Debt and Entanglements Between the Wars; November 8, 2019
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Debt and Entanglements Between the Wars Editor Era Dabla-Norris 2019 INTERNATIONAL MONETARY FUND ©International Monetary Fund. Not for Redistribution 268156_DablaNorris_FM_i-xviii.indd 1 06/11/19 8:40 PM Contents Acknowledgments ���������������������������������������������������������������������������������������������������������������vi Foreword by Thomas J� Sargent �������������������������������������������������������������������������������������vii Preface by Era Dabla-Norris and Vitor Gaspar �����������������������������������������������������������xi Contributors ������������������������������������������������������������������������������������������������������������������������� xv 1 Complications for the United States from International Credits: 1913–40 �������������������������������������������������������������������������������������������������������1 George J. Hall and Thomas J. Sargent 2 Funding the Great War and the Beginning of the End for British Hegemony ��������������������������������������������������������������������������������������������������59 Martin Ellison, Thomas J. Sargent, and Andrew Scott 3 Whom Do You Rescue? Honored Debts and Selective Defaults in Four British Dominions �����������������������������������������������������������������81 Era Dabla-Norris and Marina Marinkov 4 Two Decades of Walking on a Tightrope: Public Debt Management in France during the Interwar Period �������������������������������121 Nicolas End 5 Conquering the Debt Mountain: Financial Repression and Italian Debt in the Interwar Period ���������������������������������������������������������������173 Marina Marinkov 6 Germany in the Interbellum: Camouflaging Sovereign Debt �������������205 Mark De Broeck and Harold James 7 Japan during the Interwar Period: From Monetary Restraint to Fiscal Abandon �����������������������������������������������������������������������������241 Nicolas End Appendix: The Interwar Debt Database ������������������������������������������������������������������283 Index �������������������������������������������������������������������������������������������������������������������������������������291 iii ©International Monetary Fund. Not for Redistribution 268156_DablaNorris_FM_i-xviii.indd 3 06/11/19 8:40 PM Acknowledgments This book has been a collective endeavor and has benefited from contribu- tions from both inside and outside the IMF. The book gained momentum and inspiration from Professor Thomas Sargent, following his inaugural Richard Goode Lecture on “A History of U.S. Debt Limits” on December 2, 2015. I would like to thank Professor Sargent for his exceptional contributions and inspiring example as well as the other contributing authors for their close collaboration and enthusiasm for the topic. A very special thanks to David Lipton, Acting Managing Director of the IMF, for his enduring interest and support. Thanks also to Vitor Gaspar for his constant presence and engage- ment during the various stages of the work and his invaluable guidance and to Maury Obstfeld for his generosity. Jeffrey Hayden and Joe Procopio of the IMF’s Communications Depart- ment efficiently managed all aspects related to the production of the book, and I am grateful for their excellent work. Patricia Quiros, Von Allena, Joey Kilpatrick, and Fedor Miryugin provided excellent administrative and research assistance during the many steps needed to bring the book into completion. Mary Fisk provided excellent editorial assistance and Kevin Bradley performed layout services for the book. Era Dabla-Norris Editor vi ©International Monetary Fund. Not for Redistribution 268156_DablaNorris_FM_i-xviii.indd 6 06/11/19 8:40 PM Foreword THOMAS J. SARGENT NEW YORK UNIVERSITY HOOVER INSTITUTION JUNE 17, 2019 The seven chapters in this volume tell stories about correlated macro- economic and political events that occurred in six countries and four Domin- ions of the British Commonwealth between 1914 and 1940. By a story, I mean a collection of observations ordered in time together with causal interpreta- tions that come from projecting the observations onto a theory. Correlations among our stories arise partly from the international aspects of the events being studied here and partly from the economic theories that we authors share. Prices, quantities, and political arrangements in all countries under study responded to common forces discharged by World War I: (1) large disturbances to each government’s taxes, expenditures, and debts; (2) disruptions to an in- ternational gold standard, surges of uncertain durations in agricultural and other primary product prices, destruction of transportation networks, and new military and political barriers to international trade; (3) collateral stresses on political and economic arrangements for sharing costs of government services and transfers; (4) consequent uncertainties about how failing fiscal plans would eventually be renegotiated that reduced prices and marketability of debts, fur- ther complicating government finances; (5) common movements in growth rates in national GDPs (for example, a worldwide boom in the 1920s followed by the Great Depression in the 1930s) that affected government finances; and (6) a postwar web of international debts and reparations that aggravated con- flicts of interest between creditors and debtors. The chapters assembled here pro- vide cross- country comparisons of economic and political outcomes that were responses to a common set of problems that had been created by these forces. Confining our attention to the 1914–40 period brings risks. Responses to the enormous disruptions associated with World War I did not start from a blank slate. Decision makers knew how countries had coped during earlier wars: in the United Kingdom during and after the wars from 1792 to 1815 against France, and in the United States during and after the Civil War. Those experiences had formed a conventional wisdom about how to finance wars and how to manipulate returns on government debts through price level adjust- ments that could be engineered by temporarily suspending convertibility of government notes into gold but eventually resuming convertibility at prewar rates of exchange. Thus, an issue that confronted many countries after World War I was how to reconstruct a prewar gold standard. That same problem vii ©International Monetary Fund. Not for Redistribution 268156_DablaNorris_FM_i-xviii.indd 7 06/11/19 8:40 PM viii Foreword had also been faced in the 19th century. UK monetary-fiscal authorities after 1815 had awarded high real returns to government creditors by presiding over a fall in the price level sufficient to allow the Bank of England in 1821 to make its notes convertible into gold once again at the same rate that had been maintained before convertibility was suspended in 1797. US monetary- fiscal authorities did something similar after the US Civil War ended in 1865. Greenback dollars issued by the Union during the dark days of the war at big discounts relative to gold dollars were ultimately made convertible into gold one for one starting in 1879. Authors of these policies wanted wartime suspen- sions of convertibility to be temporary because they wanted observers to infer that future suspensions would also be temporary. Subsequent monetary and fiscal decision makers praised those episodes for fostering expectations among creditors that public debts would be honored, thus enhancing the market- ability of public debts and providing future government officials opportunities to borrow at the low interest rates brought about by low default probabilities. But, digging deeper, post–US Civil War debt repayment and currency policies had, in truth, emerged only after bitterly contested political struggles that had pitted the interests of government creditors against the interests of both tax payers and the private borrowers who had issued bonds dominated in paper units of account. Those disputes should have warned post–World War I policy- makers that the foundations of the conventional wisdom were fragile and sub- ject to substantial political risks. Nevertheless, the idea that a government earns a reputation as a trust- worthy creditor by honoring promises to award high returns to government creditors has been treated well by modern theories of how sovereign debts are valued and optimally managed. Theories of sovereign and domestic govern- ment debts are driven by assumptions about the different consequences of paying and defaulting. These consequences are affected by and feedback on how government deficits are chosen. Models differ in their assumptions regarding consequences of defaults and about incentives to repay. Even when they are not mentioned explicitly, authors of the papers in this volume had a suite of modern models of sovereign borrowing and tax-expenditure policies in mind both when they selected observations to report and when they created stories about those observations. Our accounts are thus frankly prejudiced by our theories. Information theory is the science of communication between a theoretical statistical model and a data set. The chapters in this volume emerged from informal iterative processes in which models were projected onto information that authors had first censored by projecting onto theoretical models. Story- tellers always select data to report and to emphasize. Sometimes data reveal pat- terns that send us back to our drawing boards as theorists and storytellers. For example, some useful modern models of sovereign