Following World War I, the United States reinvented itself from a debtor nation to the second largest creditor nation, behind only the United Kingdom. U.S. bankers, often with the support of the government, aggressively sold investments in foreign loans. During the 1920s, U.S. investors purchased billions of dollars of foreign government securities. In contrast, prior to the 1920s, investors showed little interest in foreign securities and virtually no mechanism for individual investors to purchase such securities existed.
In the 1920s, however, thousands of local agents working for New York banks began selling, on commission, the debt of foreign countries. With American banks competing to underwrite such loans, the quality of such debt was often poor. One U.S. Senate report found bankers accepted, without question, information provided by foreign governments while ignoring economic and political risks and engaging in serious misstatements in their sales literature. Bankers' activities were indirectly and sometimes directly supported by the U.S. government, especially the State Department, as it helped fulfill U.S. foreign goals of stabilizing European economies and developing Latin American and Caribbean economies.(1)
By 1930, as the Great Depression hit the world in successive tidal waves, many foreign bonds went into default. By 1934, 40% of Europe's and 82% of Latin America's external debt was in default.(2) This constituted approximately $1,748,898,000 of defaulted loans held by approximately 600,000 to 700,000 U.S. investors.(3) Many placed significant blame upon the State Department for creating the appearance that such foreign loans had been approved by the U.S. government.(4)
In trying to work out defaulted foreign loans, private creditor committees were created by banks and others to negotiate with foreign governments. Such representation was at best chaotic; at times, multiple committees represented creditors of the same debtor. This only confused investors and debtor nations.
Both Congress, which held hearings on defaulted sovereign debt, and individual investors believed that the State Department should have a greater role in negotiating defaulted bond settlements. Heeding such a call but not wanting to be directly involved in settlements, in 1933, the State Department established the Foreign Bondholders Protective Council, Inc., a non-profit Maryland corporation independent from the State Department and the U.S. government. Significant conflicts arose as the State Department and the Roosevelt administration wanted the FBPC to be lenient with debtors, while the FBPC demanded close to full payment on defaulted bonds.(5)
(1) See Emily S. Rosenberg, Spreading the American Dream: American Economic and Cultural Expansion, 1890-1945 (New York: Hill and Wang, 1982); Michael R. Adamson, "The Failure of the Foreign Bondholders Protective Council Experiment, 1934-1940," 76 Business History Review 479.
(2) Adamson, 486.
(3) May 14, 1937 SEC Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees – Part V: Protective Committees and Agencies for Holders of Defaulted Foreign Government Bonds (Government Records).
(4) Adamson.
(5) Adamson, 493-494.
