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Til Debt Do Us Part: The U.S. Capital Market and Foreign Lending, 1920-1955

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  • Barry Eichengreen

Abstract

This paper analyzes U.S. experience with foreign lending in the half-century from 1920. A first question raised by this experience is what ignited the process of U.S. 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 U.S. capital market once lending was again underway. I find that while lenders discriminated among potential borrowers and demanded compensation for default risk, they did so insufficiently. 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 maintained debt service continuously. Rather, default reduced access to private portfolio capital flows for defaulting and nondefaulting countries alike.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2394.

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Date of creation: Oct 1987
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Publication status: published as Developing Country Debt and Economic Performance, Vol. 1: The Internation-al Financial System, edited by Jeffrey D. Sachs, pp. 107-155. Chicago: The University of Chicago Press, 1989.
Handle: RePEc:nbr:nberwo:2394

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  1. Robert E. Lipsey, 1987. "Changing Patterns of International Investment In and By the United States," NBER Working Papers 2240, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and the World Economy, pages 225-236 National Bureau of Economic Research, Inc.
    • Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
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Cited by:
  1. Acharya, Viral V & Rajan, Raghuram G, 2011. "Sovereign debt, government myopia, and the financial sector," CEPR Discussion Papers 8668, C.E.P.R. Discussion Papers.

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