Tuesday, January 18, 2005

What if the consequences of default were more drastic?

This is what happened to the Dominican Republic in 1905, when it defaulted. It surely is a good thing that the world doesn't work this way any more, but then again, it might reduce borrowing costs...
Financial difficulties prevented Santo Domingo from paying its debts…On February 4, 1905, a protocol was drawn up between the two governments by which the United States was to act as bankrupt’s receiver for Santo Domingo, taking over all customhouses, administering its finances, and settling the claims of foreign and domestic creditors. Of the revenues which the United States should collect, 55 percent were to be used for paying bondholders and the remainder was to be turned over to the Dominican government for administrative expenses. The Senate at Washington refused to ratify this drastic protocol, but President Roosevelt entered into an “executive agreement” with the president of the Dominican Republic which achieved the same results. Under the agreement the customs collectors were to be American and to have the support of American warships.

From Scott Nearing and Joseph Freeman, Dollar Diplomacy, New York, 1925

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