Chapter 6

Money and Banking

i.              Definitions

1.      Nominalism

The principle that an obligation to pay a particular sum of money is fixed and does not change even if the purchasing power or foreign exchange rate of the money does change.

 

2.      IMF par value system

The currency exchange mechanism specified by the IMF prior to 1971, which required all members to declare a value (the par value) at which their currencies could be converted into gold.

 

3.      Tranche

A percentage of an IMF member’s quota that it may withdraw to stabilize its currency or to meet balance-of-payments obligations.

 

4.      Standby Arrangements

These are designed to help countries address short-term balance-of-payments problems. Standbys have provided the greatest amount of IMF resources. These facilities are in essence bridging loans provided to member states while the IMF deliberates about whether to provide other funds to the particular member state.

ii.              True or False

1. The international monetary system is highly informal and regulated primarily by custom and practice.   

 Answer: True

2. Unlike official money, private money can only be used for making payments between private parties who agree in advance to its use. 

Answer: True

3. According to the principle of “nominalism,” the purchasing value of a currency within a country remains constant.

 Answer: True

4. If the parties to an international sales contract do nothing to anticipate changes in the exchange value of the currency of payment that they have chosen to use, then any risks associated with its depreciation are assumed by the debtor (i.e., the person who must deliver the money). 

Answer: False

5. Mr. A agrees to sell a coin (currency of State A) to Mr. B.  Just prior to the time for delivery, Mr. A discovers that the coin is extremely rare and that Mr. B has taken advantage of him.  Nevertheless, because this transaction involves an exchange of currencies, Mr. A would be unsuccessful if he asked a court to set aside the sale.    

Answer: False

6. Prior to 1920, the value of most official currencies was determined by their convertibility into gold.  

 Answer: True

7. The size of an International Monetary Fund member state’s quota is determined by the size of its economy. 

Answer: True

8. Even if a state is not a member of the International Monetary Fund, other states will enforce its currency exchange regulations as a matter of comity.

Answer: False

9.Most countries impose highly restrictive regulations that discourage the establishment of foreign branch banks.

Answer: False

10. It is not uncommon for a parent multinational bank to treat its branches as separate business units.

Answer: True

11. According to the customary practice of most states, a branch bank is subject only to the rules and regulations of its home state regardless of the directives given to it by the host state.

Answer: False

12. Most courts regard a parent bank as being liable for the debts incurred by its foreign branches because the branch is subject to the supervision and control of the parent.

Answer: True

iii.              Multiple Choice

1.  Which of the following is not a characteristic of money?

a)        It is a means of exchange.

b)        It is a mechanism for ensuring economic growth.

c)        It is a medium for storing value over time.

d)        It is a unit of measure or value.

Answer: b

2.    “Private money” can be:

a)        a basket of official currencies.

b)        a stock of some commodity that is easily transferable and reasonably nonspoilable.

c)        gold and silver coins minted by mining companies.

d)        Any of the above.

Answer: d

3.  Which of the following is/are example(s) of official money?

a)        The European Community’s European Currency Unit (Euro).

b)        The International Monetary Funds’s Special Drawing Right (SDR).

c)        The West African Monetary Union’s (UMOA’s) dollar.

d)        All of the above.

Answer: d

4.  Ms. X in State X agrees to sell widgets to Mr. Y in State Y for a sum of money to be paid in the currency of State Z.  At the time of the delivery of the widgets, the value of State Z’s currency has depreciated 5,000 percent and Mr. Y, in effect, will be getting the widgets for free.  Ms. X has brought suit to ask a court to determine a new payment for the widgets.  Depending on the state where the court is located, it may:

a)        order a different payment because the value of State Z’s currency has totally (or almost totally) collapsed.

b)        refuse to order a different payment because Mr. Y tendered payment as required at the time it was due.

c)        refuse to order a different payment because the parties’ contract clearly specifies payment in State Z currency.

d)        Any of the above.

Answer: d

5.  To ensure that the value of the money of payment in an international contract does not change dramatically, the contract can:

a)        designate that the money of account be a currency basket.

b)        designate that the money of account be an official currency that traditionally maintains its value.

c)        include a maintenance of value clause.

d)        Any of the above.

Answer: d

6.  Since 1978, many member states of the International Monetary Fund (IMF) have defined the value of their currencies in terms of:

a)        gold.

b)        the currencies of other countries.

c)        the IMF’s Special Drawing Right (SDR).

d)        Either b. or c.

Answer: d

7.    According to Article VIII, Section 2(b) of the Articles of Agreement of the International Monetary Fund, exchange contracts which violate one member state’s exchange control laws are to be treated in other member states as:

a)        evil.

b)        invalid.

c)        unenforceable.

d)        void.

Answer: c

8.  Which of the following persons or agencies may enforce the United States antitrust acts?

a)        The US Justice Department.

b)        The US Federal Trade Commission.

c)        Private persons.

d)        All of the above.   

Answer: d

9.  The sources of funding available to the International Monetary Fund come from:

a)        membership contributions.

b)        monies borrowed from commercial banks.

c)        value-added taxes collected in member states.

d)        Both a. and b. above.

Answer: d                                 

10. Central banks commonly do which of the following?

a)        Issue bank notes and coins.

b)        Maintain and invest currency reserves.

c)        Set the monetary policy of the national government.

d)        Both a. and b.

Answer: d

11. Which of the following is not a function of a commercial bank?

a)        To accept and manage deposits.

b)        To make loans.

c)        To offer trust services.

d)        To regulate the quantity of money in circulation.

Answer: d

12. Which of the following is true?

a)        Branches of foreign banks are regulated in the same way as domestic banks.

b)        Branches of foreign banks are required to maintain reserves with the host state central bank to cover potential losses.

c)        Foreign banks are expected to stand behind the local obligations of their branches with their entire worldwide assets.

d)        All of the above.

Answer: c

iv.              Short answers

1. X in State A and Y in State B plan to enter into a contract. What can they do to avoid the impact of a fluctuation in the value of their money of account?

Answer: To guarantee that the worth of the value stays consistent, the gatherings can: (1) assign that the cash of record be a money bin, (2) assign that the cash of record be an authority cash that generally keeps up its worth, or (3) remember a support of significant worth proviso for the agreement.

v.              Case analysis

1. The State of Q forbids its citizens to take more than 1,000 units of its currency out of the country in any one-month period. To avoid this limitation, Ms. Ecks, a State Q citizen who lives abroad in State X, engages in the following scheme with a friend, Mr. Zed, a travel agent in Tokyo, Japan. Ms. Ecks buys yen from Mr. Zed at a sizable premium. She pays for the yen with checks, made out to Mr. Zed, that she draws on her account with QueBank, located in the capital city of State Q. Mr. Zed regularly accompanies tour groups to State Q, and when he is there, he cashes Ms. Ecks’s check at QueBank. Mr. Zed, accordingly, makes a nice profit from selling yen to Ms. Ecks, and Ms. Ecks is able to get as much money as she wants out of State Q. Somehow the government of State Q learned of this transaction, and it ordered QueBank to freeze Ms. Ecks’s account so long as she is abroad. Mr. Zed, unable to cash Ms. Ecks’s latest checks, sues Ms. Ecks in State X to get back the money he had already advanced her. Both State Q and State X, as well as Japan, are members of the IMF. Will Mr. Zed succeed? Explain. (Consider Case 6-2: the Wilson, Smithett & Cope , Ltd. v. Terruzi case.)

Answer:  states that "Trade contracts which include the cash of any part and which are in opposition to the trade control guidelines of that part kept up or forced reliably with this Agreement will be unenforceable in the regions of any part." Assuming that Q Country and X Country are both GATT part states, then, at that point Q Country's guideline is obviously an "trade control guideline" (i.e., it restricts the amount Q Country money can be taken and traded abroad). Mr. Zed's endeavor to authorize that agreement which would disregard that guideline can't be upheld. Mr. Zed is left with the useless checks.