Deterioration in the Quality of Foreign Bonds Issued in the United States, 1920–1930
As a crude measure of quality, the author uses the ratio of the amount of bonds issued in a given quarter that subsequently defaulted to the amount of all bonds issued in the quarter. The 1920s were the defaultless era in American foreign lending. The progressive deterioration in the quality of new loans did not become evident until severe depression set in. She concludes that since the factors commonly regarded as responsible for the widespread defaults on foreign bonds affected issues of earlier as much as those of later years, the upswing in American financial activity may be held responsible for this steep decline in loan quality.
Although foreign bond flotations increased hugely during the major upswing of the '20s they ran counter to the shorter business cycles of this period. Their relation to American business cycles is even closer than that of domestic bond issues, though one might have expected differently timed foreign business cycles to interfere. The quantity as well as the quality of foreign loans seem to have been largely determined by the state of the American economy at the time of lending.