Default Setting II.

Between 1775 and 1825, the revolts against the British and Spanish Empires in the Americas created a host of new nations.  In the minds of European leaders, formal “empire” sold at a deep discount.  However, the “empire of free trade” arose as a far more appealing idea.  If non-European countries would pursue Western economic[1] and legal[2] policies, then you could get the same benefits of empire without the costs and heartbreak.  The Western capital generated by industrialization could then safely flow toward the economic development of the rest of the world.[3]  All would benefit.

The world of international investment brimmed with challenging opportunities in the later Nineteenth Century: Latin America, the United States, the Ottoman Empire, Japan, and China for example.  However, a willingness to fulfill commitments to Western economic and legal doctrines in exchange for Western investment varied from society to society.

Russia came late to industrialization and wanted to hurry the process forward.  Russia possessed rich natural resources, but its primitive agriculture generated little wealth.  Where to find the capital for rapid industrialization?  Two solutions offered themselves.  Either the country could borrow from rich foreign lenders or the peasantry could be squeezed very hard.  Fearful of peasant unrest, Russian leaders sensibly opted for foreign borrowing.

Foreign lenders could discern positive and negative features in Russian borrowers.  On the plus side were two essential factors.  Russia’s gigantic territory housed vast amounts of minerals and other natural resources.  In the middle of the century, the Tsar Alexander II had shoved through a series of “Great Reforms” intended to begin the modernization of Russia.  Those reforms had not yet taken full hold, but they provided a foundation for further progress.  On the negative side the “Great Reforms” had compounded the turmoil inside Russia.  Rapid industrialization would intensify the strains.  Then, Russia remained an absolute monarchy.  After the death of Alexander II, the quality of leadership declined markedly.

Between 1890 and 1920 political considerations, rather than purely economic ones, exerted a growing influence over foreign investments in Russia.  First, seeking escape from the diplomatic isolation into which it had been forced by Bismarck’s diplomacy, the French government encouraged lending to the Tsarist regime.  This lending supported the eventual Franco-Russian alliance that surprised and alarmed German statesmen.  Second, during the First World War, the French and British tried to prop up their tottering ally by ample credit.  Third, the Bolshevik regime repudiated the Russian external debt.[4]  The Bolsheviks understood the Red default as a stroke against global capitalism.  It would—and, in France, did—gravely weaken the middle class savers who formed a vital support for bourgeois democracy.

At the same time, default contributed to making Soviet Russia an international pariah.  Within a decade, the Soviets turned to the alternative strategy of squeezing assets out of the peasantry.  As late Nineteenth Century leaders had foreseen, the human cost would be terrible.

[1] Raise no barriers to imports and exports; pursue “sound” money.

[2] Practice Western notions of the rule of law, especially the sanctity of contracts.

[3] See, David Landes, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (1958).

[4] See: Hassan Malik, Bankers and Bolsheviks: International Finance and the Russian Revolution, 1892-1922 (2018).