Abstract:
France and Britain were responsible for the two largest sovereign defaults in modern history when they unilaterally suspended war debt repayments to the United States during the Great Depression. Despite facing similar economic challenges, Paris defaulted in 1932 whereas London continued payment until 1934. Conventional explanations for why states default or repay their debts— which tend to focus on future borrowing costs, the risk of sanctions, economic spillover effects, or domestic-political trade-offs—struggle to explain this variation. This article refocuses attention on the role of ideas and norms in policymakers’ decision-making at critical moments on the path to default. Archival research in Britain and the United States reveals a default taboo in operation in London. The taboo functioned instrumentally, affecting cost-benefit calculations, but also substantively, making repayment legitimate and appropriate. Variation in the key mechanisms of normative influence— domestic public opinion, international reputation, and personal moral convictions—provides a stronger explanation of repayment behavior than existing theories. British policymakers were initially concerned about outraging the public, feared non-payment by Britain’s own debtors, and believed repayment was morally right. Britain defaulted only after these concerns faded, and despite economic recovery. In contrast, French policymakers faced immediate and strong public resistance to repayment, held more limited concerns about international reputation, and were more divided on the morality of default. Analysis of these historical examples, which represent difficult cases due to pervasive assumptions about economic rationality, highlights the importance of ideas and norms in the study of sovereign debt and helps to explain why states can repay debts in bad times or default in good times.
Moderator: Maggie Peters
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