Professional Documents
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REFORMS
CH.S.V.S.PRASANNA
18L31E0015
2ND MBA-A
FOREIGN EXCHANGE
Foreign exchange, or FOREX, is the conversion of one country's currency into another. In a free economy, a
country's currency is valued according to the laws of supply and demand.
In other words, a currency's value can be pegged to another country's currency, such as the U.S. dollar, or even
to a basket of currencies. A country's currency value may also be set by the country's government.
MONETARY REFORM
Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that
is different from the current system.
Monetary reformers may advocate any of the following, among other proposals:
Abolition of central bank support of the banking system during periods of crisis and/or the enforcement of full reserve
banking for the privately owned banking system to remove the possibility of bank runs.
The issuance of interest-free credit by a government-controlled and fully owned central bank. This proposal seeks to
avoid debt-free money causing inflation.
The direct cash payments would be made to "replenish" or compensate people for the net losses some monetary
reformers believe they suffer in a fractional reserve-based monetary system.
INTERNATIONAL MONETARY REFORMS
Some of the monetary system reforms include:
1 January 1970:
The first of the annual allocations of $3.4 billion to 104 countries participating in the Special Drawing Department.
Allocation to each individual country is in proportion to its quota in the TMF.
8January 1976:
The IFM Interim committee reaches the agreement on the second Amendment to the Fund’s Article of Agreement. As per
it, all the member countries will be free to opt for either fixed or foreign exchange rates.
A new international currency unit; called bancor, with a fixed value in gold will be created. At the same time,
holdings of foreign currency will be abolished.
According to this plan a single country can acquire bancor in two ways:
-It can sell gold or use its overdraft facilities with the clearing union.
-The exchange of gold and bancor, however, is one way.
Gold can be used to acquire bancor, but bancor cannot be used to buy gold.
A deficit country needing liquidity can borrow from the clearing union by using the overdraft facilities. Each
member country has a quota in the union.
The quota depends on the sum of each country’s exports and imports.
Keynes plan was rejected at Bretton Woods for two reasons. First, Keynes plan did not allow the right of conversion
into gold of holdings of “bancor”. Second, the credit creating powers of the proposed clearing union were unlimited
with possible inflationary implications for the world economy.
The Bernstein Plan
The leading idea of the Bernstein plan is to give the IMF a more central place in the present international monetary
system. The member countries now hold quotas in the IMF.
The first suggestion of the Bernstein plan is that the IMF quotas should be integrated into each country’s working
balances. Thereby the amount of international liquidity should increase.
The second suggestion of the Bernstein plan is the creation of a Reserve Unit Account within the IMF.
A member country of the IMF could be allotted say $ 100 million of reserve units. This would mean that the country
would deposit an equivalent amount of its own currency with the Reserve Union Account.
The growth of reserves could simply be handled by an increase in the total amount of reserve units.
Bernstein suggests that new reserve units should be issued each year “to provide for an adequate but not excessive
increase in total monetary reserves”.
The Bernstein plan only creates a mechanism through which increases can be made; it does not solve the essential
problem: what rule should govern the creation of liquidity. The plan could in this respect easily turn into a scheme for
special assistance to deficit countries.
The Triffin Plan
Countries which now hold foreign exchange as part of their reserves will be required to hold an increasing proportion of
their foreign exchange assets as deposits in the IMF. Thus, IMF will get reserves and the Central Banks will be credited
with deposits. The deposits with the IMF will carry a gold guarantee.
Member countries be required to hold at least 20% of their total reserves as deposits with the IMF. IMF will then
gradually expand its activities in this direction and eventually will acquire all international reserves in the form of
foreign currency.
The background of this part of the plan is the need for a long-
term increase of international liquidity which Triffin views as
one of the essential tasks that any reform plan should solve. If
IMF recognizes a need for a secular growth of international
liquidity, its open market purchases will exceed its open
market sales.
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