Contesting the League of Nations’ Preferred Creditor Status, 1931-1933

This blog is based on an article forthcoming in the Economic History Review, now available on Early View at the following address: https://onlinelibrary.wiley.com/doi/10.1111/ehr.13071.

by Juan Flores Zendejas (University of Geneva)

Research on the economic role of The League of Nations has been considerable over the last decade.[1]  However, assessments of the League’s economic activities are divided:   some think it was a failure, while others — noting the ability of the League to accelerate capital flows to countries in distress — argue that it was a success and  a forerunner of the IMF.[2]

In the early 1920s, the League was expected to contribute to the reconstruction of war-damaged countries.   While several proposals were not implemented, the League promoted private loans to Austria, Hungary, Greece, Bulgaria, and Danzig.  These ‘League loans’ were part of stabilization programmes to restore  balance in public finances and to stabilize exchange rates.

Two questions are central to an assessment of the impact of these loans.  First, how did the League attract capital to countries unable to access private capital markets?   Second, why was the League incapable of averting defaults on these loans?

Regarding the first question, scholars have argued that investors’ attitudes towards these loans were particularly favourable because of a belief  that the League guaranteed the loans.  This may have implied that League loans enjoyed some kind of seniority over other loans and may explain why investors bought  League loans when they were first issued.  This is analogous to the German Dawes loan of 1924.[3]

The fact that the League enjoyed a preferred status is not surprising because the League provided a public service to investors and borrowing governments. It monitored the stabilization programmes and designated the trustees who were responsible for managing the proceeds of the loans.  In the most extreme case – Austria, the first country in which the League intervened — the League coordinated a collective effort involving European governments to issue a guaranteed loan in 1923 (Figure 1).   While successive loans were not explicitly guaranteed by other governments, all loans were successfully placed.

Even if League loans were not legally senior, most  enjoyed first charges over specific public revenues.   However,  analysis of the League’s  bond yields does not reveal a common pattern when compared with other issued by governments in Central and South Eastern Europe.[4] A common pattern emerged after 1931, when the effects of the banking crisis in Central Europe affected the position of  governments in this region.

The pricing of League loans provides an explanation for the League’s alleged failure. I compared the yields of two Hungarian loans,  a League loan and a municipal loan.  Both loans were dollar denominated and had a long maturity (20 years).  There was no difference in their yields before the banking crisis, but afterwards there was increased variance due to the government’s announcement that it would grant a preferred status to the League loan (Figure 2).  Hungary’s government perceived that avoiding a default on the League loan would grant it further support from that multilateral body.  But this support failed to materialize because the League lacked the necessary financial resources.  Consequently,  Hungary defaulted

The results reported in my article have implications for the historiography on the Great Depression and help explain why governments defaulted selectively. To some extent, the League resembled an international lender of last resort.  The League’s economic activities  parallel recent debates on the benefits  of the  IMF’s retaining its preferred creditor status.

To contact the author:

Juan.Flores@unige.ch,  @JFloresZendejas
Linkedin: Juan Huitzilihuitl

References

[1] Patricia Clavin and Jens-Wilhelm Wessel, “Transnationalism and the League of Nations: Understanding the Work of Its Economic and Financial Organisation,” Contemporary European History 14, no. 4 (2005): 465–492.

[2] Louis Walter Pauly, The League of Nations and the Foreshadowing of the International Monetary Fund, Essays in International Finance, no 201 (Princeton N.J: International Finance Section Department of Economics Princeton University, 1996).

[3] Albrecht Ritschl, “The German Transfer Problem, 1920–33: A Sovereign-Debt Perspective,” European Review of History: Revue Européenne d’histoire 19, no. 6 (December 1, 2012): 943–64.

[4] Bond yields were computed based on the prices quoted on the New York Stock Exchange.