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Till Debt Do Us Part: The US Capital Market and Foreign Lending, 1920-1955

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  • Eichengreen, Barry

Abstract

This 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.

Suggested Citation

  • Eichengreen, Barry, 1987. "Till Debt Do Us Part: The US Capital Market and Foreign Lending, 1920-1955," CEPR Discussion Papers 212, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:212
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    5. Robert E. Lipsey & Mario Schimberni & Robert V. Lindsay, 1988. "Changing Patterns of International Investment in and by the United States," NBER Chapters,in: The United States in the World Economy, pages 475-558 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    2. Viral V. Acharya & Raghuram G. Rajan, 2013. "Sovereign Debt, Government Myopia, and the Financial Sector," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1526-1560.

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