Ilse Mintz, Deterioration in the Quality of Foreign Bonds Issued in the United States, 1920–1930

Ilse Mintz’s NBER study reinterprets interwar American foreign lending by shifting attention from the depression-era moment of default to the boom-era moment of issue. Written when the United States was again becoming a major foreign lender, the book challenges accounts that attribute bond failures mainly to the transfer problem or to the Great Depression. Mintz does not deny that the Depression exposed weakness, but she argues that the crucial variation lay in the quality of loans made before the crash.

we investigate the relation between conditions at the time of issue of the loans and their quality, their ability to stand the test of depression.

Her method is deliberately restrained. Mintz classifies the foreign government bonds of the 1920s by later performance, especially default status by the end of 1937, and compares defaulted loans with the total volume floated in the same period. She also avoids counting as sound those issues repaid before default if the same borrower later failed, thereby treating repayment as less important than the borrower’s demonstrated ability to withstand crisis.

We call the ratio of defaulted loans to all loans issued the ‘default index’.

The opening chapter separates the volume of lending from its quality. Foreign government bond issues tended to rise during short American recessions and fall during expansions, while also reflecting the decade’s broader upward financial movement. Mintz considers explanations based on borrowing-country conditions, trade balances, British competition, and interest rates, but finds them insufficient. The decisive setting was the American capital market: investors’ search for yield, the attractiveness of foreign bonds relative to domestic securities, and the changing rhythm of underwriting competition.

The empirical core of the book is the contrast between the apparent safety of the 1920s and the later record of default. During the lending boom, the market seemed vindicated because failures were rare. That absence of immediate default encouraged lenders and investors to misread the underlying risk.

The 1920’s were the defaultless era in foreign lending.

Retrospectively, however, Mintz finds a sharp deterioration. Loans issued from 1920 to 1924 performed much better than those of 1925 to 1929, and the decline appears even more strongly when Canadian issues are excluded. This is her central revision of the standard story: dollar scarcity and depression explain why defaults became visible in the 1930s, but they do not explain why late-decade bonds proved so much more fragile than early-decade ones.

The middle chapters show that deterioration was both geographical and institutional. Lending shifted away from western Europe, Canada, and the Far East toward Latin America and eastern Europe, regions with higher subsequent default rates; yet Mintz also finds deterioration within those regions themselves. The decline therefore cannot be reduced to a simple change in destination. A parallel pattern appears among banking houses. More cautious firms reduced activity as the boom advanced and recorded lower default indexes, while newer or more aggressive underwriters expanded and contributed disproportionately to failures. Poor loan quality thus reflected not only weak borrowers but also changing competitive pressures within American finance.

Mintz then asks whether the market priced the growing danger. If investors had recognized declining quality, risk premiums should have widened as the decade advanced. Instead, yields and spreads remained stable or even moved in the opposite direction while the default index rose. The market did not knowingly accept higher risk for adequate compensation; it failed to perceive the risk it was assuming.

Evidently, investors not only were unaware of the increasing riskiness of new foreign issues but even grew more confident at the very time the quality of new bonds was lowest.

The final chapter turns the statistical findings into an account of credit expansion. Early in the decade, borrowers sought bankers and bankers still had to persuade a cautious investing public. Later, bankers competed abroad for issues, borrowers could demand concessions, and investors readily absorbed high-yield foreign securities. Optimism became institutionalized through the absence of defaults, repeated profits, and the belief that prosperity would continue. Underwriting standards weakened not because participants intended failure, but because success itself eroded judgment.