Case study

Bank Operations

Background information

Everything in economy is controlled by money and the bank is the most important link in the world of money controlling money circulation between firms, depositors and loaners, and offering services to make this circulation easier for them.

The Ukrainian foreign exchange system is regulated by the decree of the Cabinet of Ministers “On the System of Foreign Exchange Control”. The National Bank of Ukraine together with the Cabinet of Ministers is responsible for implementing foreign currency exchange policy. It has the authority to issue licenses for currency operations.

The NBU issued a resolution canceling the restrictions on banking transactions, which non-balance branches of commercial bank can effectuate. The NBU also allowed banks to open branches in any oblast.

Problem

The “Prominvest Bank” plans to extend services and to open new branches. It has organized an informal meeting of subsidiary bank managers to brainstorm the opportunity of performing additional bank services.

Task

You are representative of the managing staff of the “Prominvest Bank”. Work in groups of 3 or 4 persons and brainstorm the points listed in the rough notes. Then meet as one group and select best suggestions for further study.

Brainstorming session

1. What traditional bank services are to be done?

2. What nonspecific services can be operated by the bank?

3. Where will you open a new branch?

4. How will you perform transactions?

5. What juridical help will you use?

6. How will you present the clients’ interests in the court?

7. Will you deal with information services? How?

8. Will you extend tourist services? How?

9. Will you accept “utilities” payment?

10. Will you accept proceed of enterprises?

11. Will you trade in banking metals and cash currency?

12. Will you sell lottery tickets?

13. At what expense will you open a charity fund?

14. What privileges for agricultural companies will you introduce?

Text III. The gold standard

The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value – a practice that stretches back to ancient times. In the days when international trade was limited in volume, payment for goods purchased from another country was typically made in gold or silver. However, as the volume of international trade expended in the wake of the industrial revolution, a more convenient means of financing international trade was needed. Shipping large quantities of gold and silver around the world to finance international trade seems impractical. The solution was to arrange for payment in paper currency and for governments to agree to convert the paper currency into gold on demand at a fixed rate.

The gold standard worker reasonably well from the 1870s until the start of World War I in 1914, when it was abandoned. During the war several governments financed part of their massive military expenditures by printing money. This resulted in inflation, and by the war’s end 1918, price levels were higher everywhere. The United States returned to the gold standard in 1919, Great Britain in 1925, and France in 1928.

Great Britain returned to the gold standard by pegging the pound to gold at the prewar gold parity level of $4.25 per ounce, despite substantial inflation between 1914 and 1925. This priced British goods out of foreign markets, which pushed the country into a deep depression. When foreign holders of pounds lost confidence in Great Britain’s commitment to maintaining its currency’s value, they began converting their holdings of pounds into gold. The British government saw that it could not satisfy the demand for gold without seriously depleting its gold reserves, so it suspended convertibility in 1931.

The United States followed suit and left the gold standard in 1933 but returned to it in 1934, raising the dollar price of gold from $20.67 per ounce to $35 per ounce. Since more dollars were needed to buy an ounce of gold than before, the implication was than the dollar was worthless. By reducing the price of U.S. exports and increasing the price of U.S. imports, the government was trying to create employment in the United States by boosting output. However, a number of other countries adopted a similar tactic, and in the cycle of competitive devaluations that soon emerged, no country could win.

This put pressure on the gold reserves of various countries, forcing them to suspend gold convertibility. As a result, by the start of World War II in 1939, the gold standard was dead.