After the dissolution of the postwar monetary order, the global financial system changed dramatically. The most notable changes were that industrialized countries widely adopted floating exchange rates and their further relaxation of restrictions on international capital flows. The balance sheets of commercial banks in the advanced economies—once confined within their national borders—began to absorb more and more international assets. Leading the charge in this new era of global banking were US banks. Seeking out new opportunities for profit around the globe, they capitalized on growing worldwide demand for the almighty US dollar. Meanwhile, the US government supported, even encouraged, the trend. Finance was becoming an increasingly important sector of the national economy. Beginning in earnest under the Reagan administration, the central aim of US international financial policy was to create a truly global financial system with the United States at the core.11 Figure 4.1 plots the impressive growth in US banks’ cross-border claims from 1977 to 1982.[1] [2] In under five years, total foreign claims more than doubled from $164 billion to $353 billion. Almost half of this lending went to developing countries. US bank claims grew in these countries from around $79 billion to $180 billion in the same time span. A significant source of demand for US bank loans came from Latin American sovereigns. Indeed, by year-end 1982, more than 10 percent of US banks’ total foreign claims ($38.6 billion) were against Latin American governments.[3]

Figure 4.1

US Banks' Claims on Foreign Residents, 1977-1982

A necessary consequence of the internationalization of US banks' balance sheets, however, was that a major foreign financial crisis could now directly threaten the stability of the US financial system. In August 1982, that is exactly what happened when Mexico announced that it was suspending payments on its external debt obligations. The crisis quickly spread. One year later, 27 developing countries were in negotiations to restructure their loans.

Major global banks, many of them in the United States, were facing losses larger than their entire capital stock, and the global financial system was facing its most serious financial crisis since the Great Depression. It was in this context that the IMF asserted itself as the world's de facto ILLR.[4]

  • [1] Helleiner 1994.
  • [2] Data reported are consolidated unadjusted claims; data collected by the author fromrelevant Country Exposure Lending Surveys (CELS) via the Federal Reserve archive available at publication/?pid=333.
  • [3] Totals from December 1982 CELS report.
  • [4] Boughton 2000; Sachs 1995.
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