Bretton-Wood Monetory System for World Money Exchange
Traditionally world (global) money was the gold, but in a 1944 Bretton-Wood convention has reduced a rating of gold, by making world(global) currency, alongside with gold, dollar. Under this convention were created International monetary fund (IMF) and International bank for Recons ruction and Development (IBRD). The system of stabilization of the exchange rates was accepted.
The international bank for Recons ruction and Development - international bank organization, which is the property of countries - participants of International monetary fund. More often it name as world(global) bank.
All countries - participants have agreed to support the course, fixed in dollars, of the currency called as parity course.
Each country, under the convention, should have a dollar store as backup currency and to use it for a purchase of the currency, when cost of dollar falls. For want of increase of course of dollar the own currency is sold.
The exchange rate of currencies was fixed through tripartite arbitration. For example, if parity cost of English pound made 2,00 dollars, and French franc - 0,25 dollars, the exchange rate between pound and franc the tripartite arbitration defined(determined) as:
Pound/franc = dollar/franc / dollar/pound = 2/0.25 = 8.00
Today in the international payments have received development the currency clearing, that is accounts between countries on the basis of offset of the mutual requirements according to the international conventions.
Islamic Banking System.. The Ideal One?
Posted: Oct 25, 2008 9:39 AM
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After most countries were hit by the global financial crisis, writers and economists started calling for revising the global financial and banking system and the ideologies it was built on. Many of the western intellectuals are asking for adopting a new ideology that do not have such deviations that the capitalism have.
The Islamic financial and banking system is the one with most popularity now. The following are sayings by some western economists and writers:
- Roland Laskine, Editor in Chief of Journal des fienance: "Is it time now for adopting the principles of Islamic Sharia'h in Wall Street? If our leaders are really looking for limiting the financial speculation that caused the crisis, then simply the solution is to apply the principles of Sharia'h."
- Beaufils Vincent, Editor in Chief of The Challenger: " I think that in the spite of such crisis, we need to read Quran to understand what happened to us and our banks because if the managers of such banks tried to respect and apply what the Quran contained from teachings and orders, such crisis would have not existed and we won't have being in such miserable situation as money does not breed money!."
Some economists called for making the interest rate equal to 0 % which simply is the same as the Islamic principle of forbidding the collection of interest on money given out as loans.
Islamic banking & finance system follows some principles such as:
1 - Prohibition of usury and Cornering
2 - Prohibition of fraud
3 - Prohibition of injustice and inequity
4 - Prohibition of gambling
5 - Sharing in the profit and loss
6 - Prohibiting the sale of cash money
7 - Prohibiting the sale of debt
Dr Mahathir's comment on US dollars and Malaysian Pegging of Ringgit
1. I am not in the business of advising the Government. When I mentioned the advisability of pegging the Ringgit, it was in answer to a question posed by a reporter. If the Government noticed the report I would feel flattered.
2. Pegging currencies is not as easy as it sounds. The whole thing must be studied very carefully. Even getting agreement by a select panel is not easy. A decision made on the spur of the moment that pegging is not possible cannot really reflect the assessment made together with experts in consultation.
3. Pegging need not be always with the US Dollar. But the fact that the US Dollar is currently not stable is no reason why the idea should be summarily dismissed.
4. There can be other options. Other more stable currencies can be used or a basket of currencies may be used to reduce extreme volatility.
5. The US Dollar is backed by nothing, not even reserves in foreign currencies and gold which other countries hold in order to back their own currencies. The US is a bankrupt nation which means it is not in a position to provide foreign currency backing for its money.
6. The gold in Fort Knox has been depleted long ago and the pegging to gold of a certain amount as agreed to at the Bretton Woods has been done away with by President Nixon. No more gold standards. Yet the US Dollar still commands a certain value in the market. It is still being used for trade payments. This in fact gives the US Dollar a certain value even though the value, in exchange rate terms may change.
7. If the US Dollar is not used in international trading, it will have no value at all. This will of course hurt a lot of countries including Malaysia which carry substantial sums of US Dollar as reserves. Countries like China, Saudi Arabia and tiny Singapore would want to support trade payments made in US Dollar. They do not want their huge reserves of US Dollar to become worthless.
8. What we see here is the importance of international trade payments in sustaining the value of a currency.
9. Long, long ago I suggested the use of a special currency for trade. The currency should be equal in value to a fixed amount of gold. It should not be used domestically as each country would have its own currency pegged to the special trading currency.
10. The price of gold may go up and down but we know that the price of gold today is more than, say, 30 years ago. If we keep gold long enough we will eventually see it appreciating. It is not as volatile as currency notes.
11. So gold is an ideal standard for a trade currency. Effectively we would be going back to the Gold Standard, both for the trading currency and the domestic currency. For the domestic currency the rate against gold can change in keeping with inflation.
12. It was suggested that we call this trading currency the "dinar". Transactions would of course not be in solid gold dinars but with equivalent papers. It is not practical to carry around so much gold dinars but this will not be necessary if a country's export to another country and its import from that country is fairly balanced and only the difference need to be paid.
13. I am not an expert in this area but we can get experts to study whether pegging or the gold dinar are feasible. I would not dismiss the eficacy of these so easily.
14. Perhaps I can make a ridiculous suggestion. Why not make all Malaysian trade payments in Malaysian Ringgit?
15. We are a big trading nation. We export more than 200 billion Ringgit worth of raw material and manufactured goods and we import slightly less than that. Traders cannot just ignore us or boycott us. They need our exports and they need to sell their products to us.
16. All we need to do is to demand payment in Malaysian Ringgit for our exports. We can require payment for our imports in Ringgit according to the current value in an international trading currency or gold.
17. If we do this there will be a constant demand for Ringgit and this will keep the value of the Ringgit at a certain level which we can fix, taking into consideration factors which influence its value.
18. This may sound like a ridiculous suggestion. But not being a trained economist or financier I can allow myself the privilege of unorthodox thinking.
Why America Facing the Financial Crisis?
As the 21st century began, the United States experienced its worst financial crisis since the Great Depression. The crisis came to a head in 2008 when the nation saw its largest bank failure and the near collapse of the investment banking industry. The crisis required an extraordinary intervention by the Federal Reserve System and the Department of the Treasury as the bank failures led to a virtual halt in lending by the financial industry. At the urging of the Fed and the Treasury Department, the U.S. Congress passed legislation authorizing a $700-billion bailout package to restore liquidity to the system.
To many observers, the crisis began as a result of a “bubble” (risky speculation) in the housing industry. As housing prices continued to climb year after year, many lenders began offering so-called subprime (below market rate) mortgages and adjustable-rate mortgages. In addition, beginning in the 1970s, banking institutions for the most part no longer held onto mortgages as they had in the past but instead sold them to other institutions. These institutions in turn grouped mortgages together and repackaged them as mortgage securities, a process known as securitization.
When housing prices began to decline, many homeowners found that they owed more on their homes than their homes were worth, and they ceased making payments, sending the homes into foreclosure and leaving the holders of mortgage securities with worthless assets. Subprime mortgages had often been made to people who would not ordinarily qualify for a mortgage. When they experienced financial difficulty through the loss of a job or higher interest rates, they, too, faced foreclosure.
Further complicating matters was uncertainty over the reliability of mortgage securities, since no one actually knew how many bad mortgage loans were involved in these securities. As the housing market crumbled, the nation’s sixth largest bank, Washington Mutual, with $307 billion in assets, saw many depositors begin to withdraw their money in panic. The Federal Reserve seized the bank and arranged for it to be acquired by J.P. Morgan Chase & Co. It was the largest bank failure in the nation’s history.
Soon after Washington Mutual failed, the Fed also had to rescue the banking operations of Wachovia Corporation. With this action, the U.S. banking industry was further consolidated into only three major banks—Bank of America Corporation, Citigroup, and J.P. Morgan Chase—that controlled about 30 percent of all bank deposits in the United States.
By October 2008 Congress had passed and President George W. Bush had signed the largest bailout plan in U.S. history. The banking rescue plan initially gave the Treasury Department the power to use $350 billion in taxpayer funds to buy up the failed mortgage securities. It gave the secretary of the treasury, Henry Paulson, wide powers to negotiate the cost of these purchases with the ultimate authority to spend up to $700 billion. In addition, to reassure bank depositors, Congress increased deposit insurance guaranteed by the Federal Deposit Insurance Corporation from $100,000 per depositor to $250,000.
The crisis promised to spark a sweeping reassessment of government regulation of the banking industry. Congressional inquiries began into the bank failures, and the Federal Bureau of Investigation (FBI) opened formal probes to determine if fraud was involved in any of the failures. Some economists argued that a “shadow banking system” had emerged in which commercial, or depository, banks played only a minor role in providing credit. Instead, nondepository institutions, such as the failed investment banks Bear Stearns and Lehman Brothers, assumed huge debts that were not backed by savings deposits and provided credit through complex financial instruments known as derivatives. These derivatives had escaped regulatory control and thus imperiled the entire financial system. See also Investment Banking.
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