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Lessons from the past: capital markets during the 19th century and the interwar period

Published online by Cambridge University Press:  22 May 2009

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On Friday, 13 August 1982, Finance Minster Jesus Silva Herzog of Mexico made a series of visits to the International Monetary Fund, the Federal Reserve, and the U.S. Treasury. His message to each was the same: Mexico could no longer continue to service its debt. Thus began a dramatic weekend of negotiations that marked the end of the preceding decade's buoyant expansion of developing country debt and the start of a still continuing response to the sudden collapse.

The Political Economy of Debt
Copyright © The IO Foundation 1985

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1 Kraft, Joseph, The Mexican Rescue (New York: Group of Thirty, 1984), p. 3Google Scholar.

2 Clarke, Hyde, Sovereign and Quasi-Sovereign States: Their Debts to Foreign Countries (London, 1879), p. 9Google Scholar.

3 Information on the creditor countries comes from Matthews, R. C. O. et al. , British Economic Growth (Stanford: Stanford University Press, 1982)Google Scholar; Cameron, Rondo, France and the Economic Development of Europe, 1800–1914 (Princeton: Princeton University Press, 1961)Google Scholar; and Mitchell, B., European Historical Statistics (New York: New York University Press, 1980)Google Scholar, containing national income and balance-of-payments series of Walther Hoffmann. Contemporary data are from the World Bank and the International Monetary Fund.

4 For data on the importance of investment to a variety of recipients see Bloomfield, Arthur I., Patterns of Fluctuation in International Finance before 1914, Princeton Studies in International Finance no. 21 (Princeton, N.J., 1968)Google Scholar, Appendix 3, and the country-specific sources later cited.

5 Lewis, W. A., Economic Survey, 1919–1939 (London: Allen & Unwin, 1949), p. 12Google Scholar.

6 Among such classics, still highly useful, must be counted Jenks, L. H., The Migration of British Capital to 1875 (New York: Knopf, 1927)Google Scholar; Feis, H., Europe the World's Banker: 1870–1914 (New Haven: Yale University Press, 1930)Google Scholar; Cairncross, A. K., Home and Foreign Investment, 1870–1913 (London: Cambridge University Press, 1953)Google Scholar; and Thomas, B., Migration and Economic Growth (London: Cambridge University Press, 1954)Google Scholar. For a summary of some of the discussion and selected readings see Hall, A. R., ed., The Export of Capital from Britain, 1870–1914 (London: Methuen, 1968)Google Scholar. A recent and highly useful reexamination of some of the basic hypotheses surrounding British capital export is Edelstein, M., Overseas Investment in the Age of British Imperialism: The United Kingdom, 1850–1914 (New York: Columbia University Press, 1982)Google Scholar.

7 Feis, , Europe the World's Banker, p. xxviGoogle Scholar.

8 Corporation of Foreign Bondholders, Thirty-third Annual Report, 1906 (London), p. 11.

9 Moulton, Harold G. and Pasvolsky, Leo, War Debts and World Prosperity (Washington, D.C.: Brookings, 1932), Appendix AGoogle Scholar.

10 Yates, P. Lamartine, Forty Years of Foreign Trade (London: Macmillan, 1959), p. 204Google Scholar.

11 Simon, Matthew, “The Pattern of New British Portfolio Foreign Investment, 1865–1914,” in Hall, , Export of Capital, p. 23Google Scholar. The contemporary estimate is that of George Paish, “Great Britain's Capital Investments in Other Lands,” in Journal of the Royal Statistical Society, rpt. in Mira Wilkins, ed., British Overseas Investments, 1907–1948 (New York: Arno, 1977), p. 479 (original).

12 Calculated from Edelstein, Michael, “Realized Rates of Return on U.K. Home and Overseas Portfolio Investment in the Age of High Imperialism,” Explorations in Economic History 13 (1976), p. 295 n. 16 and p. 305, Table 5CrossRefGoogle Scholar.

13 Paish, , “Great Britain's Investment,” p. 480Google Scholar.

14 Hall's introduction to Export of Capital is a useful summary of the debate surrounding the causal mechanism underlying the transmission of long swings internationally. See also Edelstein, Overseas Investment.

15 For data on inflows of net investment for the United States see U.S. Department of Commerce, Historical Statistics of the United States (Washington, D.C., 1975), pp. 865ffGoogle Scholar; for Argentina, Ford, A. G., The Gold Standard, 1880–1914: Britain and Argentina (Oxford: Oxford University Press, 1962), p. 142Google Scholar; for Australia, Butlin, N. G., Australian Domestic Product, Investment and Foreign Borrowing, 1861–1938/39 (London: Cambridge University Press, 1962), pp. 405ffGoogle Scholar.

16 Edelstein, , Overseas Investment, pp. 133–34Google Scholar.

17 Ibid., p. 148.

18 Edelstein, Overseas Investment, finds no evidence of such a bias, dubbed a “Macmillan gap” because it arose in the report of that parliamentary inquiry in 1931.

19 Edelstein, , Overseas Investment, pp. 153–54Google Scholar.

20 Jenks, , Migration of Capital, p. 306Google Scholar, cites the success of the Turkish loan of 1858: “The Stock Exchange … was hostile to the affair …. But the loan was taken up in the provinces where the market for manufactures seemed more important.” We have too little knowledge of how this externality was internalized, especially in the latter part of this period.

21 For a brief discussion of the report of 1875, the forerunner of the U.S. Senate Finance Committee investigation of 1932, see Jenks, , Migration of Capital, pp. 292–93Google Scholar.

22 Ibid., p. 123.

23 Cameron, , France and Economic Development, p. 486Google Scholar; Feis, , Europe the World's Banker, p. 74Google Scholar.

24 Mulhall, M. G., Dictionary of Statistics (London, 1899), p. 272Google Scholar; the Cave report is quoted in Fenn on the Funds, 14th ed. (London, 1889), p. 447Google Scholar.

25 Landes, D. S., “Some Thoughts on the Nature of Economic Imperialism,” Journal of Economic History 21 (1961), p. 505CrossRefGoogle Scholar.

26 Quoted in Stern, Fritz, Gold and Iron (New York: Knopf, 1977), p. 424Google Scholar.

27 For the discussion of tied loans in France and Germany see Feis, , Europe The World's Banker, pp. 124–33 and 176–81Google Scholar.

28 Ibid., pp. 211–12.

29 Ibid., p. 211.

30 Van Oss, S. F., Stock Exchange Values: A Decade of Finance, 1885 to 1895 (London, 1895), p. lxxviGoogle Scholar: “The alternating rage for South American and European securities and its result I upon their quotations has been one of the most interesting phenomena of the Stock markets during recent years.”

31 This discussion of the Argentine default draws on Ford, The Gold Standard, and Ferns, H. S., Britain and Argentina in the Nineteenth Century (Oxford: Oxford University Press, 1960), especially chap. 14Google Scholar.

32 Economist, 7 March 1891, pp. 301–2.

33 Ferns, , Britain and Argentina, p. 473Google Scholar.

34 These trade data are taken from the Anuário Estatístico, 1939–40, Appendix, pp. 1359ff.

35 Villela, Aníbal and Suzigan, Wilson, Política do governo e crescimento da economía brasileira: 1889–1945 (Rio de Janeiro, 1975), p. 318Google Scholar. (My translation, authors' emphases.)

36 This discussion of Turkey follows Wynne, W. H., State Insolvency and Foreign Bondholders, vol. 2 (New Haven: Yale University Press, 1951), pp. 393528Google Scholar. The quotation is from the dispatch of the British ambassador at Constantinople as cited in Wynne, p. 396 n. 13.

37 Wynne, , State Insolvency, p. 411Google Scholar, quotes the comments of the Money Market Review in reaction to the extension of the responsibilities of the Imperial Ottoman Bank. It is merely one of a series of mistaken declarations about both the potential of Turkey and the role of foreign administration that filled the prospectuses.

38 Wynne, , State Insolvency, p. 450Google Scholar, citing Robert Bourke, the British delegate nominated by the Council of Foreign Bondholders to the negotiations leading to the settlement.

39 Ibid., p. 478.

40 Mathew, W. M., in chap. 9 of Platt, D. C. M., ed., Business Imperialism, 1840–1930 (Oxford: Oxford University Press, 1977), p. 370Google Scholar.

41 Wynne, , State Insolvency, pp. 190–95Google Scholar, traces the complex history of Peruvian foreign debt defaults and negotiations.

42 Ibid., p. 153 n. 64, cites the reaction of Sir Henry Tyler of the Peruvian Bondholders' Committee to the communication of the Foreign Office to Chile. Britain thus rejected an official role endorsing a proposed private settlement, while at the same time offering, and requesting, reopening of negotiations that did not seem favorable to the British bondholders.

43 Ibid., p. 179.

44 Miller, Rory, chap. 10 of Platt, Business Imperialism, p. 384Google Scholar.

45 Van Oss, S. F., ed., Fenn on the Funds, 18th ed. (London, 1898), p. 427Google Scholar.

46 Moulton, and Pasvolsky, , War Debts, pp. 426, 428Google Scholar.

47 Quoted in ibid., pp. 66, 69.

48 Madden, J. T., Nadler, M., and Sauvain, H. C., America's Experience as a Creditor Nation (Englewood Cliffs, N.J.: Prentice-Hall, 1937), p. 74Google Scholar.

49 Einzig, Paul, World Finance, 1914–1935 (London: Macmillan, 1935), pp. 140ffGoogle Scholar.

50 Royal Institute of International Affairs (RIIA), The Problem of International Investment (Oxford: Oxford University Press, 1937), p. 21Google Scholar.

51 Ibid., p. 20.

52 Peters, H. E., The Foreign Debt of the Argentine Republic (Baltimore: Johns Hopkins University Press, 1934), pp. 144, 146Google Scholar.

53 RIIA, Problem of International Investment, p. 12Google Scholar, reprints a section of his A Revision of the Treaty. (His emphases.)

54 Reprinted in Moulton and Pasvolsky, War Debts, pp. 379–80.

55 Reprinted in J. T. Madden and M. Nadler, Foreign Securities (New York: Ronald, 1929), p. 223.

56 Ibid., chap. 10.

57 Madden, , Nadler, , and Sauvain, , America's Experience, pp. 241ffGoogle Scholar.

58 Felix, David, “The Baring Crisis of the 1890s and the International Bond Defaults of the 1930s,” mimeo. (Washington University, St. Louis, Mo., 11 1984)Google Scholar, citing the conclusions of the Senate Finance Committee inquiry.

59 Winkler, Max, Foreign Bonds (Philadelphia: Swain, 1933), p. 90Google Scholar.

60 Reprinted in Madden, Nadler, and Sauvain, America's Experience, p. 205.

61 For the analysis of the commissions actually earned, as calculated from the Senate Finance hearings, see ibid., pp. 226ff.

62 For the yield on new foreign bonds based on prices at time of issue, see RIIA, Problem of International Investment, p. 170Google Scholar, drawing on a publication of the U.S. Department of Commerce. The analysis of the actual rate of return, including capital gains and allowances for nonpayment, is found in Madden, , Nadler, , and Sauvain, , America's Experience, pp. 154ffGoogle Scholar.

63 These are the Federal Reserve Board estimates presented in Madden, , Nadler, , and Sauvain, , America's Experience, p. 96Google Scholar.

64 Moulton, and Pasvolsky, , War Debts, p. 380Google Scholar.

65 George C. Auìd, former accountant general of the Reparations Commission, and cited as a “leading economist” by Madden, , Nadler, , and Sauvain, , America's Experience, p. 169Google Scholar.

66 Costigliola, Frank C., “Anglo-American Financial Rivalry in the 1920s,” Journal of Economic History 37 (1977), p. 929CrossRefGoogle Scholar.

67 See Felix, , “The Baring Crisis,” pp. 46ffGoogle Scholar. For Argentina in the 1930s see Díaz-Alejandro, Carlos, Essays on the Economic History of the Argentine Republic (New Haven: Yale University Press, 1970), chap. 2Google Scholar.

68 Moulton, and Pasvolsky, , War Debts, pp. 285, 306Google Scholar.

69 Quoted in ibid., p. 311.

70 Sir Arthur Samuel, quoted in Winkler, , Foreign Bonds, p. 252Google Scholar.

71 I have followed the discussion in my “Revisiting the Great Crisis of 1982,” to appear in a symposium published by the Notre Dame Press in 1985.

72 See my “The Debt Crisis: A Longer Perspective,” Journal of Development Planning, 04 1985Google Scholar.

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