International Banks and Funds

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International Banks and Funds

International banks and funds include a variety of institutions operating in many parts of the world whose purpose is to aid member nations financing economic development and to provide balance of payments assistance.

International banks provide loans for industrial, agricultural, and infrastructure projects and, when needed, make available to members technical assistance in many areas of economic and social life. Today, international banks play a particularly important role in the development of many countries of Asia, Africa, and Latin America. The most important is the International Bank for Reconstruction and Development (IBRD), usually called the World Bank. It has two affiliates. One, the International Development Association (IDA), makes subsidized loans to poor developing countries; the other, the International Finance Corporation (IFC), is active in the international investment field. The European Investment Bank, the Asian Development Bank, the African Development Bank, and the Inter-American Development Bank serve specific regions. A special place in the international bank field is held by the Bank for International Settlements (BIS), set up in 1930 by several European central banks.

International funds provide financial assistance to members with balance of payments difficulties. The foremost example is the International Monetary Fund (IMF). Traditionally, IMF assistance takes the form of conditional, relatively short-term loans, but since the mid-1960s and especially since the quadrupling of oil prices in 1973-1974, the Fund also makes available--mainly to developing countries--nonconditional longer-term credits. The International Bank for Reconstruction and Development (IBRD or World Bank). The World Bank, like the International Monetary Fund, was established at the Bretton Woods conference in July 1944. The Bank's headquarters are in Washington, D.C., and its president is traditionally a United States citizen. Membership in the World Bank is open to any country that is also willing to become a member of the International Monetary Fund. As of 1982, there were 143 members.

The bank's resources are derived partly from the capital subscriptions of its members. Approximately 90 percent of the World Bank's subscribed capital (about $34 billion in 1979) consists of a guaranty fund subject to call when needed to meet the obligations of the bank. The remaining 10 percent of capital must be paid in cash. Of this, 10 percent (one percent of capital) is payable in U.S. dollars or gold and the remainder (9 percent of capital) in the subscribing members' own currencies. The U.S. dollar portion of the paid-in capital is freely usable by the IBRD, whereas capital paid in other currencies can be lent by the bank only with the consent of the member whose currency is involved. Generally, however, consent has been readily forthcoming.

The major portion of the bank's loan funds comes from investors in the world's capital markets. They buy the bank's own bonds or acquire parts of the actual loans made by the bank. World Bank borrowings from public and private investors totalled more than $26 billion in mid-1979. Of this total, about 76 percent was held by investors in Germany, the United States, Switzerland, and Japan. The remaining 24 percent was held by private and official institutions in more than 80 countries. In addition to borrowing, the bank generates new loan funds from earnings and from repayments of earlier loans.

The early loans of the IBRD were made to governments whose economies had suffered severely from World War II. Since the end of the postwar reconstruction period, however, the bank's principal purpose has been to make loans for development projects to member governments and their political subdivisions and agencies and to private enterprises in less developed countries. Before `it makes a loan, the bank studies the feasibility of the project and the country's capacity to earn the foreign exchange out of which the loan must be repaid. international bank credit financial

The scope of IBRD operations goes far beyond making loans. One of the bank's major activities has been providing member countries with technical aid and advice. To this end, the bank sends general survey missions to member countries to review their needs and make recommendations. In addition, resident experts sent by the bank assist governments in implementing programs designed to promote economic development. In planning and implementing a program, the bank frequently cooperates with various United Nations agencies. Such projects have ranged from a survey of manpower and training needs in West Africa to a global study of the feasibility of replicable low-cost water supply and waste disposal techniques in rural and urban fringe areas. The bank has also acted as a mediator in international disputes, such as the disagreement between Egypt and the Suez Canal Company over the assets seized by Egypt, and that between the governments of India and Pakistan on sharing the waters of the Indus River basin.

All loans are made on commercial terms. The rates of interest charged borrowers on disbursed loans are based on the current market rate for the bank's bonds of a similar due date. The IBRD is generally rated as an exceedingly low credit risk, which allows it to raise loans at better terms than many of the member countries have been able to obtain on loans raised directly in the market.

As of mid-1979, the IBRD had made loans totaling $51.7 billion. Of that sum. 28 percent had gone to Europe, the Middle East, and North Africa; 32 percent had gone to Latin America and the Caribbean; and 22 percent had gone to East Asia and Oceania. The poorest regions--sub-Saharan Africa and southern Asia--got only 18 percent. Nearly 23 percent of the funds loaned went to develop transportation facilities; about 20 percent went for agriculture and rural development, and another 20 percent for industry and industrial development; some 19 percent went for electrical power projects, and the rest for a variety of other purposes.

The International Development Association (IDA). Established in i960, the IDA is an affiliate of the World Bank through which the bank makes concessionary loans (loans on especially favorable terms) to the poorest developing countries. Only IBRD members can elect to become IDA members. The association is essentially an intergovernmental fund administered by the IBRD, with resources being provided primarily by rich countries. The president of the bank serves also as IDA's president and the bank's executive directors serve as IDA's executive directors. Only governors of the bank representing countries that have elected to become IDA members are governors of IDA. IBRD staff does all work associated with IDA activities.

The bulk of IDA's resources has come from members' initial subscriptions and periodic replenishments provided by its richer members. In addition, there are special contributions by individual members, transfers of income from the IBRD, and IDA's own accumulated income. As of mid-1979, total subscriptions and supplementary resources amounted to $18.4 billion, of which $17.7 billion, or 96 percent, was provided by the 21 “part I” members--relatively high income countries. The 100 “part II” members-- mostly relatively poor developing countries--contributed the remainder, the bulk of it in their own currencies.

IDA lending differs from that of the IBRD in two important ways: i) IDA concentrates almost exclusively on very poor developing countries, and 2) its “credits” (so called to distinguish them from IBRD “loans”) are on extremely favorable terms, with long maturities and only a small service charge. As of mid-1979 IDA credits to a total of 74 developing countries stood at $16.7 billion, including $5.6 billion not yet disbursed.

The International Finance Corporation (IFC)

Set up as an affiliate of the IBRD in 1956, the International Finance Corporation was created to aid the growth of private investment in countries promoting rapid economic development, by helping to mobilize domestic and foreign capital. Only members of the IBRD are eligible to become members of the IFC. As of mid-1979 membership totaled 109 countries. The corporation has its own operating and legal staff, but draws upon the bank for administrative and other services. Like IDA, the IFC has its offices in the IBRD building in Washington.

The IFC has share capital of $650 million, of which nearly one half had been paid in by 1980 or was due in installments payable no later than Feb. 1, 1982. The IFC can increase its resources by borrowing from the IBRD or other sources and by selling portions of its investment portfolio.

The IFC makes funds available to a business only if the major share of its capital is provided by private investors. The IFC's main function is to bring together experienced management, private investors, and business interests seeking capital. Under its original charter the IFC was empowered only to lend to private enterprise in developing countries, but not to make equity investments. Thus, the main difference between the IFC and the IBRD in providing venture capital to private enterprise in developing countries was that the corporation could do so without the IBRD requirement of a government guarantee. In 1961 an amendment to the IFC articles of agreement lifted the limitation on IFC equity investments, which enabled the corporation to simplify its investments and, in general, be more flexible in investment negotiations. The holding of equity investments also makes it easier for the corporation to find participants in a venture and to sell portions of its portfolio, thus increasing the leverage of its own resources. As a shareholder of an enterprise, the IFC is frequently also able to play an influential advisory role and assist in the development of sound business and financial practices. -- The European Investment Bank. Among inter-government institutions serving regional needs is the European Investment Bank. It was set up in 1958 with the founding of the European Economic Community (EEC), consisting initially of Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany, and since 1973 of Great Britain, Ireland, and Denmark as well. This bank provides financial resources to speed the economic advancement of the less developed areas in the member countries, in order to reduce differences in productivity and unequal basic facilities, which are obstacles to the proper functioning of the EEC. Since the mid-1970?s the bank has also provided development aid to former colonies of several EEC countries. According to the bank's statutes, it may make loans only to member governments, or to public and private firms within member countries and in countries affiliated with the EEC by various treaties. Loans to private concerns must either be guaranteed by the respective member government or be protected by other adequate guarantees. Loans are to be made only if the necessary funds are not available on reasonable terms from other institutions. Priority is to be given to financing enterprises or programs that will tend to strengthen the bonds among the EEC economies.

The bank is in theory administered by a board of governors composed of the finance ministers of the member countries. Actual operations, however, are handled by a board of directors, assisted by a three-man management committee made up of the bank's president and two vice-presidents. The bank's headquarters are in the city of Luxembourg.

Subscribed capital was doubled in 1978 to 7.1 billion European currency units (ECU), equal to $9.3 billion at the prevailing rate of exchange. Of the total, 900 million ECU ($1.2 billion) were paid in and 6.2 billion ECU ($8.1 billion) were subject to call. The callable part of the bank's capital serves as a guarantee fund for its creditors. The bank is authorized to sell its own securities and to sell the obligations it receives from borrowers. The bank may also borrow directly from its members. Total commitments of the bank may not exceed 250 percent of subscribed capital; they amounted to 17.7 billion ECU ($23.1 billion) in 1978. By 1979, outstanding loans for projects within the EEC totaled 7.2 billion ECU ($9.5 billion) and outside the EEC 639 million ECU ($840 million).

The Inter-American Development Bank (IADB)

The Inter-American Development Bank was founded in 1959 by the United States and the 20 Latin American countries. Its principal purposes are to support Latin American economic development, to serve as an instrument for economic cooperation among the member countries, and to provide technical assistance in preparing and carrying out economic development plans. Since 1959 four regional and 17 non-regional countries (Canada, Israel, Japan, and 14 European countries) have become members. The bank's headquarters are in Washington, D.C.

The bank was established with two completely separate resources: its ordinary capital resources and its Fund for Special Operations. The ordinary capital resources are for projects that pay for themselves within a reasonable period of time. Such loans are repayable in the currency in which the loan was made. The Fund for Special Operations, which is administered separately, finances projects that are unlikely to produce quick returns. The repayment of these loans may be made partly or entirely in the borrower's currency. In addition, the IADB administers the $500 million Social Progress Trust Fund, established by the U.S. government in the early 1960?s under the Alliance for Progress, and the $500 million Venezuelan Trust Fund, set up in 1975.

The initial authorized capital of the regular loan department of the IADB was $850 million; that of the Fund for Special Operations was $150 million. As of 1979 the authorized ordinary capital resources had reached more than $9.6 billion, while those of the fund amounted to about $5.9 billion. Following the example of the World Bank, only a part of the authorized capital stock must be subscribed in gold and dollars. A portion of this gold and dollar subscription is paid in; the remainder is on call. Of the more than $9.6 billion authorized for regular loans in 1979, more than $1.1 billion was paid in. Only one half of this amount was paid in gold or U.S. dollars; the remainder was in the member's own currency. The $8.5 billion not paid in was callable to meet IADB liabilities on bonds or other securities that it might issue.

The U.S. subscription is extensive; as of the end of 1979 the United States had contributed 35 percent of the capital stock of the bank and 62 percent of the capital for the Fund for Special Operations. M The Asian Development Bank (ADB). The ADB, established in 1966, provides financing and technical assistance to developing member countries in Asia and the Far East. The bank is owned by its member governments. It is governed by a board of governors and administered by 12 directors and a president, all of whom are elected by the board of governors. By 1983 there were 45 members, including 31 regional and 14 non-regional countries. The headquarters of the bank are in Manila.

The original authorized capital of the ADB was $1.3 billion, but the amount was raised in several steps to $9.5 billion by 1980. Of this amount nearly $8.9 billion was subscribed, with some f 1.8 billion paid in and $7.1 billion subject to call. The capital subscriptions of regional members were determined on the basis of their relative gross domestic product, population, tax revenue, and export earnings. Subscriptions by non-regional members are essentially the result of negotiations based on the foreign aid policies of the respective countries.

The bank also administers a Multi-Purpose Special Fund, through which it channels concessional loans to poor members, and a Technical Assistance Special Fund, which serves as a source of financing expert services to members. The funding of these special funds relies mainly on member governments' grants. The bulk of the contributions has come from developed member countries, both regional and non-regional.

The bank is empowered to augment its own financial resources through borrowings in the financial market and by seeking private participation in its project loans. Until the mid-1970?s the bank borrowed on a relatively small scale, but in recent years it has stepped up its activities. Lending by ADB to member countries from 1967 through 1979 totaled nearly $4.7 billion. In addition, concessional lending from the special funds amounted to nearly $2 billion and technical assistance grants to $326 million. Of the combined total of S6.65 billion in loans approved through the end of 1979, more than 50 percent went into agriculture and energy development.

The African Development Bank (ADB). The African Development Bank was established in 1967 to promote the economic development and social progress of its African members. The bank is administered by a board of governors, on which each member is represented. By 1983 the bank's membership stood at 50 countries. The bank's headquarters are in Abidjan, Ivory Coast.

The original authorized capital of the bank was 250 million units of account (U.A.), each U.A. being equal to one U.S. dollar in terms of its gold content. This valuation was later changed to 1 U.A. = 1 SDR (the special drawing right of the International Monetary Fund). As a result of several increases, authorized capital at the end of 1978 totaled 800 million U.A., which at the prevailing exchange rate equaled $1.04 billion--$391 million paid-in capital and $649 million subject to call. To augment its own resources, the bank is empowered to borrow from its members. By 1979 such borrowings outstanding totaled $200 million.

The bank has financed projects--and in some instances provided technical assistance--in almost all the member countries. Cumulative lending from 1967 through 1978 totaled $810 million, including $455 million still undisbursed. The bulk of the ADB's lending went into the financing of public utilities projects, transportation facilities, and agriculture.

The Bank for International Settlements (BIS)

The BIS provides facilities for international banking operations for and on behalf of central banks. It was set up in 1930 by many of the world's leading central banks and is also authorized to act as trustee and agent with respect to international financial agreements. Its headquarters are in Basel, Switzerland. The original capital was just under $25 million and, although in the 1930?s it commanded larger resources, its capital remains small.

The resources of the BIS consist primarily of deposits by central banks. It uses these funds for its credit operations and for its investments in gold and commercial paper. The BIS also engages in buying and selling gold for future delivery and in acquiring gold from central banks in one country and matching this operation by delivery of gold to the credit of the same banks in another country. It thereby saves these banks the cost of a physical transfer of gold. It also buys and sells in foreign exchange markets.

Before World War II, the BIS performed various functions in preparing and carrying out international financial settlements. After 1948, it performed agency functions for the Organization for European Economic Cooperation (OEEC), first in executing the Agreements for Intra-Euro-pean Payments and Compensations, set up under the Marshall Plan, and then in operating the Agreement for the Establishment of the European Payments Union. From 1959 to 1973 the BIS acted as agent in the credit operation of the European Fund and the multilateral system of settlements under the European Monetary Agreement. In 1973 the bank became the agent of the newly established European Monetary Cooperation Fund, which administers the currency exchange rate and credit arrangements of the European Economic Community (EEC) under the European Monetary System. The BIS carries out the operations of the fund and acts as the clearing house for transactions between the fund and participating central banks of EEC countries. The bank also acts as trustee for international government loans and as depository for the European Coal and Steel Community.

“The International Monetary Fund (IMF). The articles of agreement establishing the International Monetary Fund were drawn up by the United Nations Monetary and Financial Conference, meeting at Bretton Woods, N.H., in 1944. The main purpose of the fund is to provide a reserve of foreign exchange on which member governments can draw during temporary balance of payments difficulties. In 1982 IMF membership included the governments of 146 countries. Most countries of the non-Communist world are members. Switzerland is a notable exception, but since 1964 Swiss authorities have participated in various IMF-sponsored financial arrangements under a special agreement. Among Communist countries, Yugoslavia, Romania, China, Vietnam, and Hungary are members.

The IMF is governed by a board of governors, with each member appointing one governor and one alternate governor. Administration and day to day operations are directed by the managing director and the board of executive directors. By tradition and precedent, the managing director is always a national of a European country. IMF headquarters are located in Washington, DC.

The IMF has undergone considerable evolution since it began operations in late 1945, as reflected in two amendments to the articles of agreement. The first of these established Special Drawing Rights (see below) in 1969. In 1978 a far more important second amendment formalized far-reaching changes in the policies and operations, and even the make-up of the fund.

Under the original articles of agreement each member pledged to cooperate with the IMF in promoting stable exchange rates among currencies and to avoid competitive devaluations. Currency values were expressed in units of gold. Members seeking to change the value of their currencies were obliged to consult first with the IMF. In 1978 official gold-linked currency exchange rates were abolished and the requirement that the IMF be consulted on rate changes was removed. As a result, countries are now free to adopt any exchange rate regime they wish--freely floating exchange rates, managed floats, exchange rates fixed in terms of some other currency or a “basket” of currencies, cooperative arrangements with other countries, etc. However, the IMF still retains policing power over members' foreign exchange policies, with the objective of preventing competitive rate manipulations.

Each member of the IMF has a quota based on the country's relative economic and financial strength. The quota determines the member's financial contribution (subscription), its voting power in IMF, and its access to the IMF's resources. In 1980 the United States contributed about 19 percent of the IMF's resources, which gave it effective veto power over decisions affecting the IMF's governance, where 85 percent of all votes are required for agreement.

Subscriptions to the IMF were originally payable partly in gold and partly in the member's own currency. For the original members, a gold subscription was assessed at 25 percent of the member's quota, or 10 percent of each country's net official gold and dollar holdings on Sept. 12, 1946, whichever was smaller. The subscriptions for members who joined the IMF after 1948 have been determined on an individual basis. In 1978, with the abolition of the role of gold in IMF operations, a process was initiated of gradually disposing of a portion of the IMF's gold holdings. As a result, 25 percent of members' subscriptions are now in convertible currencies, while the remaining 75 percent are, as before, in each member's own currency. Countries' own currency subscriptions can be in the form of noninterest bearing notes of the respective member government, which the fund may cash if needed. As of March 1980, members' subscriptions, which comprise the IMF's general quota, totaled over 39 billion Special Drawing Rights (SDR's), or nearly $50 billion at the prevailing exchange rate.

Separate from the general quota, the IMF also administers the SDR account, which contains all SDR's allocated to members since the asset was created in 1969. By early 1980 more than 17 billion SDR's had been allocated. Another 4 billion SDR's, still available under a second authorization in 1978, were to be allocated to members by 1981. All newly created SDR's are allocated to members in proportion to their quotas in the IMF.

Special Drawings Rights, also called paper gold, were created in 1969 both to augment international liquidity and eventually to replace gold as an international reserve asset. SDR's now perform the same function as reserve currencies in the settlement of international accounts, but only on IMF books. Aside from being a reserve asset, the SDR has also been adopted by the IMF as the unit of account in all its transactions. Moreover, several countries have adopted the SDR as the standard of their respective currency values. The value of the SDR was at first linked to that of the U.S. dollar. But after 1974 its value was based on the market value of a “basket” of 16 major currencies. As of 1981 this valuation basket was reduced to five currencies--the U.S. dollar, the British pound, the French franc, the West German mark, and the Japanese yen.

Financial assistance by the IMF to members in balance of payments difficulties has increased enormously over the years in both scope and types of credits. All drawings from the IMF take the form of a sale by the IMF of the currencies of other members for an equivalent amount of the buyer's own currency. Repayments are made in other members' currencies acceptable to the IMF or, subject to the IMF's consent, in SDR's.

The basic financing facilities of the IMF are the reserve tranche and four credit tranches. (“Tranche” means “slice” and refers to the fact that members draw on their quotas in successive “slices” or installments.) Drawings from the reserve tranche--equal to 25 percent of the member's quota --can be made almost automatically. However, drawings from the next four credit tranches--each equivalent to 25 percent of the member's quota--are conditional. With respect to the first credit tranche, the IMF tends to be fairly liberal. The member government requesting assistance is merely required to submit a plan that shows its serious intention to remove the causes that produced its unfavorable balance of payments. However, a member government that requests assistance in excess of 50 percent of its quota must satisfy the fund that it is adopting a sound program that will assure financial stability, both domestically and externally.

Rights of member countries to draw tranche credit are determined also by provisions limiting the total amount of IMF holdings of a member's currency as well as the rate at which the IMF may increase such holdings. Without special permission of the IMF's executive board, a country cannot borrow from the fund more than 100 percent of its quota in addition to its reserve tranche. Nor may it, without special permission, draw amounts in excess of 25 percent of its quota within any 12-month period. Tranche credit is ordinarily made available for not more than three to five years. The IMF has since the mid-1960?s added several new credit facilities and, in the process, has substantially broadened the scope of its financial assistance and improved its ability to act flexibly. These special financing facilities were set up to provide financial assistance to help qualifying members meet special needs. Loans from these special facilities are separate from tranche credits and are available for longer periods of time.

The Compensatory Financing Facility, set up in 1966, allows nonconditional drawings by members experiencing temporary shortfalls in export earnings due to circumstances beyond their control. Maximum credit allowed is 75 percent of the member's quota, with drawings in any 12-month period ordinarily limited to 50 percent of the quota. Drawings are for a maximum period of seven years.

Auto Insurance

About 25 million auto accidents occur in the United States each year. Approximately 5 million people are injured in these accidents; some 50,000 are killed. Auto insurance of course cannot reduce the deaths, the injuries, or the damages, but it does offer protection against the financial risks of auto ownership and operation.

Auto Insurance Coverages

Auto insurance includes several different forms of protection. Some of the coverages may be required by state law; some are valuable even though they are not compulsory; and some may be desirable for certain motorists but not for others.

Liability Coverage

Auto accidents often result in lawsuits in which one party seeks reimbursement for bodily injury or property damage caused by the negligence of another. Auto liability insurance protects against the financial consequences of such claims. The insurer promises to provide legal defense if an insured is sued and promises to pay damages for which the insured is legally responsible. In other words, liability coverage defends against damage claims and pays amounts needed to settle the claims. Some policies have two separate liability coverages, one for bodily injury (Bl) claims and the other for property damage (PD) claims; other policies have a single liability coverage for both Bl and PD claims. The amount of liability insurance is indicated by a “limit of liability” stated in the policy. It is the maximum that the insurer will pay to others for Bl or PD claims. The protection extends to the person in whose name the policy is written, relatives who are members of that person's household, and other people who have permission to use the insured's car. It also applies while an insured person is using someone else's car with their permission.

Medical Payments Coverage

Auto medical payments insurance pays for medical expenses arising from auto accidents. It covers 1) the insured and relatives who are members of that person's household and 2) other people who are riding in the insured's car. Notice that this coverage does not pay the medical expenses of people in another car that is struck by the insured car. If such persons sue, the insured of course will be protected by the liability coverage.

Uninsured Motorists Coverage

This coverage is designed to protect people who have valid bodily injury liability claims against drivers from whom they cannot collect because the latter are uninsured. To illustrate, an insured man is badly injured when his car is run into by a car driven by a drunken driver. The drunken driver has no auto liability insurance. If the injured man has purchased uninsured motorists coverage, his insurer will pay him the damages for bodily injury that he is legally entitled to collect from the drunken driver. Uninsured motorists coverage also pays damages that the insured is legally entitled to collect from hit-and-run drivers and from drivers whose insurers are insolvent. In most states the protection does not apply to claims for property damage liability.

Coverage for Damage to Your Auto

This insurance, called physical damage coverage on some policies, has two parts. One part pays for damage caused by collision; the other, commonly called comprehensive coverage, pays for other damage to the insured auto. Types of loss paid for by the comprehensive coverage include glass breakage, vandalism, flood damage, fire damage, and theft of the car or any part of it. Collision insurance always is written subject to a deductible amount that is subtracted from each loss payment. If the deductible is $200 and repairs to an auto damaged in a collision cost $1,000, the insurer pays $800. If repairs cost $200 or less, nothing is paid. Comprehensive coverage commonly has a deductible also, but it usually is a smaller amount. Note that these coverages pay for damage to the insured's car; they should not be confused with property damage liability coverage, which protects against claims from other people who allege that an insured has damaged their property.

Personal Injury Protection (PIP)

About one third of U.S. states have adopted auto no-fault laws. Those laws permit lawsuits for injuries resulting from auto accidents only if the injuries are serious enough to exceed a certain “threshold” level. Compensation for less serious injuries is required to be furnished on a no-fault basis, meaning without regard to who caused the accident. Each motorist in the states that have auto no-fault laws must buy insurance that provides the required no-fault benefits. The benefits usually are for the motorist, the motorist's family, other occupants of the motorist's car, and pedestrians; they commonly are furnished by a Personal Injury Protection page attached to the motorist's regular auto insurance policy. In most states the PIP benefits apply to bodily injury only and pay the insured persons' medical expenses and lost income up to maximum amounts stated in the law.

Buying Auto Insurance

The principal decisions to be made by auto insurance buyers are what coverages to buy, what amounts of insurance to buy, and what agent and company to buy from.

Auto liability coverage is essential. No one should drive a car without protection against the potentially high cost of lawsuits. In some U.S. states liability insurance is required by law. Because the size of lawsuits cannot be predicted, there is no way to know in advance how much protection will be needed. In deciding upon the amount, consumers should realize that the extra cost of high limits is relatively small. Doubling the cost of the limits, for example, does not double the cost of the protection. Agents should be asked the cost of several different limits for the buyer to choose among. Reasonably high amounts of liability protection should be a high priority objective.

Medical payments coverage is less important than liability protection. It is least important in the states with strong and effective auto no-fault laws; there the mandatory PIP provides sufficient coverage for medical expenses. Medical payments insurance also is unnecessary for people who have adequate health insurance protection. The minimum amount of medical payments insurance in the United States is $500 per person. If the protection is needed, higher amounts should be purchased.

Uninsured motorists coverage costs only a few dollars a year, because covered losses are infrequent. The protection is important, though, because accidents with uninsured drivers can be costly. Most people should buy the coverage and should request high limits of liability.

The advisability of buying coverage for damage to the auto (collision and comprehensive) usually depends upon the value of the auto. Most people insure relatively new cars against such damage, but as a car ages its value declines and at some point it becomes no longer worth insuring. For example, if $200 deductible collision insurance is carried on a car that is worth only $800, the maximum loss payment is $600. If the cost of repairs after a collision would exceed $600, the insurer will consider the car a total loss and pay the owner $600. In view of the cost of the protection, many owners prefer not to insure older cars against collision damage.

When collision and comprehensive coverages are carried, the amount of insurance automatically equals the value of the auto minus the deductible amount. The greater the size of the deductible, the lower is the cost of the insurance. Collision coverage often is written with a $100 or $200 deductible. Comprehensive may have no deductible amount, but $50 and $100 deductibles are common. Substantial deductibles make good sense because they eliminate coverage for minor losses. Insuring such losses is uneconomical for two closely related reasons. First, because small bumps and scratches happen frequently, premiums on policies covering them must be high in order to pay for the large number of minor repairs. Second, the premiums also must be high enough to allow for the overhead costs of handling the numerous small claims. If an insurer's cost of processing a $40 claim is $20, then the company must spend $60 to pay a $40 loss. For these reasons, it is more economical to pay small losses out of one's own pocket and to buy insurance for large losses only.

Auto buyers usually shop before they buy, comparing the prices and service of several auto dealers. Shopping for auto insurance is also advisable. Prices vary among insurers and the differences may be substantial. Price should not be the only basis for choosing an insurer, though. Service is equally important. The agent from whom one buys auto insurance should give helpful advice about the kinds and amounts of coverage to buy, should see that the policy is properly prepared, and should assist with claims.

Investment Trust

A type of financial enterprise engaged in the business of investing in securities. In general, investment trusts sell their owjn securities to the public and use the proceeds to acquire a portfolio of other securities. The income of an investment trust consists of interest and dividends on the securities it owns, to which may be added or subtracted profits or losses on sale of securities. From this income, after expenses of operation, dividends are paid on the shares of the trust. The basic economic functions of the investment trust are to provide diversification and, usually, management of investments for the small investor, who does not have enough funds to spread his investment risks economically over a large number of securities and who frequently also lacks the time or ability to select and supervise his investments properly. These needs are met in principle by the investment trust. By assembling funds from many investors, such an institution is able to invest in a diversified portfolio of securities, and by employing investment experts it is able to provide skilled management. Of course, the effective performance of these functions may vary from time to time and among different investment trusts.

Although investment trusts originated in England and Scotland in the latter part of the 19th century, their history in the United States dates only from the early 1920?s. During the great “bull market” of that decade, investment-trust securities became highly popular with American investors, and a large number of trusts of many varieties were organized. The stock market crash of 1929 and the depression of the 1930?s brought the inevitable reaction. Many trusts were liquidated or were merged with others. Furthermore, various abuses and undesirable practices in the promotion and management of investment trusts came to light. An investigation by the Securities and Exchange Commission provided the basis for enactment in 1940 of the Investment Companies Act, which established federal regulation of investment trusts by the Securities and Exchange Commission. Previously, the Revenue Act of 1936 had established certain conditions under which investment trusts were exempted from the federal corporate income tax. This legislation did much to establish the basic pattern of operation for a large segment of the investment-trust business. The lessons of experience plus federal regulation have resulted in substantial correction of the earlier faults of investment trusts, and they have emerged as a reputable and well-regarded type of financial institution.

Although there are several variations of the basic principle of the investment trust, the management type became by far the most important during the period of development following the depression of the 1930?s. Its essential characteristic is that the directors or trustees exercise broad discretion in the investment of the trust assets, subject only to general restrictions provided in the charter. Investment policies vary widely. Broad diversification is the usual policy, but some invest largely in stocks, some largely in bonds, and some divide their commitments between these two general classes of securities. A few confine themselves to stocks of a single industry. Some place emphasis upon a stable income from the portfolio, and others seek appreciation in the value of their investments.

History of International Trade

Traditional Societies

Until the late 19th century, most people virtually everywhere were peasants who produced food and also knew how to fashion many tools and other necessities. What they could not make for themselves, they bought in neighboring towns in exchange for their (usually small) agricultural surplus and a few handicrafts. Longdistance trading was rare, because output of all products was low and because transportation was expensive, slow, and dangerous. Whatever international trade did occur was usually monopolized by government-licensed private organizations like the British East India Company. Only goods with a high value in relation to their weight, like precious stones, metals, spices, special fabrics (particularly wool and silk cloth), furs, and wine, could be taken to faraway places and sold profitably. Grain, too, was sometimes traded abroad but, it would seem, in small quantities. For centuries, trade was concentrated along the shores of the Mediterranean and Baltic seas and around the Asian caravan routes to which they were linked. The focal points of international exchange were the Italian cities of Venice, Genoa, and Florence, the German cities of Augsburg and Niirnberg, the towns of Flanders (in present-day Belgium), and the Hanseatic ports along the southern and eastern shores of the Baltic. Trade hardly touched the lives of ordinary people, however. Neither were their lives much altered by the discovery of the Americas and the circumnavigation of Africa and South America. But those feats of courage and skill did divert trade from the inland seas of Europe to the Atlantic and Indian oceans.

The Industrial Revolution

In the 17th and 18th centuries, technological innovations in Britain opened the way to higher productivity, first in agriculture, then in manufacturing. New machinery enabled larger units to manufacture cheap textiles and, a bit later, iron. These first steps toward mass-production led to the mass movement of goods from country to country, for they were accompanied by improvements in transportation and communications. British industry was soon imitated in France and Belgium.

Despite the remarkable progress of the previous hundred years, international exchanges of goods and services at the beginning of the 19th century represented only about 3 percent of the value of world output. But then the industrial revolution spread to such countries as Germany, the United States, and (a bit later) Japan. In the second half of the 19th century, new industries emerged to produce machine tools, electricity, and chemicals. These industries soon accounted for a substantial proportion of world trade. Railroads and steamships transported bulk loads over long distances; the telegraph facilitated the worldwide circulation of information. As a result of these developments, foreign trade so increased that by 1913 about one-third of everything produced in the world was exchanged over national borders.

The spread of industrialization boosted the demand for raw materials, initially cotton and timber, later metals and fuels. About half of these primary products originated in European countries; the other half came in part from plantations, mines, and similar enterprises established in the colonies to supply goods to Europe. Enclaves emerged in many colonial economies more closely connected with customers abroad than with the societies in which they were physically located, societies where peasants continued to farm in the traditional manner. Some countries (not all former colonies) have yet to overcome this division.

Despite the importance of primary products in the international exchanges of the 19th century, trade was dominated by Europe. Before World War I, less than 25 percent of world trade was transacted among non-European countries, about 40 percent represented the trade of European countries with each other, and 35 percent, European trade with the rest of the world. Britain remained the chief trading nation, but its share in international exchange diminished, inevitably in view of the rapid development of continental Western Europe, North America, and Japan.

The Era of Free Trade

The foundations of free trade-- the removal of restrictions on the movement of goods and services from country to country--were laid by the (mostly British) classical economists. In Britain, protection was very gradually discarded, starting in the 18th century, and by the early 1840?$ was mainly (though not exclusively) confined to tariffs on imported grains. In 1846 even agricultural protection was in principle abandoned.

Contrary to expectations, grain prices did not immediately fall because no countries were capable of exporting substantial amounts of grain to Britain. The 1850?s and 1860?s, in fact, were a period of sustained prosperity, and, rightly or wrongly, free trade was credited with the responsibility for it. Other liberalizing measures taken in Britain and elsewhere made the years between 1850 and 1880 the era of minimal barriers to trade.

By 1870, however, the development of ocean-going steamships had exposed British agriculture to real competition. Europe (though not, at first, Britain) began turning away from free trade in the late 1870?s, after a prolonged economic crisis. Simultaneously, a new and more volatile kind of nationalism forced governments to collect more revenue to pay for armaments. Nationalism also promoted fears in such powers as the United States and Germany that it would be difficult to industrialize if competition from Britain, the leader in this field, were not checked. This increased the popularity of the infant-industry argument for protection.

The 20 th Century

The movement toward protection continued to grow stronger after the beginning of the 20th century. Nonetheless, when World War I broke out, in 1914, protectionism had made relatively few advances, though the world economy was no longer so free from trade controls as it had been 50 years earlier. International trade was, however, still regulated by the gold standard, under which currencies had a fixed gold value and payments imbalances among nations were settled through the transfer of a limited supply of gold reserves. A country could not keep its goods competitive by simply devaluing its currency, nor could it indefinitely sustain a payments deficit. Instead, each trading country had to keep its goods competitive by keeping an edge in production costs.

The Depression

The gold standard was undermined during World War I and replaced during the 1920?s by the gold-exchange standard, under which international settlements were made mainly in British pounds and U.S. dollars. This system, however, allowed the United States and Britain and any countries able to borrow recurrently from them to sustain recurrent payments deficits. Eventually this system collapsed, helping to bring about the Great Depression of the 1930?s. Many governments reacted to the Depression by subjecting foreign trade to new controls. One after another, they formally went off the gold standard, abolishing fixed exchange rates, and sought, by devaluing their currencies and by imposing tariffs and quotas, to improve the competitiveness of their products while protecting them against international competition. This was to be achieved at the expense of other countries--the so-called “beggar-my-neighbor” policy. Since many countries could and did play the same game, the result was international disintegration and stagnating, even decreasing, world trade. Manufacturing output in most countries languished and so, consequently, did trade in primary products needed for industry.

The policy of national self-sufficiency was carried to an extreme in the Soviet Union and in Nazi Germany and Fascist Italy, which sought to achieve autarchy, or national economic independence. Foreign trade in the Soviet Union was taken over by the government and centrally planned. Fascist Italy and Nazi Germany projected a similar program of autarchy, but in those countries government control was less complete and curtailment of external trade less thorough.

The Postwar Years

The disruption of international exchange in the 1930?s, combined with the dislocation of World War II, was so great that the absolute volume of trade in the 1940?s may have been lower than it had been in 1913. Undoubtedly, it was not much higher. Mindful of the harm caused by stagnating trade, the Allied countries began planning to improve conditions during the hostilities. They agreed to establish the International Monetary Fund (IMF) to watch over the exchange of currencies. The plans for the liberalization of trade itself were implemented less smoothly. But in the 1940?s a General Agreement on Tariffs and Trade (GATT) standardized the policies of almost all non-Communist countries. GATT was negotiated in the hope of eliminating as many obstacles to trade as possible, especially quotas and subsidies, by means of the so-called “most favored nation clause,” which ensures that any trade concession between countries is automatically extended to all members. Under the aegis of GATT, various cycles of trade negotiations have taken place: several in the 1950?s, the Dillon round in 1961, the Kennedy round in the 1960?s, and, in the late 1970?s, the Tokyo round. By the end of the Kennedy round, the industrial countries' average tariff on manufactures was down to about 10 percent. The Tokyo round set itself the aim of reducing tariffs on manufactures by a further 40 percent.