Currency Zones

Currency Zones


currency groupings of the capitalist states, formed during and after World War II on the basis of the prewar currency blocs headed by the particular capitalist power and following a coordinated policy in the area of international currency relationships. The joining of states differing in level of economic development into a currency grouping resulted from close economic ties and, to a certain extent, political dependence on the predominant country. The countries of a currency zone are tied to this country by a single set of currency and financial conditions and by a generally identical system of currency restrictions.

The main features that characterize a currency zone are that all participants in the currency zone maintain a firm exchange rate for their own currencies in relation to the currency of the predominant country; changes in exchange rates for their own national currencies in relation to other currencies are made only with the consent of the predominant country; a large part of the national currency reserves are kept in the banks of the predominant country; a uniform system of currency exchange control is maintained; and the foreign accounts of participating countries are concentrated in the banks of the country that heads the currency zone.

The monopolies of the predominant country receive free access to the internal markets and sources of raw materials of the countries participating in the currency zone. The foreign trade of these countries is also subordinated to the interests of the predominant country, which leads to non-equivalent exchange in their trade relations, especially with developing countries and colonies. The existence of a currency zone makes it easier to export capital from the country that heads the zone to other countries of this zone; and their gold and foreign exchange reserves, concentrated in the banks of the predominant country, are used by it in the interests of its own monopolies.

The most significant zones are the sterling and dollar zones and the zone of the French franc; there are also the currency zones of the Dutch guilder, the Portuguese escudo, the lira, and the Spanish peseta, but the significance of these currency zones is much less.

The sterling zone is the currency grouping of capitalist states headed by Great Britain; the monetary systems and foreign accounts of this zone are oriented to the English pound sterling. It was formed on the basis of the so-called sterling bloc at the start of World War II after currency exchange control was instituted in Great Britain. During its existence there have been changes in the composition of the member countries of the sterling zone. During the postwar period the Arab Republic of Egypt, Iraq, Israel, the Sudan, and Burma have withdrawn from it. However, in 1969 this currency zone still united a significant number of countries and territories. In Europe it included Great Britain, Ireland, Iceland, Gibraltar, and Malta; in Asia, Bahrein, Hsiang Chiang (Hong Kong), Trucial Oman, India, Jordan, Qatar, Cyprus, Kuwait, Malaysia, the People’s Republic of South Yemen (Aden), Oman, Pakistan, Sikkim, Singapore, and Sri Lanka; in America, Antigua, Barbados, Guiana, British Honduras, Trinidad and Tobago, and Jamaica; in Africa, Botswana, Gambia, Ghana, Zambia, Kenya, Lesotho, Libya, Malawi, Nigeria, Swaziland, Sierra Leone, Tanzania, Uganda, South West Africa, and the Republic of South Africa; and, in Australia and Oceania, Australia, New Guinea and Papua, New Zealand, and Western Samoa. In addition, numerous island possessions of Great Britain in different parts of the world are included in the sterling zone. The sterling zone is the largest of the present-day currency groupings; more than 18 percent of world commodity turnover in 1968 fell to the share of countries included in it.

The states of the sterling zone, which differ by level of economic development, form a more or less unified currency grouping, which is determined primarily by the close economic ties with Great Britain that became established during the period of the English colonial empire. There is also a certain significance to the traditional methods of carrying on international accounts of the participating countries through the London financial center. The existence of the sterling zone secures major economic benefits for Great Britain because the participating countries are major sources of various types of raw materials and are markets for English goods. About 30 percent of English export and import in 1966 involved these countries. The sterling zone is the most important export sphere for English capital.

The system of currency exchange control established in the sterling zone ensures free currency circulation within the zone while simultaneously maintaining control of dealings with the outside world. Great Britain enjoys preferential access to the material and financial resources of the zone through currency licensing and export quotas and also through systems of various currency accounts with different conditions for carrying out currency transactions. Great Britain also has at its disposal the resources of the “dollar pool” (the centralized gold and foreign exchange reserve of the sterling zone countries, which is kept in London) because these resources are concentrated in the Exchange Equalization Account of the British treasury, whereas the bank deposits of sterling abroad that are formed as a result of the export of goods and services and are constantly on the accounts of English banks are in fact converted into compulsory credit to Great Britain, which never pays it back. The depreciation of the pound sterling and its devaluation in 1949 and 1967 disrupted the currency systems of the sterling zone countries and caused major losses.

In legal terms the sterling zone does not have a centralized managing body, and its activity is carried on by the formally autonomous currency agencies of each participant on the basis of “traditional commercial practice” and “gentlemen’s agreements.” However, the recommendations of the British treasury and its agent, the Bank of England, play an important role in the currency policy of the zone as a whole. The currency policy of participating countries is also coordinated by periodically convened conferences of the ministers of finances of the corresponding countries.

In the postwar years, with the final disintegration of the British colonial empire, English influence is weakening in the countries of the sterling zone. A majority of participants in the zone are politically independent states (it includes more than 30 sovereign states). Attempting to preserve the sterling zone and keep the participants in its sphere of influence, Great Britain permitted a number of countries participating in the currency zone to form and accumulate independent gold-currency reserves, increased its assistance to them, and expanded credits. After devaluation of the pound sterling in 1967, the member countries of the zone got a dollar clause for the bank deposits in sterling belonging to them. This guaranteed such deposits against depreciation in case of a new devaluation of the pound sterling.

The dollar zone is a currency grouping of capitalist countries, primarily in North, South, and Central America, whose monetary systems and foreign accounts are oriented to the US dollar and occupy a subordinate place in relation to it. The zone was formed at the start of World War II on the basis of the dollar bloc. It does not have official legal foundation in the form of international agreements, but the currency legislation of many capitalist states views it as a fully defined currency grouping with a stable composition. In addition to the United States, the zone in 1969 included Bolivia, Venezuela, Haiti, Guatemala, Honduras, the Dominican Republic, Canada, Colombia, Costa Rica, Mexico, Nicaragua, Panama, El Salvador, and Ecuador, as well as Liberia, the Philippines, the American territory of Puerto Rico, and most of the Japanese islands in the Pacific Ocean under US control. In 1968 about 30 percent of the entire foreign trade turnover of the capitalist countries fell to countries of this currency zone.

American capital dominates in the dollar zone. The United States consumes a significant part of the raw material resources of the participating countries and is the main supplier of finished products to these countries. The foreign trade of the members of the dollar zone is primarily oriented to the American market. The United States also owns the largest part of the capital invested in the economies of member countries and uses this capital for political pressure on these countries.

The franc zone is the currency zone headed by France and created on the basis of its former colonial possessions. It appeared in the prewar period but became established after World War II. In 1950 agreement was reached among the participating countries of this currency zone to preserve the zone as a “voluntary association” and to form a foreign exchange committee to coordinate the currency and credit policy of countries of the zone. In addition to France, the franc zone in 1969 included Algeria, Tunisia, Morocco, the Ivory Coast, Upper Volta, Dahomey, Mauritania, Niger, Senegal, Togo, Mali, the Central African Republic, the Congo (Brazzaville), Gabon, Cameroon, Chad, and the Malagasy Republic; the overseas French departments of Guadeloupe, French Guiana, Martinique, and Reunion; and the overseas French territories of the Comoro Islands, New Caledonia, Polynesia, Saint Pierre and Miquelon, and Wallis and Futuna. As a result of the acquisition of political independence by a majority of the African countries, the zone has lost its colonial basis; its basic structure is made up of states that have become independent. Some countries have begun to follow an independent currency and foreign trade policy. Algeria, Tunisia, and Morocco have established their own currencies and national institutions of issue. They have even applied currency restrictions to countries of the franc zone. However, the economic relations, in particular trade relations, between these countries and France continue to play a considerable role.

Twelve liberated states of Africa have combined into two currency unions—the West African Monetary Union and the Monetary Union of Equatorial Africa and Cameroon. Money is issued in the states by the Central Bank of West Africa and the Central Bank of Equatorial Africa and Cameroon respectively. The monetary unit of these countries, and also of the Malagasy Republic, is the franc of the African financial community—the CFA franc (one CFA franc is equal to 0.02 French francs). This franc is guaranteed by French francs and is freely exchanged for francs through a “transaction account” opened in the name of the central bank of each country with the treasury of France. The countries that are members of the currency union are obligated to turn over all earnings in foreign exchange to a centralized pool in the French treasury and do not have the right to change the exchange rate of the CFA without French consent. Since 1968, basically the same system has existed for Mali. For Algeria, Tunisia, and Morocco, so-called advance accounts in French francs have been opened at the Bank of France. Exchange of the currencies of these countries at French banks is done only within the limits of the balance in the advance account or by an authorized overdraft (an amount within which the capitalist banks credit the owner of a current account beyond the balance in the account), but these countries too carry on most settlements through the Paris currency market, in which all currency transactions of the franc zone are concentrated. In these countries the issue of currency is secured by their own reserves in gold and foreign currency as well as by other assets.

The mechanism of the currency zones permits the pre-dominant countries to keep their position in the colonial pos-sessions and developing countries that participate in the zone and this, in its turn, exacerbates the contradictions within the currency zone and within the currency system of capitalism as a whole. The disintegration of the colonial system leads to the intensification of the contradictions between the predominant countries and the others and to the undermining of the currency zones.


References in periodicals archive ?
Of the two currency zones, the Central Africa franc used in the Central African Economic And Monetary Community (CEMAC) is under more pressure than in the West African Economic and Monetary Union (WAEMU).
The study also found that of the 14 member states of the two currency zones, the Republic of Congo (CCC+/Stable/C) is the most vulnerable to a devaluation, should it occur.
This will have enormous implications for finance and treasury departments in any company exposed to multiple currency zones across its value chain.
Any business with substantial exposure to multiple currency zones needs to be thinking today about how to navigate the volatile times that loom ahead.
We support countries and not currencies or currency zones.
However, currency zones took another path with the adoption of the free exchange principle in 1972, and the use of national currencies as speculative financial instruments, competing with the currencies they are pegged to.
In the improbable situation that one of the three currency zones wished to appreciate its currency against the other two, and neither of the other two would agree to coordinate on that direction of intervention, they could combine reserves to sell on the market (in all likelihood, they could expect the market to join them in opposing the appreciation, for the unilateral intervener could only strengthen its currency to the extent it had foreign exchange reserves with which to buy up its own currency).
It is for these reasons that the IMF called upon European countries to join the Euro zone, paving the way for the establishment of further unified currency zones.