Jeffry A.Frieden 123and trans-Saharan routes all became real or potential sources of conflict—are
well-known. Strife was not due to lack of attempts to cooperate. Joint railroad
ventures, typically to finance the development of new lines with loans from several
national financial centers, were tried in China and the Ottoman Empire but with
little success. Even where investors all were British, with similar interests—as in
negotiations with the Argentine government over railroad warrantees in the 1890s—
cooperation was almost impossible to sustain.
Private Loans to Governments The argument presented here, namely, that foreign
loans to governments will tend not to be associated with home-country use of
force and will tend to be associated with cooperation among home countries, is
perhaps the most divergent from traditional impressions and received wisdom.
The logic, nonetheless, is clear. A loan is a promise, and if unmet it cannot be
seized by force. The principal penalty available to creditors against an errant debtor
is to deny it the ability to borrow again; in this case, enforcement depends almost
entirely upon cooperation among potential international lenders.
None of this is pure and simple. The use of force can help lenders, as it can
help almost anyone. Although a home country might seize assets of a country in
default, as mentioned above, such overseas assets of debtor nations are typically
vastly outweighed by their liabilities. Creditors or their governments might seize
income-earning property (such as a customs house) without the debtor government’s
consent, but this historically has been both extremely costly to accomplish and
often useless. Nor is cooperation the only way of ensuring a return on foreign
lending. Creditors use various mechanisms to cover default risk and can demand
some sort of recoverable collateral from the debtor. However, my general argument
still holds: relative to other investments, for international lenders the utility of
military force is low and the gains from investor cooperation, high.
The myriad examples of creditor cooperation in dealings with debtors throughout
history include the private creditor committees formed to monitor the finances of
shaky LDA debtors during the century before World War I. Private financiers,
generally with the support of their home governments, established such committees
in Egypt, Greece, Morocco, Persia, Serbia, Tunisia, and elsewhere.
The Ottoman Public Debt Administration exemplifies this financial cooperation.
In 1875, after fifteen years of borrowing, the Ottoman Empire began to default on
its obligations. Six years later, after laborious negotiations among the empire,
private bondholders’ groups, and the European powers, the Decree of Mouharrem
established a Public Debt Administration to be run by a Council of the Public
Debt. The council had seven members: one representative of the British and Dutch
bondholders, one representative apiece of the French, German, and Austro-Hungarian
bank syndicates, an appointee of the Rome Chamber of Commerce, a representative
of the Priority Bondholders appointed by the Anglo-French Ottoman Imperial
Bank, and one representative of the Ottoman bondholders.
By 1898 the Public Debt Administration controlled about one-quarter of all
Ottoman government revenues; its mandate gradually had expanded to include
responsibility for new bank loans and railroad guarantees. Certainly the
administration’s establishment and success owed much to the empire’s importance