THE INTERWAR DEBT CRISIS AND ITS AFTERMATH

Abstract

This article analyzes the sovereign defaults of the 1930s and reports nine major findings. (1) There is little evidence that financial markets of the 1930s were unsophisticated or that banks have a comparative advantage over the bond market in processing information. (2) Debt default in the 1930s depended on a combination of factors, including the magnitude of the external shock, the level of debt, and the economic policy response, as well as on a range of non-economic considerations. (3) Countries that interrupted service recovered more quickly from the Great Depression than did countries that resisted default. (4) There is little evidence that countries that defaulted in the 1930s later suffered inferior access to the capital market. (5) The readjustment of defaulted debts was protracted: the analogy with corporate bankruptcy proceedings is not applicable. (6) Although default led in some cases to a substantial reduction of transfers from debtors to creditors, on balance returns on sovereign loans compared favorably with returns on domestic investments. (7) Creditor governments in the 1930s did act to accelerate the settlement process. (8) Global schemes analogous to the Baker plan were widely proposed but never implemented. (9) In contrast, debt buybacks played a useful role in the resolution of the crisis.

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