1 of 27 Lecture 6 MONEY AND BANKING Topics covered: Money The International Monetary Fund Regional Monetary Systems National Monetary Systems

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Lecture 6

MONEY AND BANKING

Topics covered: • Money • The International Monetary Fund • Regional Monetary Systems • National Monetary Systems

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A. MONEY

1. Definition: "Anything customarily used as a medium of exchange and measure of value."

a. Economic characteristics: 1) A means of exchange.

2) A unit of measure or value.

3) A medium for storing value over time.

2. The Choice of Money a. Domestic transactions: Obligations are paid in

local currency.

b. International transactions.

JUDGE JUDY READY TO RULE--

Case: Republic of Argentina v. Weltover, et. al.: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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A. MONEY

b. International transactions. (cont.)1) The parties must designate two currencies.

a) Money of account: The money that expresses the amount of obligation owed.

b) Money of payment: The money that the buyer must use to pay for the items purchased.

i. Commonly this is the same currency as the money of account.

2) Parties also need to select the place of payment. a) Effect of not making a selection: The courts will

determine the place of payment and allow the buyer to pay in the currency of that place.

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B. THE INTERNATIONAL MONETARY FUND (IMF)

1. What the IMF Does a. The IMF Maintains a Surveillance

System. 1) Member states have to abide by a Code of

Conduct in their external monetary relations:

a) May not borrow or lend at unsustainable levels.

b) May not engage in protracted one-way interventions in the exchange market.

c) May not follow unwarranted monetary or fiscal policies for balance-of-payments purposes.

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1.What the IMF Does (cont.)

b. The IMF Maintains a System of Currency Support.

1) IMF may provide member states with short-term financial resources to help them correct payment imbalances.

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1. What the IMF Does (cont.)b. Currency Support. (cont.)

2) IMF funds are subject to "Conditionality" a) Conditionality defined: The policies established

in the Article of Agreement which limit the uses to which the IMF's resources may be used.

b) General policy: Access to the IMF's credit branches and other credit facilities is linked to a member's progress in implementing policies to: i. Restore balance-of-payments viability.

ii. Promote sustainable economic growth.

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1.What the IMF Does (cont.)

c. The IMF Maintains a System for Currency Exchange.

1) Originally this was based on the value of gold.

2) Now based on a system of exchange agreements.

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2. Currency Exchange a. Currency Exchange Obligations of IMF

Member States 1) Members are to define the value of their

currency (so that it may be easily exchanged) by any criteria.

a) Exception: they may not use gold.

2) Member may not manipulate exchange rates or the international monetary system in order to prevent effective balance-of-payments adjustments or to gain an unfair competitive advantage over other members.

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2. Currency Exchange (cont.)a. Currency Exchange Obligations of IMF Member

States (cont.)3) Members must collaborate with the fund to:

a) Promote exchange stability.b) Maintain orderly exchange arrangements with other

members.c) Avoid competitive exchange alterations.

4) Members with floating exchange rates must also: a) Intervene on the foreign exchange market as

necessary to prevent or moderate sharp and disruptive fluctuations in the exchange value of their currencies.

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2. Currency Exchange (cont.)b. Enforcement of Exchange Control

Regulations of IMF Member States 1) Art. VIII, Sec. 2(b): "Exchange contracts which

involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member."

a) Prohibition: Exchange contracts which violate a member state's exchange control laws are unenforceable.

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2. Currency Exchange (cont.)b. Enforcement of Exchange Control Regulations

of IMF Member States (cont.)1) Art. VIII, Sec. 2(b) - (cont.)

b) Purpose: i. To prevent one IMF member from frustrating the

legitimate exchange controls of another member.\

ii. To deter private persons from violating exchange control regulations.

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2. Currency Exchange (cont.)b. Enforcement of Exchange Control

Regulations of IMF Member States (cont.)

1) Art. VIII, Sec. 2(b) - (cont.) d) Interpretation of principle of

unenforceability i. By IMF Executive Directors: The principle of

unenforceability is "effectively part [of every member countries'] national law“.


Case: Wilson, Smithett & Cope v. Terruzzi: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

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2. Currency Exchange (cont.)b. Enforcement of Exchange Control Regulations of

IMF Member States (cont.)1) Art. VIII, Sec. 2(b) - (cont.)

e) Interpretation of "exchange contracts" i. No IMF Executive Directors' interpretation.

ii. Broadly interpreted in Continental Europe: Exchange contracts are contracts which "in any way affect a country's exchange resources.“

iii. Narrowly interpreted in the US and the UK: Exchange contract is one having as its immediate object the exchange of international mediums of payment.

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2. Currency Exchange (cont.)c. Enforcement of Exchange Control Laws in

the Absence of IMF Membership 1) Traditional choice of law rule: States do not

enforce the revenue laws of other states. a) This is often a statutory rule in civil law countries.b) It is a long-standing precedent in common law

countries.

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2. Currency Exchange (cont.)c. Enforcement of Exchange Control Laws in the

Absence of IMF Membership (cont.)1) Traditional choice of law rule: States do not

enforce the revenue laws of other states. (cont.) c) Rationale for this rule: The enforcement of foreign

revenue laws infringe on the sovereign rights of the forum state. i. Criticism: The rule is legally and economically

unsound in light of the contemporary interdependence of nations.

d) In the absence of IMF membership, the rule is universally observed.

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2. Currency Exchange (cont.)d. Enforcement of Other IMF Member State

Currency Exchange Obligations 1) Art. VIII, Sec. 2(a).

a) Prohibition: Member states may not impose restrictions on payments or transfers involving "current international transactions.“

b) A "current international transaction" is any transaction other than the transfer of capital.

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Currency Exchange Obligations (cont.)1) Art. VIII, Sec. 2(a). (cont.)

c) Restrictions on the following are forbidden: i. Any payment in connection with foreign trade,

other current business, including services, and normal short-term banking and credit facilities.

ii. Any payment due as interest on loans and as net income from other investments.

iii. Any payment of moderate amounts for amortization of loans or for depreciation of direct investments.

iv. Moderate remittances for family living expenses.

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Currency Exchange Obligations (cont.)2) Art. VIII, Sec. 3.

a) Prohibition: Member states may not engage in any "discriminatory currency arrangements."

3) Art. VIII, Sec. 4. a) Obligation: Every member states is required to

buy its own currency from other members who have acquired it as the result of a "current international transaction."

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Currency Exchange Obligations (cont.)4) Art. VIII, Secs. 4, 5, and 6.

a) Obligations: Member states are required to furnish information to the IMF, to work towards the abolition of all currency exchange restrictions, to collaborate in promoting international liquidity, and to work with other members to make the "special drawing right the principal reserve asset in the international monetary system."

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2. Currency Exchange (cont.)e. Exemptions for New Members from IMF

Member State Currency Exchange Obligations

1) Art. XIV "Transitional Arrangements" a) Exemption: New members that are unable "to

settle their balance-of- payments" obligations without "unduly encumber[ing]" their access to the general resources of the Fund may maintain the restrictions on payments and transfers for current international transactions that they have in effect on the day they become members. i. Note: any later restrictions will fall under Art. VIII.

b) Approximately 50 countries currently claim this exemption.

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C. REGIONAL MONETARY SYSTEMS

1. Regional Monetary Organizations Vary in Their Structure and Evolution

a. Some emulate the IMF in promoting currency exchange and financial support for balance-of-payment obligations.

b. Some have established a complete monetary union.

1) "Monetary union" defined: A union of states with:

a) A common currency.b) A single central bank.c) A single pool of exchange reserves.

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D. NATIONAL MONETARY SYSTEMS

1.Organizations Which Implement National Monetary Policies

a. A Political Agency of the national government that sets national fiscal policy and carries on the financial functions of the government.

1) Commonly a cabinet-level agency.

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1. Organizations Which Implement National Monetary Policies (cont.)

b. A Central Bank. 1) Owned by the national government (in most

countries).

2) Most important functions: a) To issue bank notes and coins.

b) To regulate the quantity of money in circulation.

c) To maintain and invest currency reserves.

d) To act as a lender of last resort.

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1.Organizations Which Implement National Monetary Policies (cont.)

c. Commercial Banks:

1) Accept and manage deposits.

2) Make loans.3) Offer trust

services.

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2. Branch Bankinga. International banks prefer to operate in host

countries through branches rather than subsidiaries.

1) Most major host countries encourage branch banking.

b. Jurisdiction over parent and branch bank.1) Most countries make no attempt to regulate the

activities of the foreign parent. a) Exception: United States.

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2. Branch Banking (cont.)c. Independence of foreign branches.

1) Parent banks often treat branches as separate business units.

2) Home states vary in whether or not they regard foreign branches as being independent entities.

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2. Branch Banking (cont.)d. Conflicts Between Host and Home

Country Regulations.1) As to deposits: There is no

internationally recognized rule for deciding whether a branch must comply with the home or host state regulations.

a) Suggested rule: A branch bank should only be subject to the rules and regulations of the host country, regardless of the directives given by the home country to the parent bank.


Case: In re Sealed Case: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result


Case: Vishipco Line v. Chase Manhattan Bank, NA: +Court +Facts +Legal Significance +Parties +Rational+Issue +Result

Severability Clause

Documents

1 of 27 Lecture 6 MONEY AND BANKING Topics covered: Money The International Monetary Fund Regional Monetary Systems National Monetary Systems