While revising Óscar Ugarteche's entry on "Sovereign Default" for The New Palgrave Dictionary of Economics, I was struck by a historical connection that deserves more attention. Óscar discusses the rather forgotten history of Confederate and Southern debt after the Civil War. That led me back to Jay Sexton’s excellent Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837–1873, and from there to David James Gill’s The Long Shadow of Default, on Britain’s First World War debts to the United States, which I had used for another paper on Keynes and the negotiations of the British and inter-Allied debts in the inter-war period.
Taken together, they tell an interesting story about debt and the so-called special relationship. Sexton emphasizes that the nineteenth-century United States was a debtor country whose development and even territorial expansion depended heavily on British, finance. Foreign indebtedness therefore shaped American diplomacy.
After the Civil War, this included the political settlement with Britain, the treatment of Confederate obligations, and the refinancing of the enormous Union debt. The United States declared Confederate debts void and did not assume them after victory. British creditors certainly lost money, but Britain ultimately accommodated the American settlement rather than making assumption of Confederate debt a condition for restored relations, which could have been a possible outcome. At the same time, London continued to provide the capital that helped finance American development. The role of the Morgan House, particularly after the collapse of Jay Cooke's bank in the Crisis of 1873 is worth noticing (I'm reading on the side Liaquat Ahamed's book on that, btw).
This mattered because the United States still faced an external constraint. Under the gold standard, payment in gold meant, for practical purposes, obtaining the international means of payment centered on the pound sterling. In that respect the problem was not fundamentally different from the later dollar constraint faced by peripheral countries like Argentina right now. The post-bellum political and financial settlement eased that constraint. Essentially the British limited their claims, while maintaining access to its financial markets.
Fast-forward to the inter-war period and the positions were reversed. The First World War transformed Britain from creditor to debtor vis-à-vis the United States. Gill shows that Britain eventually stopped servicing its wartime obligations in 1934. The debt, btw, was never formally forgiven and remains technically outstanding. Yet the consequences were remarkably mild compared with what the standard sovereign default literature might lead one to expect. Britain was not permanently excluded from American finance, and the United States subsequently provided enormous assistance during and after the Second World War.
There is a symmetry worth emphasizing. Britain accommodated the rise of the United States, and the United States subsequently accommodated Britain's relative decline. Debt obligations that could have become major sources of conflict were subordinated to broader geopolitical objectives. Perhaps that is one way of thinking about what might be called development by invitation. Britain, through political accommodation, made the external constraint of the US considerably less binding. Later, the United States softened the financial consequences of Britain's loss of international primacy.
The important qualification is that this sort of flexibility has rarely been extended to peripheral countries. Latin American defaults, in particular, have normally brought creditor pressure, conditionality, prolonged negotiations and harsh adjustment. Even when the blow is lessened to allies, like Milei in Argentina, the adjustment at home is severe. The history of Anglo-American debt relations is therefore useful precisely because it reminds us that there is nothing automatic about the supposedly inviolable rules of sovereign debt. Which debts must be paid, which can be forgotten, and which defaults can be accommodated have always depended heavily on the international hierarchy of power. It is ultimately a geopolitical matter.
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