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Prophesying Upon the Bones: J. Reuben Clark and the Foreign Debt Crisis, 1933-39.

Most people read history because someone told them that they could avoid mistakes by "learning the lessons of history." Such people study the past the way football coaches study game films to prepare for an opponent. Students of history study the past because they want to experience a different time and place from the present. Gene Sessions has written an excellent history that focuses on the international financial crisis of the 1930s and on the role of J. Reuben Carter in bringing the crisis under control. One could draw lessons from the 1930s that apply to the international financial crisis of the early 1980s, and I will address those in due course.

First and foremost, Sessions has written about a period in history with the style and grace of a first-rate novelist. At the center of the story is J. Reuben Clark, who at age sixty-two found himself responsible for the success or failure of the Foreign Bondholders Protective Council (FBPC) in 1933. At that time more than $1.7 billion in foreign bends were in default in the United States, consisting of almost 190 foreign government-guaranteed issues.

Sessions begins his story by painting the 1930s as a period of profound change in American culture and values. J. Reuben Clark is cast as a nineteenth-century man working his will on a twentieth-century culture that no longer believes that a man's word is his bend or that no debt must go unpaid. Throughout the story we follow Clark's travels between the fast-paced, shark-infested waters of Washington politics and his responsibilities as a leader in the Mormon church. We share the highs and lows and highs again of Clark's efforts to make foreign governments pay their debts, to keep the government from withdrawing support from the FBPC, to survive attacks by independent groups who wanted to destroy the FBPC and prey on the hapless bondholders, to withstand a probe by the Securities and Exchange Commission of the FBPC and get a clean bill of health from William O. Douglas.

This is not a story of great triumphs, though one does get a sense that some investors were helped by Clark's unwavering determination to make foreign governments honor their debts. The Second World War overwhelmed any hope of significant success in Clark's effort to assure that foreign debts would be paid in full.

The parallels to the 1980s do not interest Sessions very much, and he does not dwell on them. It is clear that Franklin Roosevelt's administration liked the idea of having a quasi-independent agency, the FBPC, haranguing foreign governments to pay their debts while the administration played its own diplomatic games. The 1980s version of that was for the United States and the governments of other industrialized countries to speak sympathetically about the financial perils facing developing countries while their quasi-independent World Bank pressured the developing countries to reform their economies and to get their financial houses in order. Unfortunately, the lesson from the 1930s that was repeated in the 1980s was that, though bad debts may get paid, really big bad debts get renegotiated, rolled over, or written off.

This is a fascinating and well-written story about an honorable man, J. Reuben Clark. He was far from perfect, but he had his heroic moment and he made good use of it.

Edward John Ray is a professor of economics and associate provost at the Ohio State University. He is the author of numerous articles on U.S. economic history and international trade, including "A Profile of Foreign Investment in the U.S.," Annals of the American Academy of Political and Social Science (1991), and U.S. Protectionism and the World Debt Crisis (1989). At present, he is working on a book with Bennett D. Baack to be titled "The Income Tax in America: The Origin and Resolution of Fiscal Crises."
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Author:Ray, Edward John
Publication:Business History Review
Article Type:Book Review
Date:Jun 22, 1993
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