1. Money is something which is generally accepted as a medium of exchange.

It is one of the most basic

and significant inventions of mankind. Before money came into use, exchange took place through barter
system, i.e., goods were exchanged for goods.
Barter means direct exchange of goods. In other words, barter refers to exchanging of goods without the
use of money. For example, corn may be exchanged for cloth, house for horses, bananas for oranges and
so on.
What are the advantages of Barter System
i. It is a simple system devoid of the complex problems of the modern monetary system.
ii. There is no question of over or under-production (or of unemployment or over-hill employment) under
the barter system since goods are produced just to meet the needs of the society.
iii. The problems of international trade, such as, foreign exchange crisis, adverse balance of payments, do
not exist under barter system.
iv. There is no problem of concentration of economic power into the hands of a few rich persons under
the barter system because there is no possibility of storing the commodities.
v. Personal and natural resources are ideally utilized to meet the needs of the society without involving
any wastage.
vi. The barter system also reaps the benefits of division of labor because it represents a great step forward
from a state of self- sufficiency hi which every man has to be a jack of all trades and master of none.
What are the difficulties of Barter System
Barter system involves various difficulties and inconveniences which are discussed below:
1. Double Coincidence of Wants:
Under barter system, a double coincidence of wants is required for exchange. In other words, the wants of
the two persons who desire to exchange goods must coincide. For example, if person A wants to acquire
shoes in exchange for wheat, then he must find another person who wants wheat for shoes.
Such a double coincidence of wants involves great difficulty and wastage of time in a modern society, it
rarely occurs. In the absence of a double coincidence of wants, the individuals under barter system are
compelled either to hold goods for long periods of time, or to make numerous intermediary exchange’ ii
order to get finally the goods of their choice.
2. Absence of Common Measure of Value:
Even if it is possible to have the double coincidence of wants, the absence of a common measure of value
creates great problem because a lot of time is wasted to strike a bargain. Since there is no common
measure in terms of which the value of a commodity can be expressed, the problem arises how much
wheat should be exchanged for how many pairs of shoes.
In fact, under the barter system, every good must be expressed in terms of every other good. If, for
example, there are 1000 goods in the economy, then, in the absence of monetary unit, every good can be
exchanged for the remaining 999 goods.

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3. Lack of Divisibility:
Another difficulty of barter system relates to the fact that all goods cannot be divided and subdivided. In
the absence of a common medium of exchange, a problem arises, when a big indivisible commodity is to
be exchanged for a smaller commodity. For example, if the price of a horse is equal to 10 shirts, then a
person having one shirt cannot exchange it for the horse because it is not possible to divide the horse in
small pieces without destroying its utility.
4. The Problem of Storing Wealth:
Under a barter system, there is absence of a proper and convenient means of storing wealth or value, (a)
As opposed to storing of generalized purchasing power (in the form of money) in a monetary economy,
the individuals have to store specific purchasing power (in the form of horses, shoes, wheat etc.) under
the barter system which may decrease in value in the due course of time due to physical deterioration or a
change in tastes, (b) It is very expensive to store specific goods for a long time, (c) Again the wealth
stored in the form of specific goods may create jealousy and enmity among the neighbors or relatives.
5. Difficulty of Deferred Payments:
The barter system does not provide a satisfactory unit in terms of which the contracts about the deferred
(future) payments are to be written. In an exchange economy, many contracts relate to future activities
and future payments. Under barter system, future payments are written in terms of specific goods. It
creates many problems. Chandler has mentioned three such problems:
(a) It may create controversy regarding the quality of goods or services to be repaid in future,
(b) The two parties may be unable to agree on the specific good to be used for repayment.
(c) Both parties run the risk that the goods to be repaid may increase or decrease in value over the period
of contract.
6. Problem of Transportation:
Another difficulty of barter system is that goods and services cannot be transported conveniently from
one place to another. For example, it is not easy and without risk for an individual to take heaps of wheat
or herd of cattle to a distant market to exchange them for other goods. With the use of money, the
inconveniences or risks of transportation are removed.

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2. The gold standard is a monetary system where a country's currency or paper money has a value
directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed
amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at
that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the
price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The gold standard is not currently used by any government. Britain stopped using the gold standard in
1931 and the U.S. followed suit in 1933 and abandoned the remnants of the system in 1971. The gold
standard was completely replaced by fiat money, a term to describe currency that is used because of a
government's order, or fiat, that the currency must be accepted as a means of payment. In the U.S., for
instance, the dollar is fiat money, and for Nigeria, it is the naira.
The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of
imperfect human beings. With the physical quantity of gold acting as a limit to that issuance, a society
can follow a simple rule to avoid the evils of inflation. The goal of monetary policy is not just to prevent
inflation, but also deflation, and to help promote a stable monetary environment in which full
employment can be achieved. A brief history of the U.S. gold standard is enough to show that when such
a simple rule is adopted, inflation can be avoided, but strict adherence to that rule can create economic
instability, if not political unrest.

Gold Standard System versus Fiat System

As its name suggests, the term gold standard refers to a monetary system in which the value of  currency is
based on gold. A fiat system, by contrast, is a monetary system in which the value of currency is not
based on any physical commodity but is instead allowed to fluctuate dynamically against other currencies
on the foreign-exchange markets. The term “fiat” is derived from the Latin "fieri," meaning an arbitrary
act or decree. In keeping with this etymology, the value of fiat currencies is ultimately based on the fact
that they are defined as legal tender by way of government decree.
In the decades prior to the First World War, international trade was conducted on the basis of what has
come to be known as the classical gold standard. In this system, trade between nations was settled using
physical gold. Nations with trade surpluses accumulated gold as payment for their exports. Conversely,
nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment
for their imports.
The Gold Standard: A History
"We have gold because we cannot trust governments," President Herbert Hoover famously said in 1933 in
his statement to Franklin D. Roosevelt. This statement foresaw one of the most draconian events in U.S.
financial history: the Emergency Banking Act, which forced all Americans to convert their gold coins,
bullion and certificates into U.S. dollars. While the legislation successfully stopped the outflow of gold
during the Great Depression, it did not change the conviction of gold bugs, people who are forever
confident in gold's stability as a source of wealth.
Gold has a history like that of no other asset class in that it has a unique influence on its own supply and
demand. Gold bugs still cling to a past when gold was king, but gold's past also includes a fall that must
be understood to properly assess its future.

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A Gold Standard Love Affair Lasting 5,000 Years
For 5,000 years, gold's combination of luster, malleability, density and scarcity has captivated humankind
like no other metal. According to Peter Bernstein's bookThe Power of Gold: The History of Obsession,
gold is so dense that one ton of it can be packed into a cubic foot. At the start of this obsession, gold was
solely used for worship, demonstrated by a trip to any of the world's ancient sacred sites. Today, gold's
most popular use is in the manufacturing of jewelry.
Around 700 B.C., gold was made into coins for the first time, enhancing its usability as a monetary unit.
Before this, gold had to be weighed and checked for purity when settling trades. Gold coins were not a
perfect solution, since a common practice for centuries to come was to clip these slightly irregular coins
to accumulate enough gold that could be melted down into bullion. In 1696, the Great Recoinage in
England introduced a technology that automated the production of coins and put an end to clipping.
Since it could not always rely on additional supplies from the earth, the supply of gold expanded only
through deflation, trade, pillage or debasement. The discovery of America in the 15th century brought the
first great gold rush. Spain's plunder of treasures from the New World raised Europe's supply of gold by
five times in the 16th century. Subsequent gold rushes in the Americas, Australia and South Africa took
place in the 19th century.
Europe's introduction of paper money occurred in the 16th century, with the use of debt
instruments issued by private parties. While gold coins and bullion continued to dominate the monetary
system of Europe, it was not until the 18th century that paper money began to dominate. The struggle
between paper money and gold would eventually result in the introduction of a gold standard.
The Rise of the Gold Standard 
The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of
gold. In other words, in such a monetary system, gold backs the value of money. Between 1696 and 1812,
the development and formalization of the gold standard began as the introduction of paper money posed
some problems. The U.S. Constitution in 1789 gave Congress the sole right to coin money and the power
to regulate its value. Creating a united national currency enabled the standardization of a monetary system
that had up until then consisted of circulating foreign coin, mostly silver.
With silver in greater abundance relative to gold, a bimetallic standard was adopted in 1792. While the
officially adopted silver-to-gold parity ratio of 15:1 accurately reflected the market ratio at the time, after
1793 the value of silver steadily declined, pushing gold out of circulation, according to Gresham’s law.
The issue would not be remedied until the Coinage Act of 1834, and not without strong political
animosity. Hard money enthusiasts advocated for a ratio that would return gold coins to circulation, not
necessarily to push out silver, but to push out small-denomination paper notes issued by the then-hated
Bank of the United States. A ratio of 16:1 that blatantly overvalued gold was established and reversed the
situation, putting the U.S. on a de facto gold standard.
By 1821, England became the first country to officially adopt a gold standard. The century's dramatic
increase in global trade and production brought large discoveries of gold, which helped the gold standard
remain intact well into the next century. As all trade imbalances between nations were settled with gold,
governments had strong incentive to stockpile gold for more difficult times. Those stockpiles still exist
today.

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The international gold standard emerged in 1871 following its adoption by Germany. By 1900, the
majority of the developed nations were linked to the gold standard. Ironically, the U.S. was one of the last
countries to join. In fact, a strong silver lobby prevented gold from being the sole monetary standard
within the U.S. throughout the 19th century.
From 1871 to 1914, the gold standard was at its pinnacle. During this period, near-ideal political
conditions existed in the world. Governments worked very well together to make the system work, but
this all changed forever with the outbreak of the Great War in 1914.
The fall of the Gold Standard
With World War I, political alliances changed, international indebtedness increased and government
finances deteriorated. While the gold standard was not suspended, it was in limbo during the war,
demonstrating its inability to hold through both good and bad times. This created a lack of confidence in
the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the
world needed something more flexible on which to base its global economy.
At the same time, a desire to return to the idyllic years of the gold standard remained strong among
nations. As the gold supply continued to fall behind the growth of the global economy, the British pound
sterling and U.S. dollar became the global reserve currencies. Smaller countries began holding more of
these currencies instead of gold. The result was an accentuated consolidation of gold into the hands of a
few large nations.
The stock market crash of 1929 was only one of the world's post-war difficulties. The pound and
the French franc were horribly misaligned with other currencies; war debts and repatriations were still
stifling Germany; commodity prices were collapsing; and banks were overextended. Many countries tried
to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather
than convert them into gold. These higher interest rates only made things worse for the global economy.
In 1931, the gold standard in England was suspended, leaving only the U.S. and France with large gold
reserves. 
Then, in 1934, the U.S. government revalued gold from $20.67/oz to $35.00/oz, raising the amount of
paper money it took to buy one ounce to help improve its economy. As other nations could convert their
existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place.
This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S.
to corner the gold market. Gold production soared so that by 1939 there was enough in the world to
replace all global currency in circulation.
As World War II was coming to an end, the leading Western powers met to develop the  Bretton Woods
Agreement, which would be the framework for the global currency markets until 1971. Within
the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which
became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of $35
per ounce. The global financial system continued to operate upon a gold standard, albeit in a more
indirect manner. The agreement has resulted in an interesting relationship between gold and the U.S.
dollar over time. Over the long term, a declining dollar generally means rising gold prices. In the short
term, this is not always true, and the relationship can be tenuous at best, as the following one-year daily
chart demonstrates. In the figure below, notice the correlation indicator which moves from a strong
negative correlation to a positive correlation and back again. The correlation is still biased toward the
inverse (negative on the correlation study) though, so as the dollar rises, gold typically declines.

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At the end of WWII, the U.S. had 75% of the world's monetary gold and the dollar was the only currency
still backed directly by gold. However, as the world rebuilt itself after WWII, the U.S. saw its gold
reserves steadily drop as money flowed towar-torn nations and its own high demand for imports. The high
inflationary environment of the late 1960s sucked out the last bit of air from the gold standard. 
In 1968, a Gold Pool, which included the U.S and a number of European nations, stopped selling gold on
the London market, allowing the market to freely determine the price of gold. From 1968 to 1971,
only central banks could trade with the U.S. at $35/oz. By making a pool of gold reserves available, the
market price of gold could be kept in line with the official parity rate. This alleviated the pressure on
member nations to appreciate their currencies to maintain their export-led growth strategies.
However, the increasing competitiveness of foreign nations combined with the monetization of debt to
pay for social programs and the Vietnam War soon began to weigh on America’s balance of payments.
With a surplus turning to a deficit in 1959 and growing fears that foreign nations would start redeeming
their dollar-denominated assets for gold, Senator John F. Kennedy issued a statement in the late stages of
his presidential campaign that, if elected, he would not attempt to devalue the dollar.
The Gold Pool collapsed in 1968 as member nations were reluctant to cooperate fully in maintaining the
market price at the U.S. price of gold. In the following years, both Belgium and the Netherlands cashed in
dollars for gold, with Germany and France expressing similar intentions. In August of 1971, Britain
requested to be paid in gold, forcing Nixon's hand and officially closing the gold window. By 1976, it was
official; the dollar would no longer be defined by gold, thus marking the end of any semblance of a gold
standard.
In August 1971, Nixon severed the direct convertibility of U.S. dollars into gold. With this decision, the
international currency market, which had become increasingly reliant on the dollar since the enactment of
the Bretton Woods Agreement, lost its formal connection to gold. The U.S. dollar, and by extension, the
global financial system it effectively sustained, entered the era of fiat money.

The Bottom Line

While gold has fascinated humankind for 5,000 years, it hasn't always been the basis of the monetary
system. A true international gold standard existed for less than 50 years - from 1871 to 1914 - in a time of
world peace and prosperity that coincided with a dramatic increase in the supply of gold. The gold
standard was the symptom and not the cause of this peace and prosperity.
Though a lesser form of the gold standard continued until 1971, its death had started centuries before with
the introduction of paper money – a more flexible instrument for our complex financial world. Today, the
price of gold is determined by the demand for the metal, and although it is no longer used as a standard, it
still serves an important function. Gold is a major financial asset for countries and central banks. It is also
used by the banks as a way to hedge against loans made to their government and as an indicator of
economic health. 
Under a free-market system, gold should be viewed as a currency like the euro, yen or U.S. dollar. Gold
has a long-standing relationship with the U.S. dollar, and, over the long term, gold will generally have an
inverse relationship. With instability in the market, it is common to hear talk of creating another gold
standard, but it is not a flawless system. Viewing gold as a currency and trading it as such can mitigate

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risks compared with paper currency and the economy, but there must be an awareness that gold is
forward-looking. If one waits until disaster strikes, it may not provide an advantage if it has already
moved to a price that reflects a slumping economy. 

3. What is the Bretton Woods Agreement

The Bretton Woods Agreement, negotiated in July 1944, established a new international monetary
system. It was developed by delegates from 44 countries at the United Nations Monetary and Financial
Conference held that month in Bretton Woods, N.H. Under the agreement, other currencies were pegged
to the value of the U.S. dollar, which, in turn, was pegged to the price of gold. The Bretton Woods system
effectively came to an end in the early 1970s, when President Richard M. Nixon announced that the U.S.
would no longer exchange gold for U.S. currency.
How the Bretton Woods Agreement Worked
When the 730 delegates representing 44 countries met in Bretton Woods in July 1944, their principal
goals were to create an efficient foreign exchange system, prevent competitive devaluations of currencies,
and promote international economic growth.
The Bretton Woods Agreement created two important organizations—the International Monetary Fund
and the World Bank.
Though the conference itself took place over just three weeks, the preparations for it had been going on
for several years. The primary designers of the system were the famous British economist John Maynard
Keynes and American Harry Dexter White, the chief international economist of the U.S. Treasury
Department. Keynes’ hope was to establish a powerful global central bank to be called the Clearing
Union and issue a new international reserve currency called the bancor.
White’s plan envisioned a more modest lending fund and a greater role for the U.S. dollar, rather than the
creation of a new currency. In the end, the adopted plan took ideas from both, leaning more toward
White’s plan.
Key Takeaways
 The Bretton Woods Agreement created a new international monetary system that lasted from the
mid-1940s to the early 1970s.
 The agreement pegged the value of other nations' currencies to the U.S. dollar, which, in turn,
was pegged to the price of gold, fixed at $35 an ounce.
With collapse of the Bretton Woods Agreement, countries could choose other ways to set the value of
their currencies, including letting market forces decide. It wasn't until 1958 that the Bretton Woods
system became fully functional. This happened as currencies became convertible. In order to convert
currencies, countries settled their international balances in dollars, while U.S. dollars were fully
convertible to gold. The exchange rate applied at the time set the price of gold at $35 an ounce. Keeping
the price of gold fixed and adjusting the supply of dollars as needed was the responsibility of the United
States. 
The Bretton Woods Agreement also created two important institutions: the International Monetary Fund
(IMF) and the World Bank Group, which were formally introduced in December 1945. The purpose of

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the IMF was to monitor exchange rates and lend reserve currency to nations that needed it to support their
currencies and settle their debts. The World Bank Group, initially called the International Bank for
Reconstruction and Development, was established to provide assistance to countries that had been
physically and financially devastated by World War II.
In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in
circulation, President Richard M. Nixon declared a temporary suspension of the dollar’s convertibility
into gold. By 1973 the Bretton Woods system had collapsed. Countries were then free to choose any
exchange arrangement for their currency, except pegging its value to the price of gold. They could, for
example, link its value to another country's currency or a basket of currencies or simply let it float freely
and allow market forces to determine its value relative to other countries' currencies.
The Bretton Woods Agreement remains a significant event in world financial history. Although it came to
an end nearly half a century ago, the two organizations it created—the International Monetary Fund and
the World Bank Group—continue to this day. Having helped rebuild Europe in the aftermath of World
War II, the World Bank's work now focuses on reducing poverty and otherwise assisting developing
countries around the world. Each of these organizations has grown to include 189 member countries.

4. By 1900 Britain had reached the zenith of its power. In spite of that, Germany that was growing very
fast was the equal of Britain in a few areas. Concerning the British Navy, no other nation's nation came
close. It would take two nations' navies to be the equal of Britain's. Germany caught up with France
economically in 1880s.
By 1900, the steel production of Britain and Germany combined was less than the USA's.
During World War I, European nations involved in the War realized quickly that this was not going to be
a quick war. Prior to the War, there were examples of how well many people were living in Western
Europe. But as WWI went on, Europeans ran out of cash and had to borrow from the USA.
America began then to finance the cost of the War. Britain, France and America had their own areas of
strengths. Britain used its navy to go and get American doughboys. France provided them with guns on
the battlefield and airplanes in the air. America lent its money to pay for all of this after Europeans ran out
of cash. And in the end America declared war and sent its armies and got into the war and that made all
the difference because it brought the war to a speedy end.

In the period between the two world wars, Britain and America had reached naval parity with their
numbers of warships being equal. Both did not have peace time military training but both had bases that
included their military involvement. However, France had peace time military training. When World War
II started, Britain needed financial and naval American help. America lent US ships and had an
arrangement to remain connected to Britain. From New Found Land (Canada) to Iceland and then to
Britain, there was like an island hopping military presence in order to keep that channel open and prevent
it to fall into German hands. At that time America did not have near as much of the military preparation
for another war that Britain had even though Britain could have been prepared better. When the War
started, it was clear that Churchill seemed to be the greatest leader to resistance to Hitler. But after 1941,
when America joined the war effort; gradually, Roosevelt started to become the main leader of the Allies
against Hitler.

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However, Churchill was more informed and would warn Roosevelt continually of the danger of
communist Russia and Stalin. But it seemed that in many situations it was in vain. Churchill was more
successful after the War when his words became prophetic. Because He never gave up spreading his
warnings, Churchill's warnings against the danger of Russia began to be more popular in America as the
Cold War began. Initially, during the War, Roosevelt was naïve and thought that He should try to get his
two Allies: Britain and Russia to get along since the enemy was Hitler's Germany. But in fact Staline's
Russia was more dangerous for the future of the Free World than the Nazis. Just look at the size of Nazi's
Germany compared to the Russian Empire or Soviet Union. Especially after they took over Eastern
Europe that they had sworn to protect and set free after World War II was over.

It was on Churchill's insistence that America agreed to include France in the occupation of Germany.
Churchill was concerned after WWII that if France would not play a major role on the Continent of
Europe that Russia would become too big to handle and too controlling and that each country of Western
Europe would fall into the Russian orbit. The British believed in the Balance of Powers.
During World War II, the Americans did not like the idea of "British Empire" just because they had been
a colony of Britain before. However, the USA obtained colonies in Hawaii, China and in the Philippines.
So, this thing against colonies did not make sense to others but it was justified in the sense that America
believed that it would allow communism to take over among the colonized. However, in order to appease
the Americans, Britain rearranged things and instead of having a "British Empire", Britain would keep
close contact with former colonies in a "British Commonwealth of Nations" where each former colony
could apply to join after independence. The role of the British Monarch changed because former colonies
could choose to have the Queen of Britain as their Queen as it is the case with Canada, Australia and New
Zealand or as Head of State as it is the case with India. That means that none of the countries that joined
would have a president of a republic because member states were not republics. The political leader of
India bears the name of Prime Minister as it is also the case in Canada, Australia and New Zealand and
other Commonwealth countries. The role of the Queen is to be a figure head and a good example and it is
a sentimental thing. Most of the Commonwealth Countries where the Queen is popular are in Africa and
the Caribbean or West Indies. Member state populations have their own country's citizenship and
Commonwealth citizenry. So because of that they are British subjects and for Australia: Australian
citizens; for Canada, Canadian citizens, etc.

The British Commonwealth works with any tyran or is not based on any centralized power. It works by
itself because of the excitement each member state feels in being able to trade with countries that have the
same goals like goals in good democratic governance. Democracy is the key!
The British Commonwealth was also born because America told Britain that they would help Britain
economically during WWII if Britain would get rid of its colonies. Most of them obtained independence
in the early 1960s, but independence was achieved by India soon after the war was over in the late 1940s.
This contributed to make Britain look smaller and at the same time, Britain began to look smaller, but as
America began to take a look at Britain's former colonies America would never cease to marvel at the
commitment that these former colonies developed responsibility in governance, which is one of the
requirements to join the British Commonwealth.

With the British Commonwealth, Britain still owned the largest number of firms around the world. Britain

9
still has the largest financial investment in the USA. Britain still has the largest merchant navy in the
world. And compared to the USA, Britain has a lot more international experience in diplomacy, and is
able to play a role a lot bigger than its size. The only other country in a similar situation as far as
diplomatic experience in the world is France.
So, yes, America has big economic and military and naval power. But due to its infancy in world affairs,
America has to rely on its Allies for advice a lot more than Britain or France have. Without America, all
of this would probably not exist because of the role that Russia played in taking over other countries and
rob them of their dignity and independence. So in the case of Britain, it was good that Britain developed
its own thing--the British Commonwealth--and also to have America there to be a protector of anyone
who wants to be a free person.

5. If the US budget deficit continues to widen they will need to borrow more and more money by issuing
treasury bonds. Right now most investors still choose to believe that the US will somehow be able to pay
back it's debt eventually. The US also pays interest to their debtors so investors (individuals, institutions,
countries) are willing to keep loaning money to the US. This can't go on forever though. Every year the
US has to borrow more and more money just to keep their own economy going. Eventually, investors will
stop believing that the US will ever be able to pay their debts. That means the US has to promise to pay
more interest to any investors who loan them money. That causes interest rates to rise for everyone. That's
good for convincing foreign investors like the Chinese to keep buying US bonds, but also makes it more
expensive for individuals and businesses in the US to borrow money.
Eventually, increasing interest rates will increase the cost of living and doing business in the US, putting a
lot of people out of house and home, out of jobs, and out of business. That makes the US economy even
worse off… the government collects even fewer taxes because more businesses and individuals are broke.
The government needs to borrow even more money. But foreign investors see that the US is doing worse
and even less likely to be able to pay their debts, so they ask for even higher interest. Eventually this
cycle has the potential to collapse the US economy. That means the US will stop buying goods and
services from many countries including China. Those businesses in South America, Europe, the Middle
East, Africa, and Asia that made money selling their goods and services to the US now also have a
slowdown, and some go out of business because the US, one of their biggest customers, went broke.
Those countries then also slow down. And China who sells product and services to everyone in the world
would be affected both by the US not buying their stuff, as well as all the other countries, who are now
poor from the US collapse, also not buying as much of China's stuff.

6. A forward contract is a contract whose terms are tailor-made i.e. negotiated between buyer and
seller. It is a contract in which two parties trade in the underlying asset at an agreed price at a certain time
in future. It is not exactly same as a futures contract, which is a standardized form of the forward contract.
A futures contract is an agreement between parties to buy or sell the underlying financial asset at a
specified rate and time in future.
While a futures contract is traded in an exchange, the forward contract is traded in OTC, i.e. over the
counter between two financial institutions or between a financial institution or client.

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As in both the two types of contract the delivery of the asset takes place at a predetermined time in future,
these are commonly misconstrued by the people. But if you dig a bit deeper, you will find that these two
contracts differ in many grounds. So, here in this article, we are providing you all the necessary
differences between forward and futures contract so that you can have a better understanding about these
two.
Comparison Chart

Basis for
Forward Contract Futures Contract
Comparison

Meaning Forward Contract is an agreement A contract in which the parties agree to

between parties to buy and sell the exchange the asset for cash at a fixed price
underlying asset at a specified date and and at a future specified date, is known as
agreed rate in future. future contract.

What is it? It is a tailor made contract. It is a standardized contract.

Traded on Over the counter, i.e. there is no Organized stock exchange.

secondary market.

Settlement On maturity date. On a daily basis.

Risk High Low

Default As they are private agreement, the No such probability.

chances of default are relatively high.

Size of Depends on the contract terms. Fixed

contract

Collateral Not required Initial margin required.

Maturity As per the terms of contract. Predetermined date

Regulation Self regulated By stock exchange

Liquidity Low High

Definition of Forward Contract

11
A forward contract is a private agreement between the buyer and seller to exchange the underlying asset
for cash at a particular date in the future and at a certain price. On the settlement date, the contract is
settled by physical delivery of asset in consideration for cash. Settlement date, quality, quantity, rate and
the asset are fixed in the forward contract. Such contracts are traded in a decentralized market, i.e. Over
the counter (OTC) where the terms of the contract can be customized as per the needs of the parties
concerned.
The buyer in a forward contract is considered as long, and his position is assumed as long position while
the seller is called short, holds a short position. When the price of the underlying asset rises and is more
than the agreed price, the buyer makes a profit. But if the prices fall, and is less than the contracted price
the seller makes a profit.
Definition of Futures Contract
A binding contract which is executed at a later date is a future contract. It is an exchange-traded contract
of the standardized nature where two parties, decides to exchange an asset, at an agreed price and future
specified a date for delivery and payment. A future contract is a standardized in terms of the quantity,
date, and delivery of the item. The buyer holds long position while the seller holds a short position in this
contract.As the contracts are traded in the official exchange, which acts as both mediator and facilitator
between the buyer and seller. The exchange has made it mandatory for both the parties to pay an upfront
cost as a margin.
The unique feature of the future contract is marking to a market where the prices are subject to
fluctuations. Hence, the differences in the price of contracts are settled daily. Further, the futures are
divided into two broad categories, which are:
 Commodity Futures: The contract whose subject matter is commodities such as aluminum, gold,
coffee, sugar etc.
 Financial futures: The contract which deals with financial instruments like treasury bill, currency
and so on.
Key Differences between Forward and Futures Contract
The basic differences between forward and futures contract are mentioned below:
1. An agreement between parties to buy and sell the underlying asset at a certain price on a future
date is a forward contract. A future contract is a binding contract whereby the parties agree to buy
and sell the asset at a fixed price and a future specified date.
2. The terms of a forward contract are negotiated between buyer and seller. Hence it is
customizable. Conversely, a futures contract is a standardized one where the conditions relating
to quantity, date, and delivery are standardized.
3. Forward contracts are traded Over the Counter (OTC), i.e. there is no secondary market for such
contracts. On the other hand, a Futures contract is traded on an organized securities exchange.
4. When it comes to settlement, forward contracts settle on a maturity date. As compared to the
future contract which is marked to market on a daily basis, i.e. the profit or losses are settled
daily.
5. There is a high counterparty risk in case of forward contract as compared to a futures contract.

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 6. In the case of a forward contract, there are high chances of default by a party, as the agreement is
private in nature. Unlike a future contract, where clearing houses are involved, that guarantees the
transaction, so the possibility of default is almost nil.
7. If we talk about the size of the contract, in a forward contract, it depends on the terms of the
contract, whereas the size is fixed in case of the futures contract.
8. The maturity of the contract is as per the contractual terms in the forward contract while the same
is predetermined in the futures contract.
9. In forward contracts, there is no requirement of collateral, but in futures contracts, initial margin
is required.
10. Forward contracts are self-regulated. Unlike futures contracts, which are regulated by the
securities exchange.
Conclusion
As per the above discussion, it can be said that there are several dissimilarities between these two
contracts. The credit risk in a forward contract is relatively higher that in a futures contract. Forward
contracts can be used for both hedging and speculation, but as the contract is tailor made, it is best
for hedging. Conversely, futures contracts are appropriate for speculation.

7. Founded in 1944, the World Bank Group (WBG, or Bank) and the International Monetary Fund (IMF,
or Fund) are twin intergovernmental institutions that are influential in shaping the structure of the world’s
development and financial order. Also known as the Bretton Woods Institutions (BWIs), they were
initially created with the intention of rebuilding the international economic system following World War
II (WWII). The key decisions leading to the establishment of both institutions were largely steered by the
US, and to a lesser extent the UK, and during the post-war period the BWIs were significantly influenced
by the US’s geopolitical strength. Their mandates focus and programmers have evolved greatly over time,
as seen, for example, by the shift of their pivotal role as designers of the fixed exchange rate regime
created by the Bretton Woods System, to their active promotion of a fluctuating exchange rate system
after its collapse in 1973. Their functions are detailed in the World Bank’s and IMF’s respective Articles
of Agreement (see also BWP, What are the Bretton Woods Institutions?)
While the establishment of the Bank and Fund was presented as a political effort to rebuild the world
economy in the aftermath of WWII, some interpretations also view them as an effort to defend or expand
the reach of western capitalism in the face of a potential challenge from the Soviet Union, and to promote
US interests in particular. Under President Robert McNamara (1968-1981), the World Bank’s mission
began to shift, as it developed a focus on income inequality and poverty for the first time.

John Maynard Keynes and Harry Dexter White at the inaugural meeting of the IMF’s Board of Governors
in Savannah, Georgia, U.S., 1946
In the 1980s and 1990s, the policies championed by the BWIs were inspired in principle by the so-called
‘Washington Consensus’, which focused ideologically on promoting free-market economic policies such
as deregulation, privatization and trade liberalization, as well as targeting unlimited economic growth,
and were implemented primarily through Structural Adjustment Programmers (SAPs). As many authors

13
have argued – including, for example, by demonstrating the links between the decimation of African
health systems by SAPS and the response to the 2014 Ebola crisis (see Observer Winter 2015) – the
devastating impacts of SAPs have been enduring and persist to this day.
While the BWIs have historically been seen as an instrument of United States and other Western
countries’ political and economic power, their role and relevance has been continually debated. This
debate has regained momentum in the decade since the 2008 global financial crisis, where the rise of
China, often presented as the coming of a more multipolar world, is seen by some as a challenge to the
perceived hegemony of the BWIs. However, others have noted that this analytical framework is flawed,
as the private interests promoted by the Bank and Fund cannot always be understood in this light and
there is a high degree of cooperation between the Bank and Fund and other multilateral institutions,
including those established by China and other developing countries.
The more frequent financial crises since the 1970s – and the 2008 crisis in particular – have had an impact
on the work of the Fund, which has been forced to move beyond essentially national interventions to a
greater focus on the global economy, and from scanning the horizon for potential crises to dealing with
them in order to avoid regional or global contagion. The role of the Bank has also changed dramatically,
from an initial focus on infrastructure lending in its incarnation as the poster child for the Washington
Consensus and Post-Washington Consensus, to the “Knowledge Bank” where it tried to position itself as
the repository of ‘development expertise’.
Today, the work of the Bank is currently framed by its twin goals, established in 2013: “eliminating
extreme poverty by 2030 and boosting shared prosperity.” These are primarily targeted in principle
through: direct lending for development projects; direct budget support to governments (also known as
Development Policy Financing [DPF]); financial support to the private sector, including financial
intermediaries (FI); and via guarantees for large-scale development. The current stated aims of the Fund
are promoting international fiscal and monetary cooperation, securing international financial stability,
facilitating international trade, and promoting high employment and sustainable economic growth. It aims
to do so by providing loan programmers to states with balance of payments problems, as well as policy
advice through either technical assistance or bilateral and multilateral macroeconomic surveillance.
There is no question that the IMF and World Bank continue to be amongst the most relevant and
significant powerful norm-setters, convenors, knowledge-holders and influencers of the international
development and financial landscape. This Inside the Institutions sets-out some of the most common
criticisms of the World Bank and IMF under three broad lenses: democratic governance, human rights
and the environment.

Democratic governance- Structural under-representation of the Global South

One of the central criticisms of the World Bank and IMF relates to the political power imbalances in their
governance structures where, as a result of voting shares being based principally on the size and
‘openness’ of countries’ economies, poorer countries – often those receiving loans from the BWIs – are
structurally under-represented in decision-making processes.

14
Despite the 2016 voting reforms at the Fund, which shifted voting powers somewhat (to the particular
advantage of China), the distribution of voting power remains severely imbalanced in favor of the US,
European countries and Japan, in particular. Importantly, the US still has veto power over an array of
major decisions. In the case of the World Bank, in addition to calls for greater representation of low-
income countries on the Executive Board, civil society organizations (CSOs) have historically demanded
reforms of decision-making through the introduction of double-majority voting, where an agreement
would require both shareholder and member state majorities, thus giving developing countries a larger
role in these processes.
The under-representation of low- and middle-income countries on the BWIs’ Executive Boards is
exacerbated by the historic ‘gentleman’s agreement’ between the United States and European countries,
which has seen the Fund and Bankled by a European and US national, respectively, since their inception.
Civil society has long called for this opaque system to be replaced with a merit-based, transparent
process. However, the April 2019 appointment of World Bank President David Malpass – a US national
who ran unopposed for the Bank’s top job – demonstrated that the gentleman’s agreement remains alive
and well despite civil society opposition.
Undermining democratic ownership
The issue of political power imbalances is exacerbated by another long-standing critique of the Bank and
Fund: that the economic policy conditions they promote – often attached or ‘recommended’ as part of
loans, projects, technical assistance, or financial surveillance – undermine the sovereignty of borrower
nations, limiting their ability to make policy decisions and eroding their ownership of national
development strategies. This is particularly the case for the IMF as ‘a lender of last resort’ for
governments experiencing balance of payment problems.
While historically the IMF and Bank enforced conditionality primarily through SAPs, today, the IMF
requires a ‘letter of intent’ from governments requesting a loan. To be approved by the IMF for a loan, the
letter requires prior actions, quantitative performance criteria and structural benchmarks – the latter of
which continues to contain structural macroeconomic policy reforms. Despite efforts to ‘streamline’ the
number of conditions in the face of severe criticism, the IMF’s 2018 Review of Program Design and
Conditionality found that the number of structural conditions is on the rise. Once again, this raises
concerns about the restriction of policy space for developing countries. For the World Bank,
conditionality is now most directly issued through its DPF, where loans and grants for development
projects are provided to countries which adopt the required ‘prior actions’ to receive this fungible finance.
In 2017, the Bank issued 434 prior actions, according to research by Belgium-based CSO Eurodad.
In addition to the formal conditions introduced through lending programmers, both institutions play a
more nuanced role in restricting policy space through their research, publications, policy advice and
training. Particularly for low-income countries that find it difficult to attract capital at affordable rates,
IMF and Bank pronouncements on domestic policies can lead to important reactions by ‘the market’
(including potential lenders or investors), therefore potentially limiting (or increasing) countries’
financing options. The Bank and Fund’s bias towards fiscal consolidation, the private sector and debt
servicing also restricts public policy space and the ability of governments to finance infrastructure and
social services. The Bank and Fund have established substantial normative power through their research,
publications, pronouncements and support of ‘independent’ academic work. Their ability to position their
policy prescriptions as ‘best practice’, supported by ‘robust’ theoretical and empirical work, oftentimes
results in the internalization of Bank and Fund positions by scholars, development practitioners and
finance ministers.

15
Biased and inconsistent decision-making
The Bank and Fund have also been heavily criticized for the role played by the political expediency of
important shareholders in its decision-making and choice of interventions, including its support to
dictatorships. The IMF’s decision to break its own rules and support the highly controversial Greek loan
programmers, agreed in 2010, prompted Brazil’s Executive Director to the IMF to protest that, “… the
program … may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment,
but as a bail-out of Greece’s private debt holders, mainly European financial institutions.”
In general, the transition from the Washington Consensus, underpinned by the trust in the efficiency of
markets and consequently a drastically reduced role for the state, to its ‘more progressive’ post-
Washington Consensus successor – which acknowledges market failures and re-inserts the state’s
relevance, is often presented as a significant change in Bank and IMF thinking and their principles. 
However, the Bank’s emphasis on using public resources to leverage (subsidise) private investment
through its Maximising Finance for Development (MFD) approach demonstrates the state’s role has
merely been reframed essentially to ‘create an enabling’ environment to allow the private sector to pursue
its objectives.
Weak ability to learn from past mistakes
The IMF’s Independent Evaluation Office (IEO) was set up in 2001 to conduct evaluations of the policies
and functionalities of the institution with the aim of enhancing the learning culture, strengthening
credibility, and supporting institutional governance and oversight. On the World Bank side, the
Independent Evaluation Group (IEG) was created in 2006, integrating several individual accountability
mechanisms, and is charged with evaluating the activities of the entire World Bank Group and
determining what works, what doesn’t and why.
However, the Bank and Fund have been criticized for failing to implement the recommendations of the
IEG and IEO, respectively. In the case of the Bank, this reflects larger criticisms of staff incentives being
misaligned with its twin goals, and the Bank having an insular, self-referential approach to knowledge
production, which – according to the landmark Deaton Report published in 2006 – sometimes borders on
‘parody’ (see ObserverSummer 2018). Meanwhile, a third independent evaluation of the IEO itself,
published in 2018, found that the IEO’s recommendations continue to “lack traction” within the Fund (see
ObserverAutumn 2018). This echoes the findings of previous evaluations of the IEO, amidst accusations
of ‘groupthink’ at the IMF, which the IEO deemed partially the cause of the Fund not foreseeing the 2008
global financial crisis, arguably its most important job and clearest recent failure (see UpdateIssue 74).
Effective impunity for harms caused
In the 1980s, the Bank was beset by a string of controversies related to environmental and social impacts
of Bank-financed projects (see Human rights and Environment section below), with the SardarSarovar
dam project in India – which sparked a global opposition campaign – leading to the establishment of the
Bank’s Inspection Panel (its independent accountability mechanism [IAM]) in 1993.
A separate IAM for the International Finance Corporation (IFC) – the private sector arm of the World
Bank – the Compliance Advisor Ombudsman (CAO), was created in 1999. These accountability
mechanisms were set up to hear complaints of people and communities affected by Bank and IFC-funded
projects, and to foster redress where relevant. While the Bank’s IAMs are generally considered to be ‘best
of class’ among IFIs, their mandates are limited, their remedy mechanisms for those negatively impacted
by Bank projects continue to lack, and management responses to their findings are often inadequate.

16
Relatedly, a 2019 US Supreme Court decision found in favor of Indian fisher folk, and against the IFC,
rejecting its claim to ‘absolute immunity’ from prosecution in US courts; the plaintiffs took the IFC to
court in the US after failing to receive adequate compensation following a CAO investigation ruling that
IFC’s investment in the Tata Mundra power plant in India had resulted in substantial damage to their
livelihoods. Despite the Supreme Court decision, the vast proportion of the Bank’s lending and other
programmers portfolios remain immune from legal action, as does the IMF.
Finally, critics also argue that the opaque nature of investments in FI (i.e. commercial banks and asset
funds) by the IFC – which constitutes a growing part of its portfolio – and its inability to screen and
monitor FI sub-projects adequately, undermines accountability. The lack of public disclosure of FI
investments makes it difficult for communities and civil society to bring cases to the CAO and hold the
IFC accountable for its actions.

Human rights
A second stream of longstanding critiques has focused on the content of the policies, programmers and
projects that the BWIs promote and enforce and how they have undermined a broad spectrum of human
rights, with the Bank even being labelled a “human rights-free zone” in 2015 by the UN Special
Rapporteur on extreme poverty and human rights.
Restricting the macroeconomic environment for human rights
At the macroeconomic level, following on from the original Washington Consensus, the Bank and IMF
continue to push a particular set of macroeconomic policy prescriptions across almost all their member
countries. Most typically, these are fiscal consolidation measures (or austerity), and include reducing the
public wage bill, introducing or increasing VAT and other indirect regressive taxes in particular, labor
flexibilisation, rationalizing (cutting) and privatizing social services, and targeting social protections and
subsidies, while maintaining low levels of inflation, corporate taxation rates and trade tariffs.
In particular, in the aftermath of the 2008 financial crisis, this ‘pro-cyclical’ approach was criticized for
leading to a decline in economic activity, leading to lower consumption, lower public revenues, lower
investment in vital public services, and higher levels of inequality, which in turn also lowers growth.
Critics have also repeatedly pointed out this approach does not address the root causes of the
government’s balance of payments distress. While the IMF has softened its position on some important
issues, such as the recognition that capital controls may be necessary in certain (limited) circumstances,
and the increased acknowledgement of the potential benefits of anti-cyclical policies (also in very limited
circumstances), the general direction of travel remains largely unchanged.

Danger: Violations Ahead. International Accountability Project

Labor unions, for instance, have long opposed the BWIs’ systematic weakening of labor rights either
directly through conditionality or indirectly through policy advice in flagship reports and surveillance,
such as the IMF’s 2017 loan programmers to Greece, or the World Bank’s 2018 World Development
Report, respectively. Other economic and social rights, such as the right to social security, health and

17
education, as well as the broader right to an adequate standard of living, including adequate food, clothing
and housing, are all undermined by the BWIs’ promotion of excessively constrained fiscal policies and
aggressive privatization that preclude states from delivering core public services and meeting their
international human rights obligations.

A related and intersectional thread of human rights critiques focuses on how these policies supported,
proposed or required by the BWIs are designed unevenly in favor of those already at the top of the
economy and society, further exacerbating inequalities within and between countries and
disproportionately harming the marginalized, who already are most vulnerable to human rights violations.
Groups that are often disproportionately and cumulatively disadvantaged by the types of macroeconomic
policies the BWIs promote include the poor, women, immigrants, the elderly, children and youth, ethnic
and religious minorities, people with disabilities, and LGBTQI communities.

Causing major harms through development projects

World Bank-funded projects have also continually been found to be in direct, serious violation of
international human rights standards. Major recurring issues include mass evictions and the forced
displacement of peoples and communities for major infrastructure and agricultural projects, violations of
the rights of indigenous and forest peoples, targeting of human rights defenders, triggering local food
insecurity, and serious labor rights violations, such as child and forced labor reportedly being used in
Bank-funded projects. The IFC has also been shown on several occasions to have invested in companies
that avoid or evade taxes. More recently, the Bank has also acknowledged that its projects can create an
environment that can foster gender-based violence; including sexual abuse and the spread of HIV/AIDS.
To safeguard against risks like these, the World Bank launched its revised Environmental and Social
Framework in 2018, although it applies only to its project lending and not to its DPF. Many in civil
society remain unconvinced that the safeguards are fit for purpose if the Bank is to deliver on its mandate
to implement policies that benefit the poorest, especially as the Bank is set to focus on more complex and
difficult environments from 2018.
Lacking evidence for positive impacts…
While maintaining they have no obligations under international human rights law, despite objections of
myriad human rights experts and the opinion of one of the Bank’s former General Counsels, both the
Bank and Fund claim their work to eradicate poverty and increase economic growth and stability
ultimately contributes to global welfare and the fulfilment of human rights, without clear evidence. First,
this ‘win-win’ scenario has been the subject of countless critiques pointing to obvious trade-offs and
conflicts between ‘pro-growth’ and ‘pro-equity’ policies, including in a paper by the IMF’s own research
department in 2014.
Second, according to data on poverty rates, the vast majority of the poverty eradication achieved during
the last 40 years is actually largely attributed to China, which has certainly not followed the policy
prescriptions of the BWIs, while the IMF’s 2018 conditionality review found several IMF programmers
where “debt overshot projections by significant margins, reflecting disappointing growth and higher fiscal
deficits”, with lower programmers completion rates. Additionally, the pace of poverty reduction is
reportedly slowing, while the number of people living in extreme poverty in Africa is increasing, and
even the way the Bank measures poverty levels remains highly disputed.

18
These and other critiques call into question the efficacy of the BWIs’ policy prescriptions more generally
and their theoretical ability to effectively contribute to the fulfilment of human rights in the first place.
While not measuring harmful impacts
At the same time, repeated calls to measure the harmful impacts Bank and Fund policies have on the
enjoyment of human rights, including systematic and comprehensive gender and inequality impact
assessments, as well as including human rights considerations in the BWIs’ Debt Sustainability
Assessments, whether at the macroeconomic policy or project level, remain unanswered.

Environment
Finally, the BWIs’ approach to development and economic policy, as well as their financing decisions,
has generated long-standing and ever-more pressing criticisms related to the protection of the
environment and staving off climate change.
Growth-based model unsustainable
In general, the growth-based approach to poverty reduction that the World Bank and IMF both promote
has immense environmental consequences, as is evidenced by the deepening climate crisis. As noted by
former World Bank Chief Economist Sir Nicholas Stern in 2007, “Climate change is a result of the
greatest market failure the world has seen.” Since their inception, the BWIs have played a formative role
in aiding and abetting the global forces that have caused this market failure, through promoting economic
growth as the core component of their development model, despite – as noted in the aforementioned
Deaton report – mixed evidence that economic growth and poverty reduction are linked. While the Bank,
and to a lesser extent, the Fund, have both increasingly tried to account for environmental and climate
factors in their work over recent decades, these efforts have largely been limited to attempting to integrate
these concerns into a growth-based development model.
Continued fossil fuel investments
In terms of its direct lending, the Bank’s investments in fossil fuels have been criticised for undermining
climate goals – with the Bank continuing to fund a considerable number of fossil fuel projects in the years
after the Paris Climate Agreement was signed in 2015, which saw countries jointly commit to limit
average global temperature rise to “well below 2°C” relative to preindustrial levels. Despite the Bank’s
recent climate commitments, CSOs remain concerned that the Bank lacks a comprehensive approach to
align its entire lending portfolio with the Paris Agreement. In addition to project finance for oil and gas
infrastructure, there are other remaining types of Bank investments that are a cause for concern. The IFC
now invests nearly 50 per cent of its portfolio in FI, and a lack of sub-project disclosure in these
investments makes it difficult to assess the exposure of these investments to fossil fuels, including coal.
However, CSO research has linked IFC FI investments to the construction of 19 new coal-fired power
plants in the Philippines, while another report found IFC FI investments linked to 41 new coal plants
between 2013 and 2016. While the IFC announced a new Green Equity Strategy in October 2018 that will
require new FI clients to divest from coal over time, this policy will not affect past FI investments.
CSOs are also concerned that the World Bank has thus far not developed a framework to FINAL assess
the climate impacts of its Development Policy Finance. CSO research has found that in some cases, these
contain ‘prior actions’ that benefit the fossil fuel and extractive industries. Finally, the Bank’s Multilateral
Investment Guarantee Agency (MIGA) has in recent years provided a number of guarantees that have

19
backed fossil-fuel projects. According to CSO research, in FY16, MIGA did not support a single
renewable energy project: “[its] guarantees to energy were worth $1.9 billion … of which $0.9 billion
went to fossil fuel projects”, with the rest going to projects such as hydropower dams, often with
detrimental environmental and human rights impacts.
Focus on mega-projects
The Bank’s shift towards leveraging private sector finance for development, which has gained momentum
since 2015, includes a particular emphasis on promoting ‘infrastructure as an asset class’, in order to
crowd in institutional investors. This policy initiative is highly dependent on mega-infrastructure projects
– and, as noted by a letter sent by concerned economists in October 2018, currently lacks a framework for
aligning such mega-projects with the Paris Climate Agreement or the Sustainable Development Goals
(SDGs).

Forests
Finally, the Bank’s forest policy and weak safeguards on forest protection have also been observed to
infringe the rights of local communities and have failed to protect one of the planet’s most important
‘carbon sinks’. CSOs have called for the Bank to open up its Forest Notes – which are meant to guide the
interface between its lending and forests – to consultation. CSOs have also been highly critical of one of
the forest initiatives the Bank manages, the Forest Carbon Partnership Facility (FCPF), a climate
investment fund that supports Reducing Emissions from Deforestation and Forest Degradation (REDD)
projects. A March 2017 post in REDD Monitor called the FCPF, “the most cost-inefficient tree-saving
scheme ever,” owing to high administrative costs between fiscal years 2009-2015 absorbing 64 per cent
of FCFP’s $55 million expenditure.
 More generally, the Bank’s overall approach to lending has undermined the protection of vital natural
ecosystems in borrower countries. As noted by Bruce Rich in his influential 2013 book, Foreclosing the
Future: The World Bank and the Politics of Environmental Destruction, “When one examines the failures
to conserve ecosystems, or to mitigate environmental impacts of development, one finds that failed
governance at all levels is almost invariably at the root. …Many of [the Bank’s] problems are associated
with a dysfunctional institutional culture in which the relentless pressure to move money out the door,
even in violation of the Bank’s own policies and rules, often overrides all other considerations.”

Conclusion
Seventy-five years on the Bretton Woods Conference, and despite the Bank and Fund’s efforts to portray
themselves as beacons of knowledge and expertise on development and macroeconomic issues, both
institutions have been and continue to be the subject of robust academic, UN and civil society criticism.
Indeed, both have faced and continue to face resistance and mobilizations from civil society and social

20
movements, from the global 1994 “50 years is enough” campaign to the 2018 Peoples Global Conference
Against IMF-World Bank.
An extensive academic literature, with which the Bank and Fund rarely engage, challenges the robustness
of the theoretical and evidence bases for Bank and Fund’s principles and policies. Volumes of documents
testify to the experiences of millions of people negatively impacted by Bank and Fund policies and
programmers. Together they suggest that Bank and Fund’s policies have failed to achieve their stated
objectives and instead support an economic order that benefits elites and private sector interests at the
expense of poor and marginalized communities.
As the Bank and Fund –  and others – now face a challenge from ‘populists’ and far-right groups about
the continued relevance of multilateralism amidst a changing global order, the BWIs continue to deny
their role in creating the social, political and economic conditions that have led to the frustration and
disenfranchisement that brought us here.

8. The multinational corporation (MNC) is neither a new development in the world economy nor an
unknown phenomenon in economic history, but its effect on the international economic system is truly
revolutionary. The growing size and volume of international transactions undertaken by MNCs are
already overwhelming the more traditional forms of international trade and capital flows for many
countries. This is causing changes in the location and organizational structure of business activity and is
raising public policy issues with which governments have not adequately dealt. MNCs have proven a
mixed blessing.
As technological leaders, MNCs help to diffuse management, production, and marketing techniques
throughout the world. Nurtured by the growing integration of world product and capital markets, MNCs
contribute to the further integration of the world economy. This trend reduces the distortions erected by
man and nature, but places stresses on the international monetary system and on the efficacy of domestic
economic policies. At present, the institutional framework of the international system is unequipped to
contend with many of the jurisdictional problems created by MNCs, including excessive market power,
distribution of tax revenues, and threats to national sovereignty. Policies are needed to ensure a
competitive environment and to reconcile the activity of multinational corporations with national interests
and welfare.

9. Advantages of dollarization from the point of view of the dollarizing country, replacement of the local
currency offers three major benefits (apart from the general advantage of reduced transactions costs).
First, administrative expenses are reduced. No longer must the government incur the cost of maintaining
an infrastructure dedicated solely to production and management of separate national money.
Admittedly, such savings are apt to be most attractive to poorer or more diminutive sovereignties because
of the diseconomies of small scale involved. But even for bigger and wealthier countries the potential
reduction of expenses would not be inconsiderable.

21
Second, dollarization can also establish a firm basis for a sounder financial sector. Dollarization means
more than merely the adoption of a foreign currency. It also means financial integration with the United
States, which will force domestic financial institutions to improve their efficiency and the quality of their
services. Even more, as a supposedly irreversible institutional change, it signals a permanent
commitment to low inflation, fiscal responsibility, and transparency. That would be of particular value to
countries that previously have not enjoyed much of a reputation for price or fiscal stability. Also
importantly, with dollarization there could be a substantial reduction of interest rates for local borrowers.
Dollarization establishes a stable relationship with a currency whose reputation is already well established
and secure. Instead of investing heavily in efforts to build market confidence in its own monetary policy,
a government can achieve instant credibility by “hiring” the respected Federal Reserve instead. Fed
policies become the country’s policy. With luck, the reduction of interest rates will result in substantially
higher levels of domestic investment and future economic growth. Presently, Latin American countries
must pay a considerable premium when borrowing in world capital markets, reflecting two perceived
risks for lenders. One is devaluation risk (or currency risk): a fear of depreciation of the local money’s
exchange rate. The other is default risk (or sovereign risk): a fear of disruption or suspension of a
country’s payments on foreign debt. Dollarization can do nothing directly to reduce default risk (the
“country” premium), which is a reflection of the political reality of national sovereignty.
An independent government can always, in extremis, suspend or abrogate its external obligations if faced
with, say, a fiscal emergency or political turmoil. But dollarization can reasonably be expected to
eliminate devaluation risk (the “currency” premium) since the reform, at least in principle, is supposed to
be irrevocable. And it might even indirectly reduce default risk, insofar as some part of default risk
reflects the possibility of future currency crises. Barring reintroduction of the local money, exchange-rate
disturbances should become a thing of the past, making it easier for governments to meet foreign
commitments.
Disadvantages of dollarization counterbalancing these benefits, however, are several potentially
substantial costs. Economists, not surprisingly, tend to focus on disadvantages that are essentially
economic in nature. These include forfeiture of national monetary autonomy and prospective losses of
both seignior age and an effective lender of last resort for domestic banks. In reality, however, none of
these costs are apt to be as serious as frequently alleged. The more critical disadvantages of dollarization
are political, not economic, involving losses of a powerful symbol of national identity, an emergency
source of state revenue, and an important measure of diplomatic insulation. Though frequently discounted
by economists, who are inclined to view political behavior as mostly interest-driven or even “irrational,”
these are in fact the costs that are likely to matter most in practice. Economic costs. It is easy to
exaggerate the purely economic costs of dollarization. It is certainly true, for example, that in formal
terms monetary autonomy is forfeited, since the dollarizing country can no longer exercise unilateral
control over its own money supply or exchange rate. The relationship is inherently hierarchical. All
authority is ceded to the Federal Reserve, with little promise that the dollarizing country’s specific
circumstances would be taken into account when monetary decisions are made. In practical terms,
however, it is likely that much of the country’s monetary autonomy has already been greatly eroded.
Otherwise, the country would not even be considering dollarization in the first place.
In Argentina, the big step was taken when its currency board was established. The Argentines have
already lived without an independent monetary policy for most of a decade. And in many other Latin
American countries monetary autonomy has long since been compromised by the steady growth of
informal dollarization. The greater the degree of currency substitution that has already occurred,
reflecting market pressures and preferences, the greater is the degree of constraint imposed even now on a

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government’s ability to manage macroeconomic conditions – and hence the smaller will be the actual loss
of monetary autonomy if the local money is eliminated formally in the future. Likewise, it is true that
with dollarization a government forfeits a potentially powerful tool for underwriting public expenditures –
the capacity to create money, otherwise known as seignior age. Technically defined as the excess of the
nominal value of a currency over its cost of production, seignior age can be understood as an alternative
source of revenue for the state beyond what can be raised via taxation or by borrowing from financial
markets at home or abroad. What cannot be paid for with tax receipts or borrowed funds can be paid for,
in effect, by using the printing press.
Dollarization automatically terminates that revenue unless explicitly offset by some kind of agreed
formula for seignior age-sharing with the United States. But once again, in practical terms, the loss will
be smaller; the greater is the degree of prior informal dollarization. For many of the countries of Latin
America, where the greenback even now accounts for a large part of local money supply, the privilege of
seignior age has already been greatly diminished. Finally, it is true that a dollarizing country forfeits a
formal lender of last resort, since in adopting a foreign currency it also gives up a central bank capable of
discounting freely in times of financial crisis. Domestic banks may thus be more exposed to potential
liquidity risks. In practical terms, however, this alleged cost can be rather easily offset on a unilateral
basis.
Dollarization reduces the overall need for international reserves, since a share of external transactions that
previously required foreign exchange can now be treated as the equivalent of domestic transactions. A
portion of the central bank’s dollar assets could therefore be dedicated instead to a public stabilization
fund to help out domestic financial institutions under stress. Alternatively a contingency fund could be
built up over time from tax revenues, or flexible credit lines with foreign banks or monetary authorities
could be negotiated, using future tax revenues or seignior age-sharing as collateral. A model for a foreign
credit line already exists in Argentina where, in support of its currency board, the government has
established a Contingent Repurchase Facility allowing it to sell dollar-denominated bonds to selected
international banks when needed in exchange for cash dollars.
Political costs. It is more difficult to exaggerate the political costs of dollarization, which are highly
visible and could be quite dramatic. At the symbolic level, preservation of a national currency is
particularly useful to governments wary of internal division or dissent.
Centralization of state authority is facilitated insofar as citizens all feel themselves bound together as
members of a single social unit -- all part of the same political and historical community. Cultural
anthropologists teach us that states are made not just through force but through loyalty, a voluntary
commitment to a joint identity. The critical distinction between “us” (the nation) and “them” (everyone
else) can be heightened by all manner of tangible symbols: flags, anthems, postage stamps, public
architecture, even national sports teams. And among the most potent of these symbols is money, which
serves to enhance a unique sense of national identity in two ways. First, because it is issued by the
government or its central bank, a currency acts as a daily reminder to citizens of their connection to the
state and oneness with it. Second, by virtue of its universal use on a daily basis, the currency underscores
the fact that everyone is part of the same social entity -- a role not unlike that of a single national
language, which many governments also actively promote for nationalistic reasons. Both effects are lost
when the money of a foreign state is adopted.
Insofar as value continues to be attached to loyalty to a distinct political community, it can no longer be
promoted through the tangible symbol of a separate national currency. Similarly, at the level of state
policy, preservation of a national currency is useful to governments as a kind of insurance policy against

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risk. This takes us back to seignior age, which is more than just a marginal source of revenue for the
state. More importantly, it can serve as an emergency source of revenue – a way of finding needed
purchasing power quickly when confronted with unexpected contingencies, up to and including war. As
John Maynard Keynes once wrote, “A government can live by this means when it can live by no other.”
Resources can be mobilized immediately without being forced to wait for tax returns to be filed or loans
to be negotiated. That privilege too is lost when the money of another state is adopted. Finally, at the
level of foreign policy and diplomacy, preservation of a national currency is useful to governments wary
of external dependence or threat.
National monetary autonomy enables policymakers to avoid dependence on some other source for this
most critical of all economic resources. In effect, a clear economic boundary is drawn between the state
and the rest of the world, promoting political authority. This insulation also is lost when foreign money is
adopted. Indeed, with dollarization the United States gains a potentially powerful instrument of influence
over the dependent dollarized economy. Hierarchy unavoidably implies vulnerability. For a case in point
consider Panama, which since its independence in 1903 has used the greenback as legal tender for most
domestic monetary purposes.
Although a national currency, the balboa, notionally exists, only a negligible amount of balboa coins
actually circulate in practice. The bulk of local money supply, including all paper notes and most bank
deposits, is accounted for by the dollar. In economic terms, most observers have rightly had only praise
for Panama’s currency dependence. Reliance on the dollar has created an environment of stability that
has both suppressed inflation – a bane of most of Panama’s hemispheric neighbors – and helped establish
the country as an important offshore financial center. In political terms, however, Panama has been
extremely vulnerable in its relations with Washington, which of course could sour at any time. In the late
1980s, Panamanians learned just how exposed to external coercion they really were. The critical moment
came in 1988, following accusations of corruption and drug smuggling against General Manuel Noriega,
the country’s de facto leader.
In March 1988, Panamanian assets in U.S. banks were frozen, and all payments and dollar transfers to
Panama were prohibited as part of the Reagan administration’s determined campaign to force Noriega
from power. The impact was swift. Most local banks were forced to close, and the economy was
squeezed by a severe liquidity shortage. The effect on the economy was devastating despite rushed
efforts by the Panamanian authorities to create a substitute currency, mainly by issuing checks in
standardized denominations that they hoped recipients would then treat as cash. The country was
effectively demonetized. Over the course of the year, domestic output fell by a fifth. As it happens, the
sanctions turned out to be insufficient to dislodge Noriega on their own. Ultimately, in 1989, Washington
felt it necessary to mount a military invasion that led to a temporary occupation of the country until a
new, friendlier government could be installed. But there can be no doubt that the liquidity squeeze was
painful and contributed greatly to Noriega’s downfall. Dollarization clearly makes a country more
vulnerable to threats of manipulation or coercion.
Conclusion
For Latin Americans the purely economic costs of dollarization, while hardly trivial, nonetheless appear
limited in scope and essentially manageable. Overall, on economic grounds alone, dollarization should be
attractive to many countries. But governments cannot ignore the fact that there are also potential political
costs, which could be substantial and may in fact be far more threatening to a nation’s internal cohesion
and external independence. The political implications of dollarization go to the heart of the fundamental
purpose of the state: to permit a community to live in peace and preserve its own social and cultural

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heritage. Such matters cannot be lightly dismissed as mere “politics as usual.” Latin American
governments have real reason to hesitate over such a momentous decision.

10. The markets have expanded because of inflation. Governments have been issuing bonds, a.k.a
printing money, to pay for spending and to increase the money supply after the Great Recession of 2009.
All this increase in the money supply was and is an attempt to keep our economic and banking system
stable. If the major banks were allowed to crash in 2009, then people would have woken up with no cash
in the bank accounts, so the government had to prop them up.
Along with issuing more government debt, the Fed put interest rates a near zero percent, so banks could
borrow for no cost. This meant a bank could borrow as much money as they needed for whatever
purposes or investments they felt necessary. The issue was, there was not much to invest in. No new
technologies or businesses for the next boom cycle, so the banks played it safe and purchased government
bonds.
Since the banks could borrow at zero and get 1–3% yield, it was like the banks were printing money too,
by borrowing from the Fed and buying government bonds. The 1–3% yield in the bond market is low, so
some also invested in equity markets, where the dividend yield is also 1–3% and they could also make
money on appreciation of stocks. So we expanded the bond and equity markets, because the banks wanted
low risk and had little else to invest in with there virtually free money.

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