Till Debt Do Us Part: The US Capital Market and Foreign Lending, 1920-1955
AbstractThis paper analyzes United States experience with foreign lending in the half-century from 1920. A first question raised by this experience is what triggered the process of United States foreign lending. I conclude that lending was restrained at the beginning of the period by the debt overhang associated with reparations and by the post World War I disruption of international trade. Intervention by creditor country governments in the form of the Dawes Loan, League of Nations loans to Central Europe and reconstruction of the gold standard system was needed to initiate long-term capital flows. A second question is how to characterize the operation of the United States capital market once lending was resumed. I conclude that while lenders discriminated among potential borrowers and demanded compensation for default risk, their efforts in this respect proved insufficient. Neither an efficient-markets nor a fads-and-fashions model provides an adequate characterization of the data. A third question is whether default in the 1930s made it more difficult for countries to borrow in the 1940s and 1950s. I find no evidence that countries which interrupted debt service in the 1930s found it more difficult to borrow subsequently than did countries which continued to service their debts. Instead, both defaulting and non-defaulting countries found their access to private portfolio capital flows reduced as a result of defaults.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 212.
Date of creation: Dec 1987
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Other versions of this item:
- Barry Eichengreen, 1989. "Til Debt Do Us Part: The U.S. Capital Market and Foreign Lending, 1920-1955," NBER Working Papers 2394, National Bureau of Economic Research, Inc.
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- Yawitz, Jess B., 1977. "An Analytical Model of Interest Rate Differentials and Different Default Recoveries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(03), pages 481-490, September.
- Peter H. Lindert & Peter J. Morton, 1989.
"How Sovereign Debt Has Worked,"
in: Developing Country Debt and the World Economy, pages 225-236
National Bureau of Economic Research, Inc.
- White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, vol. 23(1), pages 33-55, January.
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