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Finance and Trade: Issue Linkage and the Enforcement of International Debt Contracts
Unformatted Document Text:  35 States, nor did they discriminate in favor of US bondholders. Perhaps they ignored trade because sanctions were not credible. Whatever its capacity to slap trade sanctions on countries that violated their debt contracts, the US government clearly lacked the will, a reality that debtors and bondholders understood. Even without the threat of trade sanctions, though, the United States secured payment from most countries. Twenty nations paid their debts in full to American investors during the 1930s, 60 and others honored a high proportion of their obligations. Only two countries, Bolivia and Peru, made no transfers to US bondholders between 1933 and 1938. Clearly, then, the threat of a trade embargo cannot explain why countries repaid their debts to the Americans or why so many nations treated British and American investors equitably. Moreover, if the US lacked the will to apply sanctions during one of the most discriminatory moments in the history of international trade, it seems unlikely to have linked trade and debt during other periods. As a general explanation for payment patterns, the embargo hypothesis is seriously deficient. The British were only slightly more willing to flex their commercial muscle on behalf of bondholders. In relations with Rumania and Germany, the two discriminators that we identified earlier, the UK government did indeed apply some commercial leverage, though in the form of a clearing arrangement rather than a trade embargo. During the Great Depression, many countries established clearing arrangements. As parties to the clearing, each nation required its importers to pay for goods in domestic currency, which accumulated in a domestic clearing office instead of being shipped abroad. Exporters, in turn, were paid in their own currency from funds in the clearing office. Thus, clearing agreements allowed countries to trade without transferring foreign funds, except to settle the account. The country with a trade deficit invariably 60 The countries were Argentina, Australia, Belgium, Canada, Czechoslovakia, Denmark, Dominican Republic, Estonia, Finland, France, Haiti, Ireland, Italy, Japan, Netherlands, Newfoundland, Norway, Sweden, Switzerland, UK.

Authors: Tomz, Michael.
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35
States, nor did they discriminate in favor of US bondholders. Perhaps they ignored trade because
sanctions were not credible. Whatever its capacity to slap trade sanctions on countries that
violated their debt contracts, the US government clearly lacked the will, a reality that debtors and
bondholders understood.
Even without the threat of trade sanctions, though, the United States secured payment
from most countries. Twenty nations paid their debts in full to American investors during the
1930s,
60
and others honored a high proportion of their obligations. Only two countries, Bolivia
and Peru, made no transfers to US bondholders between 1933 and 1938. Clearly, then, the threat
of a trade embargo cannot explain why countries repaid their debts to the Americans or why so
many nations treated British and American investors equitably. Moreover, if the US lacked the
will to apply sanctions during one of the most discriminatory moments in the history of
international trade, it seems unlikely to have linked trade and debt during other periods. As a
general explanation for payment patterns, the embargo hypothesis is seriously deficient.
The British were only slightly more willing to flex their commercial muscle on behalf of
bondholders. In relations with Rumania and Germany, the two discriminators that we identified
earlier, the UK government did indeed apply some commercial leverage, though in the form of a
clearing arrangement rather than a trade embargo. During the Great Depression, many countries
established clearing arrangements. As parties to the clearing, each nation required its importers
to pay for goods in domestic currency, which accumulated in a domestic clearing office instead
of being shipped abroad. Exporters, in turn, were paid in their own currency from funds in the
clearing office. Thus, clearing agreements allowed countries to trade without transferring
foreign funds, except to settle the account. The country with a trade deficit invariably
60
The countries were Argentina, Australia, Belgium, Canada, Czechoslovakia, Denmark, Dominican Republic,
Estonia, Finland, France, Haiti, Ireland, Italy, Japan, Netherlands, Newfoundland, Norway, Sweden, Switzerland,
UK.


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