The Real Junk Behind Government Defaults
Reuven Brenner holds the Repap Chair at Ï㽶ÊÓƵ's Desautels Faculty of Management. The article draws on his Force of Finance.
Between 1826 to 1830, Spain, Mexico and Brazil defaulted on their debt. Between 1890 and 1900, Argentina, Brazil, Venezuela and Portugal defaulted on theirs. To get back some of their investment, the French and German fleets went down to Caracas in 1902, and bombarded it for a week. Then they put a chain up and charged a tax on each ship going into Caracas harbor. Between 1931 and 1940, Brazil , Mexico, Chile and Peru again defaulted on their debt.
The debt crises between the two world wars started with the 1929 default of Bolivia, but it was in Central Europe in 1931 that the biggest collapse took place. The German run came next, with devastating effects.
The crisis was caused by German fears of political instability (in 1930 both Nazis and Communists performed well during the elections), and resulted in a massive capital flight. British and American bankers thought that the situation would calm, did not withdraw their loans, and then saw their accounts frozen.
Germany's inability to repay World War I reparations led to the breakdown of the multilateral system of free trade. The U.S. introduced tariff restrictions in the Hawley-Smoot Act, which further deteriorated the situation around the world.
The Germans blamed the banks and - what's new? - Jewish financiers for conspiracy.  Germany then advocated default in the name of race and patriotism. After the Nazis came to power, they used the foreign assets locked in Germany to induce Switzerland and Britain to adopt less hostile policies toward the new German government. Frozen debt (call it blackmail) turned out to be an effective tool in preventing the West from getting its act together.
In Vietnam, the local currency debts of the South Vietnamese regime were repudiated when the Communists took control in 1975. The new rulers considered the debts illegitimate, as did the Russian communists in 1917...
Read full article: , August 19, 2011
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