We are living in one of the great epochs of expansion in international finance. For thousands of banks, the years from the mid 1960s to the mid 1970s have been a dizzy time. Their business has increased in value and in geographical extent. The most euphoric increase is in the developing countries, as banks set up new offices in nations from Nigeria to Peru. Some corporations, now, have almost more operations than they can count, with Citicorp of New York, for example, acknowledging “approximately 2,026 offices in 103 countries around the world.”1

Throughout the years of expansion, the political consequences of the boom have been hidden and ignored. People were busy making money. The French bankers of the Second Empire did not stop to consider the politics of finance as they lent more and more money to build ever more railroads in ever more distant countries. The bankers of the 1970s—their modern heirs—are similarly sedulous as they consider only today’s loan, to this year’s country borrowing money, not to build railroads but to explore, perhaps, for oil.

In the United States, there is a persistent illusion that the business of US banks, including their international business, is not an issue of public or political concern. But bank lending has already changed US relations with developing countries. US policy toward Chile and India, toward Argentina in the summer of 1976, is influenced by the odd, conflicting involvements of bankers and governments. The US government already pursues a politics of debt in the secrecy of the groups known as creditor “Clubs,” where countries seek to reorganize their foreign debts.

The illusion that business is private is not limited to banking. It corresponds to general changes in US policy. During the late 1960s and 1970s, the US government relinquished many of the functions of international economic hegemony that it had exercised after the Second World War, when the dollar was the main support of the international monetary system, and when most foreign aid to developing countries flowed from the United States. Since the late 1960s, the government has also permitted increasing license to US corporations as their foreign business flourished. As US arms corporations increase their commercial exports, US military assistance accounts for less and less foreign military business. Food exporters increase their commercial sales, while their exports under government aid programs dwindle.

The consequences of these changes are only now becoming evident. As the banks have grown, US financial relations with developing countries have changed from aid to private lending. Throughout the 1960s, official development assistance accounted for well over half of all US capital flows to developing countries. Now less than 35 percent are in the form of official assistance. US official aid was worth less in 1974 than in 1964, with almost all the decade’s increase in capital flows coming from private transactions, including bank lending.2 The distribution of US capital is determined, increasingly, by the preferences of private lenders. Six countries account for two-thirds of all the non-oil-exporting developing countries’ debt to banks.3 The largest US banks, to take another example, have chosen to lend to borrowers in South Korea amounts that are 14,000 percent greater per capita than the amounts they lend to people in India.4

This politics of debt was hidden during the years of the bank bonanza. But the political questions can no longer be wished away. In 1976, the financial situation of the developing countries has changed. It is now clear, as was shown in the first part of this article (NYR, May 27), that many of the non-oil-exporting developing countries will not be able to repay and pay interest on their foreign debts on schedule. This is true, above all, of the countries which borrowed money in the “good” economic boom of the early 1970s; and again in the “bad” lending boom of 1974-1975, when they needed money to buy food and oil and other essential imports. Some time in the next several years, at least some of these countries will be obliged to “reschedule” their debts, deferring payments of interest and principal.

The rescheduling need not bring insolvency and the collapse of banks. It is likely that most countries will consider their debt problems in quiet negotiations. But the negotiations will engage banks and deep political interests. The US government will be involved in every phase of the debt crisis. It is still the developing countries’ largest creditor. And it is committed through the involvement of US private banks. The twenty-one largest US banks, according to statistics made public recently by the Subcommittee on Multinational Corporations of the Senate Foreign Relations Committee, have claims worth over $20 billion on borrowers in the non-oil-exporting developing countries.5 Many of these loans are to countries that could need to reschedule their debts: $6 billion to Brazil, $1 billion each to Argentina and Peru, $162 million to Zaire.


There are three periods to the troubles to come. In the short term, during the next few months, many developing countries will remain in the depths of the world recession. By 1977, their exports should recover. But until then they must still finance a large current account deficit, as well as pay interest on earlier debts. During the last year, Zaire has defaulted on interest payments to banks, including Chase Manhattan; Argentina recently prevailed upon some of its foreign creditors to “roll over” or renew their loans, often for a period of no more than 120 days.

Beyond 1976, there are further problems. Even when their exports increase, the developing countries which borrowed heavily from private banks expect to pay a high proportion of their earnings to repay old debts. The structure of their debt is such that many loans will come due at the same time, “bunched” together in the late 1970s. Brazil, for example, will be paying interest and principal on loans dating from 1970, as well as on the shorter and more stringent loans of 1974-1976.

One issue will endure even longer. This is the question of whether the process of private lending—now providing more and more of the capital for developing countries—is a proper basis for development. Many people—in developing countries and in the US multinational banks themselves—believe that in the future, and as debt reschedulings continue, governments and public institutions like the World Bank and the International Monetary Fund should resume a much more powerful role in international lending.

Almost all countries and banks and international conferences have their own view of how to solve the new problem of debt. At the recent UNCTAD IV conference of the United Nations Conference on Trade and Development in Nairobi, these divergent views emerged more openly than ever before. The most profound difference, as the conference confirmed, sets the US government, and the Department of the Treasury in particular, on the one side, against the developing countries’ bloc on the other. The authors of the UNCTAD conference agenda favor “significant departures from established orthodoxies” in balance of payments financing, development aid, “and the treatment of contractual obligations.”6 Thus, in the UNCTAD view, the debt question can be resolved only by devising new procedures for rescheduling loans—above all, because of the developing countries’ new involvement with private lenders.

The UNCTAD conference considered a scheme for international financial reform put forward by the “Group of 77” bloc of developing countries within the United Nations. The scheme calls for the creation of a new institution, “such as a fund or a bank,” to refinance debts. One version describes an “International Bank for Debt Redemption.” The plan also proposes that the official debts of the poorest countries be canceled.7

The UNCTAD conference agenda explains that the new fund would be designed primarily to “iron out the ‘bunching’ of private debt over a longer period.” The governments of the developed countries would give money to the fund, or guarantee or buy its bonds. If it turns out that US lenders are owed, say, 40 percent of the developing countries’ debt, then the United States would be responsible for 40 percent of the fund’s capital. A country in the fund might have, for example, a seven-year loan from the Bank of America. The fund or “IBDR” would provide the debtor country enough money to meet its payments to the Bank of America. The country would continue to pay interest to the fund, and would eventually also repay the principal, but would have perhaps fifteen years in which to pay.

Such schemes are intended to resolve the developing countries’ problems in the next several years, as more of their loans come due; beyond 1980, the fund could provide a longer term basis for financing development. M. Jean-Pierre Fourcade, the French finance minister, who opposes such generalized reschedulings, himself suggested in Nairobi that governments should establish a scheme within, the World Bank to guarantee loans to developing countries.

UNCTAD officials believe that the private banks would welcome a system of this sort. “Private lenders,” they write, “are likely to take a more positive stand with regard to provision of loans to developing countries when it is known that governments, acting collectively, stand ready to refinance….” Banks, not surprisingly, would lend more money if they were less at risk.

“We have a lobby,” one UNCTAD official remarked recently to me, explaining that bankers apprehensive about their foreign loans are eager to see their claims guaranteed by a new public institution. The official pointed cheerfully to the recent observations of bankers at the Bank of America. “We would like official bodies to use public guarantees for commercial loans,” one said, “or to provide longer term funds from official lenders in order to improve the structure of debt of some countries.”8


The US government’s position is that the procedures which have evolved in the last twenty years, the tried and true process of debt and penitence, are adequate to the task of containing developing countries’ debt problems in the late 1970s. Henry Kissinger suggested this view in May when he said in Nairobi at the UNCTAD IV conference that “the debt problem must be addressed in relation to each country’s specific position and needs…. The device of a creditor club is a flexible instrument for negotiations.”9

The ideas of tradition and convention come up often in the recent study of debt prepared by the US Treasury.10 As the study shows, US officials explained their philosophy in the course of justifying US participation in the 1975 rescheduling of Chile’s debts. “As the world’s largest bilateral creditor,” one official wrote, “we lay great importance on the tradition of treating debt crisis situations such as that being encountered by Chile in accordance with overall creditor financial interests and within the context of traditional multilateral arrangements.”11

The traditional procedure is for creditor countries to convene groups known as the Clubs of Paris, London, the Hague. The Clubs meet in conditions of considerable secrecy. But glimpses of their business can be seen in the US government studies under review. Countries are represented in the Clubs by treasury and other officials. The Paris Club, for example, meets in the French finance ministry. One UNCTAD study observes that “it is not clear who formally calls the group into being.”12 But the procedure is for a country facing balance of payments difficulties, and needing to reschedule its foreign debt, to approach a Club.

The International Monetary Fund (IMF) is involved in the Club process. Usually, the debtor country asks for credit from the IMF, in order to meet its immediate needs. The IMF dispatches a mission of experts to review the country’s policies. When the country agrees to change its policies in line with the IMF mission’s recommendations, the IMF itself extends credit. Then the creditor countries meeting in their club decide to allow relief on payments of interest and principal.

Since the first Club met to consider Argentina’s debt in 1956, the groups have negotiated reschedulings for countries ranging from Brazil (1961 and 1964) to Cambodia (1972). In the 1970s, most of the Clubs’ time has been reserved for Chile. In 1970, Chile faced debt problems very similar to those which several countries expect in 1977 and 1978. Its debts were “bunched together” because, in the late 1960s, Chileans borrowed large sums in medium-term credits, mostly credits coming due in less than eight years. By the early 1970s, service payments were due on most of these credits simultaneously. Since 1970, therefore, Chile has come before the Paris Club of creditors in 1972, 1973, 1974, and again in 1975.

The Clubs’ conditions for relief are often arduous. UNCTAD officials describe renegotiation as “a painful and costly process.” They write that “the focus of creditor attention in Club discussions is upon restoring economic balance in the debtor’s economy in order to maintain ‘confidence,’ this confidence being seen as the essential condition for private lenders to continue to make funds available to the debtor.”13 The policies recommended often include a reduction in imports and in economic growth; cuts in public spending and public sector employment; weakening of restrictions on private investment.

When the Paris Club considered Chile’s debts in 1972, for example, the creditors required that Chile compensate the foreign owners of nationalized businesses, promise to change its financial policies, and provide the creditors with statistical information so they could make sure that it was keeping its promise.14 Even then, the US alone among the creditors would not agree to reschedule Chile’s debt. Twelve countries were involved in the 1972 negotiations. Eleven signed their own bilateral agreements with Chile, from Belgium in May 1972 to West Germany in January 1973. The US eventually signed an agreement with Chile’s new military government, in December 1973, under the 1972 Paris Club understanding.

The Clubs do not consider private lenders’ claims directly, but only debts owed to or guaranteed by governments. Thus the US government has, since 1973, granted relief to Chile on, among other obligations, Agency for International Development loans, Public Law 480 food aid loans, Export-Import Bank credits, promissory notes to the Braden Copper Company guaranteed by the US government.15

The private banks, however, are often guided by the Clubs’ procedures. The view of the US Treasury is that private lenders will follow the example of international institutions. As the authors of the recent Treasury study under review write, “The availability of IMF financing and the policy conditions attached to the use of Fund resources will increase the private sector’s confidence in a country’s ability to maintain its creditworthiness.”

In 1972, to illustrate, Chile was able to negotiate “special agreements” for debt relief with American and European banks and other lenders. The private lenders were encouraged, presumably, by Chile’s assurances to its government creditors at the Paris Club proceedings of the same year. Their worries were also eased by the actions of the government creditors in allowing Chile to defer payments. The Club, in fact, made it possible for Chile to meet most of its purely commercial obligations. In the Club agreements the proportion of debt relief to payments owed was more than twice as great as it was in the “special agreements.”


It is this tradition that the US government endorses. Yet the financial situation of the developing countries has changed enormously in the 1970s. At the end of a world recession, and with the most troubled countries owing more than half of their debt to private lenders, the old procedures seem far less powerful.

The authors of the Treasury study, looking at debt in the short term, conclude briskly that any financial problems will affect “individual countries” as distinct from the group of all developing countries. “If there are LDC [less-developed countries] balance of payments and debt problems in calendar year 1976,” they write, “these problems will be associated with individual countries, rather than the LDCs as a whole.”

This judgment is on one interpretation self-evidently true. It is not “wholes” but countries that incur debts, pay interest, or use foreign exchange to buy food. But the Treasury view also ignores the extent to which the economic problems of the 1970s afflict many developing countries in much the same way. It ignores the question of repercussions: how a debt crisis in one country would affect foreign lenders and the international banking system, and whether one country’s crisis would lead foreign banks to cut their lending to other countries.

The Treasury’s assumption dismisses the most pertinent political issue which divides the US from developing countries. The US view is precisely that the debt question should be contained according to accustomed procedures and resolved for individual countries one after the other. The view of some developing countries, as expressed at UNCTAD, is the opposite. They believe that debt problems are the sign of a failure of the international financial system, and that they should be resolved by reform of the system itself.

The sorts of balance of payments problems which countries have experienced in 1974-1976 are new. They have lasted longer; the deficits involved are larger. Peru, for example, approached the Paris Club at the time of its debt crisis in 1971, when its balance of payments deficit was $34 million; now its deficit amounts to more than $1 billion.16 Almost all the non-oil-exporting developing countries have suffered from inflation in the import price of oil, food, and manufactured goods, from a reduction in their own export prices in 1975, and from the world recession, when developed countries cut back their imports. These problems are to a novel extent beyond the control of individual governments, as developing countries find themselves the losers in the movement of resources between the West and the oil-exporting countries.

The IMF/creditor Club system evolved in an epoch when debt crises were simpler and shorter. They could perhaps more plausibly be explained by the derelictions of individual debtors. They happened one at a time. Development experts from many institutions could concentrate on the debt crisis of, say, Peru; creditor countries could convene at their leisure in London or Paris. Now one imagines that the great tropical garden of the IMF’s Washington headquarters might be half empty, as experts find themselves on study missions to ten or twenty Perus.17

A further problem with the Club system has to do with the change in debt from aid to private lending. In the 1970s, as we have seen, an increasing part of the developing countries’ liabilities are to private banks, large and small, solvent and desperate. The old processes were designed for a world where even the more prosperous developing countries owed much of their debt to government agencies and to lenders backed by foreign governments.

In the procedure favored by the US Treasury, the behavior of commercial creditors is seen as somehow residual. Any communication between the Clubs and private lenders is informal, the confidences of gentlemen and bankers; yet for many countries, now, purely private obligations are critical. When the Federal Reserve counted more than $20 billion in US banks’ claims on developing countries, it excluded all claims guaranteed by agencies of the US government.18 The $1 billion in claims on Peru and $1 billion claimed on Argentina are free of US government involvement. In their study, the Treasury officials identify eight countries with particularly severe financial problems. In 1974, these countries together owed more than half of their debt to private lenders, much of it not guaranteed by the lenders’ governments.19 The US banks’ unguaranteed claims on borrowers in these countries amount to more than $3.2 billion.

Something close to the conventional process has been happening this spring in Argentina. At the time of the March coup against the Isabel Peron regime, Argentina needed urgently to find some $1 billion to repay foreign debts. Before the coup, the prospective junta chose a new economics minister.20 Days after the coup, the IMF announced that $128 million in credit was now available to Argentina. The Economics minister proclaimed a policy of providing more incentives to foreign investment, increasing the role of the free market in setting prices and reducing government spending. A few days later, the Argentine government had persuaded many of its foreign creditors to “roll over” or renew their loans, at least for three more months.

The old informal ways are working for the moment. But the banks’ renewals will expire again this summer. There is no reason to suppose that the convention will hold for other countries, and other banks. In the summer of 1976, indeed, Argentina’s economics minister will head for Washington and Europe, and for meetings with government and private lenders.

In the view of the Treasury and of Kissinger, debt reschedulings will be settled in secret, and in the conference rooms of the Clubs, with their policy conditions and gentlemanly understandings. Yet the United States’ own policy toward developing countries will be determined to a great extent in these debt reschedulings. The Club procedure can be questioned on the grounds that it is no longer likely to work. It should also be questioned on political grounds.

The history of US involvement in debt reschedulings is even now, with the worst crises still to come, a story of coercion and inconsistency. The events of 1974-1975 show the prejudices of US policy. In 1974, the US government was involved in two major debt reschedulings, with Chile and with India. That year, the “net flow” of US government assistance to Chile amounted to $87 million, including a generous sum for relief on debt. India, in the same year, was sending money to the United States rather than the other way around. It had to meet such large service payments on its existing debt from the United States, mostly incurred in the 1960s, that it experienced a “negative net flow” of assistance in its transactions with the US government. “Recoveries from India,” US Treasury officials write in their study of debt, “exceeded all forms of new flows resulting in a net flow to the US of $178 million.”21

The Treasury study describes the cases of Chile and India in some detail. In 1974, under the auspices of the Paris Club, the US granted Chile $101 million in debt relief. In 1975, the US again agreed to reschedule Chile’s debts. (It was this agreement that covered, for example, the promissory notes held by the Braden Copper Company.) The Treasury officials explain their motives. “The choices open to the creditors,” they write, “were either to reschedule or to accept default.” “Cognizant of the unfavorable financial precedent that would be established by default,” the creditors therefore agreed to reschedule.

India was less favored. At first, in 1974, the US refused to participate in the rescheduling of India’s debt organized by the Indian “Aid Consortium.”22 It later relented, to the tune of $17 million. This relief reduced India’s “negative net transfer” to $178 million. In 1975, again, the officials record that “the United States stated that it would not grant debt relief to India for its fiscal year 1976.”23

The criteria for US generosity are not made explicit in the Treasury study. But political judgments evidently weighed heavily, while the interests of private business also seem important. Unlike Chile, India owed little money to private lenders. US officials were less than “cognizant,” or so it seemed, of the consequences of India’s predicament.

There are several criteria under which India might have qualified for lenient treatment. One has to do with India’s position in 1974 as a country paying back to the US more than it received. (The only other non-oil-exporting developing country with a substantial “negative net transfer” of aid to the US government in 1974 was Peru; such countries as Argentina, Angola, and Liberia also had tiny negative flows.24 ) There is also the question of absolute need. Aid for India is hardly a popular cause; and as US officials pointed out at the time, the question of India’s debt rescheduling came up soon after the Indian nuclear explosion of 1974. Yet Indians have an average yearly income of some $110 per year, as compared to $800 per year for Chileans: a difference not mentioned in the Treasury studies.

A further criterion for leniency has to do with the extent to which India’s problems are related to the business of American exporters. As the Treasury officials write, India suffered in 1974 from inflation in the price of imported food, fertilizer, and oil. In September 1974, the officials comment, the US “reassessed the Indian economic situation,” and decided to grant some debt relief: India’s situation, then, was one of intermittent famine in its eastern states. But most of the food India imported, like some of the fertilizer, came from the United States. In fact India has become one of the largest customers for US agricultural exports, paying for its food not with US government credit, as in the 1960s, but with foreign exchange. Its “commercial” farm imports from the US—US government-financed imports aside—increased from a value of $85 million in the 1973 fiscal year to $245 million in 1974 and $548 million in 1975.25

The cases of Chile and India, finally, were only the most public of the debt reschedulings in which the US government was involved in 1974-1975. The Treasury study also mentions, for example, debt relief granted on US government-guaranteed loans to borrowers in Nicaragua, Antigua, and to a nickel producer in Australia. Other relief in the 1975 fiscal year went to Israel for loans used to buy US military goods. Two Korean companies were allowed to defer repaying $342,000 and $230,000 of money they had borrowed to buy US farm exports, using the proceeds to store and process US grain. “Debt relief was provided to these two companies,” according to the Treasury study, “because their financial statements indicated that their continued operations were in jeopardy.” One of the companies is “Korea-Cargill Ltd.,” the local associate of Cargill of Minneapolis, the largest US grain corporation.26

In Zaire, US policy was once more determined by a mixture of political and corporate exigencies. When Zaire, the former Belgian Congo, faced a debt crisis in 1975, the US helped directly, before any Club or consortium of creditors had convened. In the course of defending US aid to Zaire—at a hearing called by Senator Dick Clark (D-Iowa)—the US government provided a rare view of the politics of debt.27

Zaire was by far the most favored African country in the recent bank bonanza. But in 1975 its export earnings fell sharply. That autumn it defaulted on some of the interest payments on its foreign debt, including payments to the Chase Manhattan Bank. The US government determined late in 1975 to provide an “aid package” of some $60 million for Zaire, offered on the understanding that Zaire would accept the recommendations of an IMF team of experts.

The State Department officials who testified in favor of the aid described clearly the old routine:

Mr Birnbaum: Just to reinforce what the Ambassador is saying…. They do need the IMF “Good Housekeeping” seal of approval to come up with a stabilization program which will enable a cross section of private and public creditors to help them….

The officials also provided a view of the mixed motives for US aid. Zaire, one witness explained, “has been a good friend to the United States” and “we do have a warm spot in our hearts for President Mobutu”; another mentioned “the basic commonality of attitudes and policies in foreign affairs.” But there were banks and corporations to be considered:

Mr Mulcahy: Of concern to the United States are not only Zaire’s stability and development, but also the security of three quarters of a billion dollars in US investment, loans and contracts…. [There are] copper and power projects in which Eximbank and US companies and commercial banks are heavily involved….”

Senator Clark asked how many US commercial banks had loans outstanding to Zaire:

Mr Vance: I do not know how many. There are quite a list…. They are the First National Bank of New York, the Chase Manhattan, Bankers Trust, and there are a couple of banks in Chicago….

The officials later provided a longer list “for the record.” It included seven out of the ten largest US banks, as well as the Crocker National Bank of San Francisco and the Commerce Union Bank, which is the third largest bank in Nashville, Tennessee. The smallest bank named is an institution called the Equator Bank of Hartford, Connecticut, which is around one thousandth the size of the Chase Manhattan Bank.28

U.S. debt policies have served, over these years of creditor meetings, to reinforce most powerfully the preference in US foreign policy for a few relatively prosperous developing countries. In the first place, debt relief is a direct instrument of US policy, as is evident in the case of Chile. Secondly, the US government, by granting relief on debts, endorses after the event the distribution of lending which gave rise to the debts. And the distribution—to a great extent formed by the policies of private banks—favors many of the same countries that are cherished in US foreign policy. Chile, Korea: these are cynosures of US munificence, in foreign relations as in private investment.

Under President Nixon’s philosophy of foreign aid, the favored countries were those thought to be at the “perimeter” of US security interests: Korea, Turkey, Vietnam; since 1973 Chile has been among them.29 These countries have received military assistance, US government loans, sometimes food aid as well. The report called International Finance provides a view of the process in its summary of US government “net foreign assistance” (or grants such as economic and military aid, and credits such as loans from the government’s Export-Import Bank and loans to buy food).

In 1974, Brazil received more “net” US foreign assistance than any other country except Vietnam and Cambodia. Among the twelve most favored of the non-oil-exporting developing countries are also Taiwan, Mexico, Chile, Korea, and Zaire. India, as noted earlier, received “negative net assistance” to a value of $178 million. Since 1969, only 13 percent of net US assistance to the non-oil-exporting developing countries has gone to all the countries of Africa and the Indian subcontinent together, while 25 percent went to these countries between the end of the Second World War and the end of 1968.30

The banks’ choice corresponds closely, although not perfectly, to this standard. The six non-oil developing countries with the largest loans outstanding from US banks are Brazil, Mexico, Argentina, Peru, Korea, and Chile; Taiwan and Zaire are other favored borrowers.31 The roster of countries to which the US Export-Import Bank authorizes loans, guarantees, and insurance also fits. The six most favored borrowers among non-oil developing countries, in the 1975 fiscal year, are Brazil, Mexico, Korea, Taiwan, Argentina, and Zaire.32

US banks are if anything more arbitrary in their lending policies than is the US government. They are less cautious; their lending is more of a gamble, above all when they lend through their foreign branches, often offering Eurodollars, or dollars on deposit outside the United States. They are more catholic, too, than official lenders. Two of their largest debtors, Mexico and Peru, are among the developing countries with more radical views of economic issues. One US bank, the Wells Fargo Bank of San Francisco, was indeed a pioneer in Eurolending to Peru in the early 1970s, at a time when the Peruvian government was embroiled in disputes with the US over its restrictions on foreign investment and recent nationalization of the local Standard Oil company.

The conflicting political relationships among the banks, the US government, and foreign countries are often worked out in the privacy of the creditor Clubs, or in the even greater confidentiality of bank counsels. Yet it is clear that while the US exercises power over the debtors of its banks, the debtors at the same time enjoy a “counterpower” of their own.

The United States, on the one hand, uses its own government credit and its influence on US banks to affect the policies of other countries. The procedure is most evident in the case of Chile. The Senate Intelligence Committee Staff Report on Chile found that “United States foreign economic policy toward Allende’s government was articulated at the highest levels of the US government.”33 Credit strategies—including strategies in the Paris Club meetings—were perhaps the most important part of this policy, with its objective of “condemn[ing] Chile and the Chileans to utmost deprivation and poverty.”34

The report observes that “a central point in the execution of this policy was the Department of the Treasury,” and it describes the “foreign credit squeeze” during Allende’s government as contributing to a “devastating” financial crisis in Chile. It notes that the US Export-Import Bank, for example, reduced Chile’s credit rating in the months after Allende took office, and adds that “insofar as the rating contributed to similar evaluations by private US banks, corporations and international private investors, it aggravated Chile’s problem of attracting and retaining needed capital inflow through private foreign investment.” As the report shows, the US cut its own economic assistance from $140 million a year in the late 1960s to $7.4 million in 1972, and private lenders in the US reduced short-term credits to Chile from some $300 million a year to $30 million in 1972.

Yet the client countries themselves sometimes exercise a form of power over their creditors. Even Chile, now, may have some new influence by virtue of the $2 billion in new foreign credits it has received since the 1973 coup.35 The United States is bound to Chile’s regime not only by political choice but also by the interests of the US banks that have returned to Chilean lending.

Clearly a debt crisis in one of the countries with large commercial debts would be perilous for US banks, if only through its consequences for banking confidence. As the authors of the recent Treasury study of debt write, describing the situation of Brazil, Mexico, and South Korea, “This group warrants continued attention since they have large private debts and any debt management problems could have an adverse impact on private capital markets.” In the Zaire crisis of 1975, to take another example, the United States undoubtedly had political and geopolitical reasons to be generous. Yet US officials, as shown earlier, also felt some concern for the interests of US banks and other US investors; they may even have considered the consequences of a debt crisis in Zaire—one of the most prominent of all developing country borrowers in Eurocurrency markets—for banking confidence and for international financial tranquillity.

All these concerns—the power of creditors and the counterpower of insolvent clients—will become more urgent in the debt negotiations of the next few years. It is not clear which form of influence will gain, and where. But the decisions implicit in such concerns should, at the least, no longer be made in the secrecy of gentlemen’s colloquies.


The Club procedure is unjust and outmoded. Creditor and debtor countries need to devise new conventions for rescheduling debts. The US Treasury is wrong to oppose such reforms. The reforms are urgent. They need to be considered openly in the next few months, while countries confront their short-term debt problems of 1976.

The principles for rescheduling debts should be explicit, and should be consistent among different debtors. As one UNCTAD study concludes, “There are certain common elements which might…contribute to a broadly comparable treatment of debtor countries in similar situations.”36 The creditor countries should also agree, as the UNCTAD IV reports recommended, to consider the long-term economic needs of the debtors as well as their emergencies: above all for the countries whose debt problems are related directly to changes in the world economy.

The creditors’ meetings should be convened and conducted by an international organization such as the IMF. If the IMF were chosen, it would be concerned no longer with short-term crises alone, but with more lasting questions of development and debt. Debtor countries should also be able to discuss their debt problems with creditors before they get to the point of default where the Paris Club, for example, is invoked. UNCTAD has invited countries to convene such discussions under the aegis of UNCTAD itself. But no countries have taken up the offer. An UNCTAD official recently described the vicious circle in which some debtors find themselves, explaining that few countries are prepared to discuss their debt problems openly, lest private lenders learn about the discussions, lose “confidence,” and impose even more stringent conditions on their lending.

In the longer term, too, the international organizations should be more involved than they have been since 1970 in the processes of lending to developing countries. One promising possibility is the scheme for an international system of loan guarantees which M. Fourcade proposed at Nairobi.37 Under his scheme, which would work within the World Bank, developed countries would jointly guarantee longterm loans to developing countries. One of the advantages of the system, in Fourcade’s view, is that it would attract Eurocurrency deposits, including deposits held by oil-exporting countries, and thereby reduce the extent to which these funds are held in short-term, fluctuating forms.

Such a system of loan guarantees could work better than schemes based on the new international fund or bank proposed by the Group of 77 at UNCTAD. That fund would be large and expensive. As a system for the generalized rescheduling of debts, it would also be subject to the objections which the US Treasury study posed in its recent study of debt, and which Kissinger repeated in Nairobi. As the Treasury officials point out, such a system would favor the few rich countries which hold most debt, while failing to reward “the efforts of some debtor countries to deal effectively with their debt problems.”

But the loan scheme should be linked to any new arrangements for reviewing existing debts: perhaps in a joint Finance Department within the IMF and the World Bank. As M. Fourcade observed in Nairobi, it is an illusion to believe that creating new institutions—two new departments where one would do—will solve the problems of development. And the principles involved are to a great extent the same in the short, medium, and long terms.

One of the consequences of the boom in bank lending has been to change the distribution of wealth and income among developing countries. More capital has gone to the Brazils and Koreas which won out in the lottery of the 1970s. An essential principle for creditor countries now—reviewing old loans or endorsing new ones—is to distribute more resources to poorer countries: guaranteeing commercial loans, and also subsidizing loans to countries which cannot pay commercial rates of interest.

The policy of the United States will lie at the heart of the new arrangements. But the principles which govern US policy in debt reschedulings have not yet been considered openly. The US government explains its preferences only in language of the greatest generality. Thus the study called International Finance—the annual report of the group of high US officials called the National Advisory Council on International Monetary and Financial Policies, or NAC—pronounces that “currently, the United States evaluates the merits of debt reorganization proposals on a case-by-case basis predicated on the principle of basic adherence to schedule terms of credit repayment.’ Debt rescheduling and relief are not “appropriate instruments for alleviating [the] current financial difficulties,” or “appropriate vehicles for providing official economic assistance.”38

The NAC toils in some obscurity. But it claims to have “during the [1975] fiscal year, further refined US policies with respect to debt rescheduling,” and to have “coordinated the US Government position on the debt rescheduling for Chile and India during the fiscal year.” The results of these refinements deserve much greater public and congressional scrutiny than they have received on the basis of the NAC’s own utterances.

The administration is required by recent legislation to tell Congress about its involvement in debt reschedulings.39 But its communications, as reproduced in the Treasury study of debt, contain much the same evasions (on Chile—“Judgments for rescheduling are based on financial and other economic criteria….”) as does the NAC report.40

Debt policy is a large part of US relations with developing countries. It will become even more important in the next few years. Yet it is perhaps the most hidden aspect of these relations. US decisions about foreign military and economic aid are now made in the light of congressional concern. Congress requires, for example, that three-quarters of all US food aid go to poor developing countries. It has reduced US military aid to countries violating human rights, and reserves the right to stop large foreign military sales. These restrictions have inhibited US support for exactly those countries—Chile and Korea—which were most favored under the Nixon administration’s aid policies: the same countries, that is, that have profited most from US credit policies.

Congress should now begin the sort of investigation of debt policies that it has undertaken in foreign aid. It should require that the administration explain its criteria for rescheduling debts with new precision. The US government should explain, for example, whether in considering India’s debts it is concerned with the poverty of Indians; with the total flow of US resources to India, either positive or negative; with any relationship between India’s difficulties and increases in the price of US exports. The government should also explain whether its criteria for debt relief have changed in 1975 and 1976 as the financial prospects of most developing countries deteriorate.

The issues of debt relief and human rights should also be explored. Since 1973, France and some of Chile’s other European creditors have used Paris Club meetings to protest the Chilean junta’s violations of human rights. Where the US was obdurate toward Allende, France now objects to Pinochet. The US government should make clear whether it considers humanitarian issues in its debt policies. This question arises not only in the case of Chile but also as the administration considers the new Argentinian junta’s requests for credit or debt relief.

An inquiry of this sort would complement other congressional activities. During the 1970s three large changes have taken place in US economic relations with developing countries: in food exports, in arms exports, and in the export of capital. In each case, the US government has reduced its own direct involvement, while the role of private US companies has increased. Meanwhile, in the case of the first two changes, Congress has been particularly active in overseeing US government policies; in food aid, at least, the Congress has changed the priorities of US policy. Debt policies, and US credit policies more generally, should be the next issue.

There are already some signs of congressional interest. One is the study of US banks’ foreign claims and liabilities released by the Multinationals Subcommittee of the Senate Foreign Relations Committee. The subcommittee is in an excellent position to begin congressional and public discussion of the relations between banks, debts, and US foreign policy. For more than two years, the subcommittee has been engaged in what it describes as an “ongoing…study of the foreign policy implications of the international operations of American banks.” Yet the few pages of statistics are the only product of its research which has been made public. The staff have prepared background reports on international banking which should also be published. No issue should have a higher priority in the subcommittee’s business.

Any congressional investigation should look at the causes of the recent boom in foreign lending. US banks expanded abroad in the 1960s and 1970s because the US economy was growing less quickly than the economies of Europe and developing countries. But the boom also suited the bank industry’s own needs, as was shown in the first part of this article. US banks were subject to fewer restrictions abroad than at home, and to fewest of all in the Eurocurrency markets where lending to developing countries increased so lavishly. In the recession of 1974-1976, finally, private banks increased their lending almost by default, as the US and other governments refused to increase substantially their foreign assistance to the non-oil developing countries.

Another congressional subcommittee, the Subcommittee on Financial Institutions of the House Banking Committee, has been looking recently at some of these issues in the history of foreign banking. The House researchers are concerned about loans to developing countries. They want more information made public about the US banks’ foreign operations; they want to see more public and government concern about the business of US bankers after they leave for Nassau and Peru.

“The basic regulatory framework governing the foreign activities of American banks has remained essentially unchanged since 1919,” Dr. Andrew Brimmer, the former Federal Reserve governor, observed recently in testimony before the House subcommittee. He concluded that “a fundamental revamping of this regulatory framework is long overdue.” 41 Such a reform could begin to complete the banking reforms of the 1910s and 1930s, extending the principle of public involvement in banking to the new world of international lending. Bankers believed in 1912 and 1932 that finance was too delicate and too complicated to be disturbed by public oversight. But now as then—and above all because of the new political consequences of foreign lending—the issues of debt and lending are too important to be resolved in private and in secret.

When President Nixon announced his new international economic policy in August 1971, he perceived the beginning of a new epoch. “There is no longer any need,” he said, “for the United States to compete with one hand tied behind her back.” The history of the 1970s—of the United States in the world economy—is the story of the ascendance of private competition. The US government has retreated as private corporations advanced, and, above all, in US relations with developing countries.

Since the late 1960s, the United States has given up some of the powers in the world economy that it assumed after the Second World War. The New Policy of August 1971 marked a climax in the process of retrenchment, as President Nixon made explicit at the time. For twenty years, the dollar sustained the international monetary system: in 1971, the US suspended the right to convert dollars into gold and other US government assets, and devalued the dollar.

The process seemed to many historians to mark the transition between two world orders, comparable to the end of Britain’s hegemony after the First World War. But where the United States eventually assumed Britain’s imperial role, there is now no new empire in sight. Professor Charles Kindleberger sees three modes of transition. First, Europe might replace the United States in the economic order, or the United States might reassert its recent hegemony; second, there might be a genuinely international order; third, there might be a period of crisis and instability comparable to that of the 1930s.42 So far, the third possibility seems most likely. The United States has ceded its functions of economic “housekeeping” to nobody: or rather to its own corporations.

The transformation in military relations is the most sudden. Last summer, after thirty-three years of military spending, the United States moved into surplus on its foreign military transactions. It was earning more money from its exports of military equipment than it spent to keep all US troops abroad. Two months after the last US Marines left Vietnam in April 1975, the United States was turning a profit on its foreign military involvement.43

US foreign military sales have increased from a value of less than $1 billion in orders in the 1970 fiscal year to $10.8 billion in orders in 1974.44 Meanwhile, the value of US military assistance fell to less than $3 billion in 1974, as America’s relations with foreign armies changed from aid to commercial business. The change is most evident in US relations with developing countries. Two-thirds of all US military exports go to developing countries, including oil-exporting countries. The US military balance with these countries has been in surplus since 1973.45

America’s agricultural policy has changed in the same way, from public programs to private business. In the 1950s and 1960s, the United States bore what one of President Nixon’s International Economic Reports described as the “lion’s share” of the costs of holding world food reserves. Until 1970, the United States provided almost all food aid, and most of its agricultural exports to developing countries were sent under government aid programs. By 1975, three-quarters of these exports were sold on commercial terms, and the US government held virtually no reserves. Agriculture Secretary Earl Butz himself sees these changes as part of a lasting transformation in America’s foreign relations. “As we are not the world’s policeman,” he has said in a discussion of US food aid, “neither are we the world’s father-provider.”46

The bank lending boom is the third form of the change. All through the 1970s, the policy of the US government has been to consider US corporations’ foreign activities as their own private business. It is nobody’s business but the banks’, on this view, where US banks choose to lend their money. But the history of debt politics shows the extent to which the banks’ business involves public and political interests: in Chile; in the banks’ own security; even in the security of the international economic order.

During the rest of the 1970s, the US will experience some of the consequences of the new epoch of corporate license. In crises having to do with food, war, foreign loans, the US government will need to reconsider its view of US companies’ foreign business; and of its own role in economic relations with developing countries. One of the earliest and most difficult questions will be whether the US can deal openly, and fairly, with the coming reconstruction of developing countries’ debts.

(This is the second part of a two-part article.)

This Issue

June 24, 1976