations of non-IMF member
states
Traditionally, states do not enforce
revenue laws of other states
As most are members of IMF, relatively
moot point

Currency Exchange contd

Enforcement of other exchange
control regulations
Forbids restrictions on
payments/transfers involving current
international transaction
Anything other than capital transaction

Currency Exchange contd

Exemptions for new members
Exemptions available
Not usually used

Currency support
Short term source of funds
From IMF quotas
Also from commercial bank loans

IMF Facilities
1) General Resources Account
2) Special Disbursement Account
3) Enhanced Structural Adjustment
Facility Trust Fund

Currency support contd

IMF Facilities Regular
Reserve tranche, Credit tranche,
Extended fund facility, Standby
arrangements, Concessional IMF facility

IMF Facilities Special (particular

situations)
Compensatory financing facility,
Supplemental reserve facility,
Contingent credit lines

Currency support contd

IMF Conditionality
Access to IMFs credit tranches and other facilities
is linked to members progress in implementing
policies to restore balance of payments viability
and sustainable economic growth
General guidelines: encourage adoption of
corrective measures at an early stage, respect
domestic social and political issues, limit
performance criteria
NB: IMF arrangements not contractual, but
decisions of IMF that set out conditions from
continued financial assistance

Development Banks
World Bank (International Bank for
Reconstruction and Development IBRD)
International Development Agency (IDA)
Loans to less developed countries

International Finance Corporation (IFC)

Loans to private enterprises

Manages trust fund of Global Environment

Facility (GEF)
Funds to developing countries to address
environmental problems: climate change, biological
diversity, international waters, ozone layer depletion

Development Banks contd

International Fund for Agricultural
Development (IFAD)
Financing for projects that introduce,
expand and improve food production
systems in its developing member
states

Regional development organizations

National development agencies

Development Banks contd

Current controversies at World Bank
Fraud

Reading 6-2, IMF comparison to

World Bank

Bank for International

Settlements
Acts as a bank for worlds central
banks
Promotes international monetary
cooperation
Acts as an agent for international
settlements

Regional Monetary Systems

Carry out similar functions as IMF,
but on a regional scale
See examples on p 311-312
See exhibit 6-5, European central
bank, national central banks

National Monetary Systems

To implement national monetary
polices
Highest level, political Ministry of
Finance, Treasury Department
Next, Central Bank (Bank of England,
The Federal Reserve, State Bank of
Vietnam)
Commercial Banks

National Monetary Systems contd

Bank Deposits
history of banking
Not as bailor

Eurocurrency deposit, example

Now euro not applicable,
Note --- foreign currency accounts (HK,
Vietnam)

Interbank Deposit Market

Most common Certificate of Deposit
(CD)

National Monetary Systems contd

Foreign Exchange Market
Good example on p. 318

Foreign Exchange Contract

Spot
Future
Hedging
Speculators
Forward contract
Option contract
Call
Put
Straddle/spread eagle

National Monetary Systems contd

Arbitrage
Arbitrageur

Transfer of money
Instruction
Bill of exchange/draft

National Monetary Systems contd

Branch Banking
Various national policies
Host state regulations
Norm v US
See case 6-5

Branch v subsidiary (separate incorporated

body)
Host and Home State treatment of branch
See p 324, 325
Foreign bank liability for branch
See VN case

National Monetary Systems contd

Conflicts between Host and Home
State Regulations
See example p 328
Suggested solution
Case 6-7,