by Mintz
[Front Matter and Institutional Context]: Introductory front matter for Ilse Mintz's study on the deterioration of foreign bond quality. It provides institutional context from the National Bureau of Economic Research (NBER) and a brief overview of the study's methodology, which uses the ratio of defaulted bonds to total bonds issued per quarter as a measure of quality. The text suggests that the upswing in American financial activity during the 1920s was responsible for a steep decline in loan quality. [Author Biography and NBER Governance]: Biographical sketch of author Ilse Mintz and a comprehensive listing of the Officers, Directors, and Research Staff of the National Bureau of Economic Research (NBER) as of 1951. It includes notable economists such as Simon Kuznets, Arthur F. Burns, Milton Friedman, and Gottfried Haberler. [NBER Publication Policy and Resolution]: The formal resolution governing the relationship of NBER Directors to the organization's work and publications. It outlines the procedures for research proposals, manuscript review by special committees, and the requirements for scientific impartiality and approval before publication. [Title Page and Acknowledgements]: Title page and author's acknowledgements for the book. Mintz credits Arthur F. Burns, Geoffrey H. Moore, and Ragnar Nurkse for their contributions to the study's substance and form, and acknowledges funding from the Social Science Research Council. [Table of Contents and Lists of Tables/Charts]: Detailed Table of Contents, List of Tables, and List of Charts. The structure reveals the study's focus on the volume of lending, the construction of a default index, geographic shifts in loans, the role of individual banking houses, and the risk premium associated with foreign bonds. [Introduction: Current Opinions on Foreign Lending]: The introduction discusses the post-WWII resumption of US foreign lending and evaluates the failures of the 1920s. It contrasts 'ex ante' bad loans (mistaken from the start) with 'ex post' bad loans (sound loans that failed due to the depression). It highlights the 'transfer problem'—the difficulty of converting local currency into dollars—as a primary cause of default cited by experts like H.B. Lary and Marcus Nadler. [Introduction: Nature of the Study]: Mintz defines the study's unique approach: investigating the relationship between economic conditions at the time of a loan's issue and its subsequent quality. She connects the deterioration of investment quality to theories of the business cycle by Mitchell, Burns, and Schumpeter, suggesting that 'reckless borrowing' during expansions contributes to eventual collapses. [Introduction: Summary of Findings]: A summary of the study's findings, showing a stark deterioration in loan quality: only 6% of 1920 issues defaulted compared to 63% of 1928 issues. Mintz argues that transfer difficulties and dollar scarcity cannot explain these variations, as they affected early and late loans equally. She concludes that the early period of lending was largely successful and provides a model for future investment. [Chapter 1: The Volume of Foreign Lending - Scope]: Chapter 1 defines the scope of the investigation, focusing on foreign government bonds issued between 1920 and 1930. It provides historical context on the US shift from debtor to creditor nation and explains the exclusion of war-related loans and short-term notes. It also discusses the inclusion of Canadian bonds, which represented a significant portion of the total volume. [Chapter 1: Cycles in Foreign Lending]: Analysis of the cyclical nature of foreign lending. Mintz observes that foreign bond flotations moved inversely to American business cycles with high synchronism—expanding during domestic contractions and contracting during domestic expansions. Despite this inverse relationship, the overall trend of lending was rising throughout the 1920s. [Chapter 1: The Balance of Payments and Foreign Bond Cycles]: Exploration of the relationship between foreign lending and the US balance of payments. Mintz examines whether trade balances or monetary reserves in debtor countries drove lending cycles. She references Bloomfield and Brown, concluding that the cycles in bond issues were likely not caused by changes in the trade balance but were more closely linked to the domestic credit situation. [Chapter 1: Foreign Business Cycles and Bond Cycles]: A comparison of foreign bond issues with the business cycles of borrowing countries (e.g., Argentina, Germany, Italy). The analysis finds no consistent correlation between a country's internal business cycle and its borrowing in the US, suggesting that American business conditions were the dominant factor in determining the timing of loans. [Chapter 1: Cycles in Foreign Creditor Countries]: Examination of competition between the New York and London capital markets. Mintz notes that British lending was subject to embargoes and Bank of England controls. While some shifts occurred (notably in 1923), British competition does not explain the overall cyclical pattern of American foreign lending. [Chapter 1: American Business Cycles and Domestic Bond Issues]: Comparison of foreign and domestic bond issues. Both were inversely related to American business cycles, but foreign bonds conformed more closely to the cycle than domestic ones. Mintz critiques H.B. Lary's interest rate hypothesis, noting that bond yields do not fully explain the sharp contractions in foreign lending, particularly in 1922-23 and 1925-26. [Chapter 1: Common Stock Issues and Foreign Bond Cycles]: Mintz argues that foreign bond cycles were driven by the competition with domestic common stocks. During speculative booms (like 1928-29), investor preference shifted to stocks, causing foreign bond issues to collapse. This inverse relationship held throughout the decade, except for a brief period in 1923 caused by the Ruhr occupation and German hyperinflation. [Chapter 2: The Default Index - Historical Context]: Chapter 2 introduces the 'Default Index'. It reviews the history of defaults, noting that the 1920s were virtually defaultless until the 1931-1934 wave triggered by the depression. It details the sequence of defaults starting in Latin America (Bolivia, Peru, Chile) and moving to Europe (Hungary, Germany). It also identifies countries that maintained full service, such as Canada and Argentina. [Chapter 2: The Sound Loan Curve]: Mintz describes the construction of the 'Sound Loan Curve' by classifying each loan as either sound or defaulted based on its status in 1937. The analysis shows that sound lending peaked in 1924 and declined thereafter, even as total lending continued to rise in the late 1920s, indicating a lead in the deterioration of quality before the volume of loans peaked. [Definition and Methodology of the Default Index]: Mintz defines the 'default index' as the ratio of defaulted loans to all loans issued in a specific year, designed to measure the impact of 1920s conditions on new issue quality. The section details the criteria for classification, including the selection of December 31, 1937, as the cutoff date and the treatment of repaid loans to avoid statistical bias. It argues that counting repaid loans by borrowers who later defaulted as 'bad' provides a more rigorous test of the hypothesis that loan quality deteriorated over time. [Description and Trends of the Default Index (1920-1930)]: This section analyzes the trends in the default index from 1920 to 1930, showing a sharp decline in the quality of new foreign issues. It compares Index A (including Canadian loans) and Index B (excluding them), noting that Canadian loans acted as a stabilizing element. The analysis explores the relationship between loan quality and business cycles, finding that while short-term movements varied, the long-term trend showed a positive correlation between major cycle expansion and credit deterioration. [Degree of Default and Post-1937 Status of Foreign Bonds]: Mintz examines the 'degree of default' using bond prices as a proxy, concluding that the rise in the default index was not offset by any improvement in the severity of defaults. The section also reviews the status of these bonds in 1949, finding remarkable consistency with the 1937 data. Despite the prosperity of Latin American debtors and the occupation of European debtors during WWII, the fundamental default status of most countries remained unchanged, reinforcing the index's validity as a measure of original loan quality. [Comparative Investigations of Investment Quality]: The author compares the findings on foreign bonds with two other studies: George W. Edwards' study of domestic bonds and R. J. Saulnier's study of urban mortgage lending. Both studies corroborate the trend of deteriorating credit quality in the late 1920s. The section highlights that domestic investments, unaffected by foreign transfer issues, showed similar patterns of increased risk and failure for loans originated between 1925 and 1929, suggesting a broader market-wide decline in lending standards. [Geographic Shifts in Foreign Loans]: Chapter 3 analyzes how shifts in the geographic destination of American capital contributed to the rising default index. Mintz categorizes regions into 'good' (Western Europe, Far East, Canada) and 'bad' (Latin America, Eastern Europe) debtors. The data shows that the deterioration of the aggregate index was driven both by declining quality within 'bad' areas and a significant shift in total lending volume away from 'good' areas toward 'bad' areas during the late 1920s. [Quality of Loans by Individual Banking Houses]: Chapter 4 examines the role of 11 New York banking houses in the foreign loan market. It finds a wide disparity in the default indexes of different firms (ranging from 13% to 100%). The analysis reveals that the overall decline in credit quality was caused by two factors: individual houses granting riskier loans over time, and a structural shift in the market where more cautious bankers (like J.P. Morgan and Kuhn, Loeb) were replaced or overshadowed by less careful firms that entered the market later in the decade. [The Risk Premium and Investor Awareness]: Chapter 5 investigates whether investors were aware of the increasing risks they were taking by analyzing the 'risk premium'—the difference between foreign bond yields and 'basic yields' of high-grade domestic bonds. The data shows a striking disconnect: while the actual (ex post) risk of default rose sharply, the risk premium (ex ante risk) remained stable or even declined in 1927-28. This suggests that investors grew more confident even as the objective quality of new issues reached its lowest point. [Interpretation: The Shift from a Buyers' to a Sellers' Market]: Chapter 6 provides an analytical description of the shift in foreign lending practices between the early (1920-24) and late (1926-29) periods. In the early period, borrowers sought out reluctant lenders, requiring high yields and spreads to overcome investor resistance. In the late period, the market transformed into a 'sellers' market' for borrowers; American bankers competed aggressively to offer loans, leading to lower spreads, high-pressure salesmanship, and a disregard for credit quality. Mintz identifies this structural change in the lending community as a primary driver of credit deterioration. [Analysis of Change: Debunking Pressure and Timing Arguments]: This section refutes the idea that foreign political pressure or the timing of loans relative to the Great Depression were the primary causes of credit deterioration. It argues that Latin American and European debtors' failure to maintain service was not due to borrowing 'too late' in the twenties, as evidenced by persistent defaults even after war prosperity. [The Scarcity of Sound Loans vs. Investor Delusion]: Mintz examines the theory that a shortage of sound investment opportunities forced investors into risky bonds. By comparing risk premiums and yields between high-grade domestic and risky foreign bonds, the author concludes that investors were not forced but rather deluded by a long period of no defaults and high profits, leading to overconfidence. [The Role of Government and the American Financial Policy]: An analysis of the U.S. government's influence on international finance during the 1920s. Citing James W. Angell, the text suggests that while the government encouraged capital exports, most financial commitments would have occurred regardless of government action due to the post-war economic position of the United States. [Role of the Banking Houses: Decision Making and Risk Estimation]: Mintz explores the internal decision-making processes of banking houses, focusing on the tension between profit and the protection of firm goodwill. The section details the extensive factors bankers considered when estimating risk, including political stability, economic indicators, and specific corporate positions, refuting the claim that bankers were simply ignorant of the facts. [Projection of Favorable Trends and Warnings Ignored]: This segment explains how bankers' judgments failed by projecting temporary favorable trends into the future, often ignoring underlying inflationary credit expansions. It highlights specific warnings from figures like S. Parker Gilbert and the Reserve Bank of Peru that were dismissed by an over-optimistic financial sector. [The Importance of Risk and Banker Responsibility]: Bankers testify to their commitment to safety and their perceived 'moral liability' to protect bondholders even after a default. The section emphasizes that a banker's reputation is their most valuable asset, though the weight placed on risk varies between firms and is influenced by public demand. [The Demand of the Public: Who is 'The Public'?]: This section examines the demographics and characteristics of investors in foreign bonds during the 1920s. It challenges the assumption that foreign bond investors were distinct from domestic ones, citing evidence that a significant portion of buyers were small individual investors and various social institutions like churches and schools. The text highlights that these small investors were particularly vulnerable because they lacked the ability to diversify their risks or wait out defaults. [Why Does the Public Buy Foreign Bonds?]: The author explores the motivations behind the public's willingness to invest in foreign securities. While 'faith in the banker' and aggressive marketing played roles, the section argues that a period of stability and previous profits created a false sense of security. Investors mistakenly viewed the mid-1920s as an era of permanent prosperity, influenced by geopolitical developments like the League of Nations and the stabilization of European currencies. [How the Change in the Public's Attitude Affected the Bankers]: This section analyzes how the public's insatiable appetite for high-yield foreign bonds pressured bankers to lower their standards. Intense competition among investment houses led to the flotation of increasingly risky loans, such as those to Peru and German corporations, where traditional safety metrics were ignored. The author concludes that the elimination of the 'fear of loss' due to easy marketability shifted the focus from safety to volume, contributing to the eventual deterioration of investment quality during the cyclical expansion. [Appendix Tables: Statistical Data on Foreign and Domestic Issues]: A comprehensive set of statistical tables (Tables 13-19) providing raw data and moving averages for bond yields, par values of flotations, default indexes by year and geography, and risk premiums. These tables compare foreign government issues with domestic corporate bonds and common stocks from 1920 to 1930, serving as the empirical basis for the book's arguments regarding the deterioration of bond quality. [Appendix Tables 15-19 and Index]: Continuation of the statistical appendix including Table 15 (Default Index by number of issues), Table 16 (Average size of issue), Table 17 (Geographic distribution of defaults), Table 18 (Risk premiums), and Table 19 (Uncorrected default index). This is followed by a detailed alphabetical index of the entire work, covering key figures, countries, and economic concepts.
Introductory front matter for Ilse Mintz's study on the deterioration of foreign bond quality. It provides institutional context from the National Bureau of Economic Research (NBER) and a brief overview of the study's methodology, which uses the ratio of defaulted bonds to total bonds issued per quarter as a measure of quality. The text suggests that the upswing in American financial activity during the 1920s was responsible for a steep decline in loan quality.
Read full textBiographical sketch of author Ilse Mintz and a comprehensive listing of the Officers, Directors, and Research Staff of the National Bureau of Economic Research (NBER) as of 1951. It includes notable economists such as Simon Kuznets, Arthur F. Burns, Milton Friedman, and Gottfried Haberler.
Read full textThe formal resolution governing the relationship of NBER Directors to the organization's work and publications. It outlines the procedures for research proposals, manuscript review by special committees, and the requirements for scientific impartiality and approval before publication.
Read full textTitle page and author's acknowledgements for the book. Mintz credits Arthur F. Burns, Geoffrey H. Moore, and Ragnar Nurkse for their contributions to the study's substance and form, and acknowledges funding from the Social Science Research Council.
Read full textDetailed Table of Contents, List of Tables, and List of Charts. The structure reveals the study's focus on the volume of lending, the construction of a default index, geographic shifts in loans, the role of individual banking houses, and the risk premium associated with foreign bonds.
Read full textThe introduction discusses the post-WWII resumption of US foreign lending and evaluates the failures of the 1920s. It contrasts 'ex ante' bad loans (mistaken from the start) with 'ex post' bad loans (sound loans that failed due to the depression). It highlights the 'transfer problem'—the difficulty of converting local currency into dollars—as a primary cause of default cited by experts like H.B. Lary and Marcus Nadler.
Read full textMintz defines the study's unique approach: investigating the relationship between economic conditions at the time of a loan's issue and its subsequent quality. She connects the deterioration of investment quality to theories of the business cycle by Mitchell, Burns, and Schumpeter, suggesting that 'reckless borrowing' during expansions contributes to eventual collapses.
Read full textA summary of the study's findings, showing a stark deterioration in loan quality: only 6% of 1920 issues defaulted compared to 63% of 1928 issues. Mintz argues that transfer difficulties and dollar scarcity cannot explain these variations, as they affected early and late loans equally. She concludes that the early period of lending was largely successful and provides a model for future investment.
Read full textChapter 1 defines the scope of the investigation, focusing on foreign government bonds issued between 1920 and 1930. It provides historical context on the US shift from debtor to creditor nation and explains the exclusion of war-related loans and short-term notes. It also discusses the inclusion of Canadian bonds, which represented a significant portion of the total volume.
Read full textAnalysis of the cyclical nature of foreign lending. Mintz observes that foreign bond flotations moved inversely to American business cycles with high synchronism—expanding during domestic contractions and contracting during domestic expansions. Despite this inverse relationship, the overall trend of lending was rising throughout the 1920s.
Read full textExploration of the relationship between foreign lending and the US balance of payments. Mintz examines whether trade balances or monetary reserves in debtor countries drove lending cycles. She references Bloomfield and Brown, concluding that the cycles in bond issues were likely not caused by changes in the trade balance but were more closely linked to the domestic credit situation.
Read full textA comparison of foreign bond issues with the business cycles of borrowing countries (e.g., Argentina, Germany, Italy). The analysis finds no consistent correlation between a country's internal business cycle and its borrowing in the US, suggesting that American business conditions were the dominant factor in determining the timing of loans.
Read full textExamination of competition between the New York and London capital markets. Mintz notes that British lending was subject to embargoes and Bank of England controls. While some shifts occurred (notably in 1923), British competition does not explain the overall cyclical pattern of American foreign lending.
Read full textComparison of foreign and domestic bond issues. Both were inversely related to American business cycles, but foreign bonds conformed more closely to the cycle than domestic ones. Mintz critiques H.B. Lary's interest rate hypothesis, noting that bond yields do not fully explain the sharp contractions in foreign lending, particularly in 1922-23 and 1925-26.
Read full textMintz argues that foreign bond cycles were driven by the competition with domestic common stocks. During speculative booms (like 1928-29), investor preference shifted to stocks, causing foreign bond issues to collapse. This inverse relationship held throughout the decade, except for a brief period in 1923 caused by the Ruhr occupation and German hyperinflation.
Read full textChapter 2 introduces the 'Default Index'. It reviews the history of defaults, noting that the 1920s were virtually defaultless until the 1931-1934 wave triggered by the depression. It details the sequence of defaults starting in Latin America (Bolivia, Peru, Chile) and moving to Europe (Hungary, Germany). It also identifies countries that maintained full service, such as Canada and Argentina.
Read full textMintz describes the construction of the 'Sound Loan Curve' by classifying each loan as either sound or defaulted based on its status in 1937. The analysis shows that sound lending peaked in 1924 and declined thereafter, even as total lending continued to rise in the late 1920s, indicating a lead in the deterioration of quality before the volume of loans peaked.
Read full textMintz defines the 'default index' as the ratio of defaulted loans to all loans issued in a specific year, designed to measure the impact of 1920s conditions on new issue quality. The section details the criteria for classification, including the selection of December 31, 1937, as the cutoff date and the treatment of repaid loans to avoid statistical bias. It argues that counting repaid loans by borrowers who later defaulted as 'bad' provides a more rigorous test of the hypothesis that loan quality deteriorated over time.
Read full textThis section analyzes the trends in the default index from 1920 to 1930, showing a sharp decline in the quality of new foreign issues. It compares Index A (including Canadian loans) and Index B (excluding them), noting that Canadian loans acted as a stabilizing element. The analysis explores the relationship between loan quality and business cycles, finding that while short-term movements varied, the long-term trend showed a positive correlation between major cycle expansion and credit deterioration.
Read full textMintz examines the 'degree of default' using bond prices as a proxy, concluding that the rise in the default index was not offset by any improvement in the severity of defaults. The section also reviews the status of these bonds in 1949, finding remarkable consistency with the 1937 data. Despite the prosperity of Latin American debtors and the occupation of European debtors during WWII, the fundamental default status of most countries remained unchanged, reinforcing the index's validity as a measure of original loan quality.
Read full textThe author compares the findings on foreign bonds with two other studies: George W. Edwards' study of domestic bonds and R. J. Saulnier's study of urban mortgage lending. Both studies corroborate the trend of deteriorating credit quality in the late 1920s. The section highlights that domestic investments, unaffected by foreign transfer issues, showed similar patterns of increased risk and failure for loans originated between 1925 and 1929, suggesting a broader market-wide decline in lending standards.
Read full textChapter 3 analyzes how shifts in the geographic destination of American capital contributed to the rising default index. Mintz categorizes regions into 'good' (Western Europe, Far East, Canada) and 'bad' (Latin America, Eastern Europe) debtors. The data shows that the deterioration of the aggregate index was driven both by declining quality within 'bad' areas and a significant shift in total lending volume away from 'good' areas toward 'bad' areas during the late 1920s.
Read full textChapter 4 examines the role of 11 New York banking houses in the foreign loan market. It finds a wide disparity in the default indexes of different firms (ranging from 13% to 100%). The analysis reveals that the overall decline in credit quality was caused by two factors: individual houses granting riskier loans over time, and a structural shift in the market where more cautious bankers (like J.P. Morgan and Kuhn, Loeb) were replaced or overshadowed by less careful firms that entered the market later in the decade.
Read full textChapter 5 investigates whether investors were aware of the increasing risks they were taking by analyzing the 'risk premium'—the difference between foreign bond yields and 'basic yields' of high-grade domestic bonds. The data shows a striking disconnect: while the actual (ex post) risk of default rose sharply, the risk premium (ex ante risk) remained stable or even declined in 1927-28. This suggests that investors grew more confident even as the objective quality of new issues reached its lowest point.
Read full textChapter 6 provides an analytical description of the shift in foreign lending practices between the early (1920-24) and late (1926-29) periods. In the early period, borrowers sought out reluctant lenders, requiring high yields and spreads to overcome investor resistance. In the late period, the market transformed into a 'sellers' market' for borrowers; American bankers competed aggressively to offer loans, leading to lower spreads, high-pressure salesmanship, and a disregard for credit quality. Mintz identifies this structural change in the lending community as a primary driver of credit deterioration.
Read full textThis section refutes the idea that foreign political pressure or the timing of loans relative to the Great Depression were the primary causes of credit deterioration. It argues that Latin American and European debtors' failure to maintain service was not due to borrowing 'too late' in the twenties, as evidenced by persistent defaults even after war prosperity.
Read full textMintz examines the theory that a shortage of sound investment opportunities forced investors into risky bonds. By comparing risk premiums and yields between high-grade domestic and risky foreign bonds, the author concludes that investors were not forced but rather deluded by a long period of no defaults and high profits, leading to overconfidence.
Read full textAn analysis of the U.S. government's influence on international finance during the 1920s. Citing James W. Angell, the text suggests that while the government encouraged capital exports, most financial commitments would have occurred regardless of government action due to the post-war economic position of the United States.
Read full textMintz explores the internal decision-making processes of banking houses, focusing on the tension between profit and the protection of firm goodwill. The section details the extensive factors bankers considered when estimating risk, including political stability, economic indicators, and specific corporate positions, refuting the claim that bankers were simply ignorant of the facts.
Read full textThis segment explains how bankers' judgments failed by projecting temporary favorable trends into the future, often ignoring underlying inflationary credit expansions. It highlights specific warnings from figures like S. Parker Gilbert and the Reserve Bank of Peru that were dismissed by an over-optimistic financial sector.
Read full textBankers testify to their commitment to safety and their perceived 'moral liability' to protect bondholders even after a default. The section emphasizes that a banker's reputation is their most valuable asset, though the weight placed on risk varies between firms and is influenced by public demand.
Read full textThis section examines the demographics and characteristics of investors in foreign bonds during the 1920s. It challenges the assumption that foreign bond investors were distinct from domestic ones, citing evidence that a significant portion of buyers were small individual investors and various social institutions like churches and schools. The text highlights that these small investors were particularly vulnerable because they lacked the ability to diversify their risks or wait out defaults.
Read full textThe author explores the motivations behind the public's willingness to invest in foreign securities. While 'faith in the banker' and aggressive marketing played roles, the section argues that a period of stability and previous profits created a false sense of security. Investors mistakenly viewed the mid-1920s as an era of permanent prosperity, influenced by geopolitical developments like the League of Nations and the stabilization of European currencies.
Read full textThis section analyzes how the public's insatiable appetite for high-yield foreign bonds pressured bankers to lower their standards. Intense competition among investment houses led to the flotation of increasingly risky loans, such as those to Peru and German corporations, where traditional safety metrics were ignored. The author concludes that the elimination of the 'fear of loss' due to easy marketability shifted the focus from safety to volume, contributing to the eventual deterioration of investment quality during the cyclical expansion.
Read full textA comprehensive set of statistical tables (Tables 13-19) providing raw data and moving averages for bond yields, par values of flotations, default indexes by year and geography, and risk premiums. These tables compare foreign government issues with domestic corporate bonds and common stocks from 1920 to 1930, serving as the empirical basis for the book's arguments regarding the deterioration of bond quality.
Read full textContinuation of the statistical appendix including Table 15 (Default Index by number of issues), Table 16 (Average size of issue), Table 17 (Geographic distribution of defaults), Table 18 (Risk premiums), and Table 19 (Uncorrected default index). This is followed by a detailed alphabetical index of the entire work, covering key figures, countries, and economic concepts.
Read full text