Dance of the Trillions

In the 1970s, oil exporters earned more money than they could spend, so banks recycled the surpluses as loans to developing countries (DCs).

In 1973, after US president Richard M. Nixon announced military aid for Israel in the Arab-Israeli war, the Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia was a crucial member, chose to use its cartel power to choke off oil supplies to the United States. Oil prices soared worldwide. The revenues of major petroleum-exporting countries amassed quickly, in amounts far in excess of those nations’ potential spending on imports. Oil-importing economies, accustomed to strong economic performance, began to suffer.

At that time, the United States supported the view that banks and the free market should be the intermediaries for recycling the oil-trade imbalances. US inflation was high, compared to investment returns, and faster growth in the developing countries motivated banks to follow this line of business. US banks focused on 65 DCs around the world, spanning large and small economies, including Peru, Poland, Turkey, South Korea, China and India. Loans to those nations provided...