The Mexican peso crisis of December, 1994, pro-
duced a series of rapid consultations between
U.S. and International Monetary Fund (IMF)
advisers and Mexican government officials. Guided by
their First World advisers, these Mexican technocrats
designed an austerity program to curtail public spend-
ing, privatize state industries, ease price controls and
cap wages. Hailed by the White House and the IMF,
these belt-tightening moves were enough to convince
international financial observers that the country–
despite its financial crisis-would be able to meet its
domestic and foreign obligations. The fear that Mexico
might soon be unable to service its foreign debts was
dispelled, and the country qualified for a bailout from
outside funders. 1
The foreign-consultant/foreign-debt connection has
long helped to shape the economic restructuring and
development of Latin America, and has determined the
destinies of numerous other indebted countries. 2 In 1991,
for example, four years prior to the Mexican bailout,
U.S. President George Bush told Russian President Boris
Yeltsin that Russia could not obtain massive new loans
until it sought the guidance of the IMF At the same time,
a U.S. economist from Harvard, Jeffrey D. Sachs, coun-
Paul Drake is Professor of Inter-American Affairs and Dean of
Social Sciences at the University of California at San Diego. This
essay is adapted from his “Introduction: The Political Economy of
Foreign Advisers and Lenders in Latin America,” in his edited
book, Money Doctors, Foreign Debts and Economic Reforms in
Latin America from the 1890s to the Present (Scholarly
Resources, 1994).
BY PAUL DRAKE
seled Yeltsin on how to acquire foreign loans and con-
struct a capitalist system. Sachs had proved his mettle
previously by designing sweeping reform programs for
heavily indebted Poland and Bolivia. His activity paral-
leled visits to Poland and Bolivia over sixty years ago by
another U.S. academic economist, Dr. Edwin W.
Kemmerer of Princeton University. Known as the
“Money Doctor,” Kemmerer restructured those coun-
tries’ economies and rewrote their economic legislation
in order to placate foreign lenders.
The phenomenon of “money doctoring” has a long his-
tory in the so-called Third World due at least in part to
the chronic economic and political instability that has
characterized underdeveloped countries. Through the
successive debt cycles of the past two centuries, money
doctors have performed their operations in various ways, but always on borrowers, not lenders. By inspecting and
restructuring indebted economies, they have served as
intermediaries between debtor/borrowers and creditor/
lenders, sending reassuring signals to foreign investors.
The seal of approval of these monetary medics has
helped risky credit recipients attract loans in the first
place, acquire subsequent loans to help repay the old
ones and adjust or escape from some of those obligations
during debt crises. The evolution of their practice has
been deeply tied to the cycles of debt and repayment that
have accompanied Third World economic development.
In Latin America, the first of these cycles occurred
during the wars of independence of the early 19th cen-
tury, during which naive Europeans invested in the
fledgling new republics. By the end of the 1820s most
32 NACIA REPORT ON THE AMERICAS
0
0 t,
oi
uREPORT ON THE DEBT
The United States first elaborated its
brand of money doctoring after the
Spanish-American War in 1898,
when it dispatched economists along
with troops to install economic as
well as political institutions in its
new colonies and semicolonies.
Harvard’s Jeffrey D. Sachs, a contemporary Money Doctor
of the new governments had defaulted. They were nei- ther able to revive their war-torn economies quickly nor fund the new state apparatus-let alone repay their external obligations. Some of these financial burdens continued to hang over the young republics until the 1920s, though other loan spurts occurred in the 1860s, 1880s and 1900s. The external economy was dominated by Great Britain throughout this period.
he United States first elaborated its brand of
money doctoring in the formal and informal empire it carved out of Spain’s former posses- sions in the Caribbean and the Pacific. After the Spanish-American War in 1898, the U.S. government dispatched economists along with troops to install eco- nomic as well as political institutions in the colonies and semicolonies it acquired. From the 1890s to the 1920s, security and economic motivations led to U.S. interven- tions in putatively sovereign countries in the Caribbean and Central America. The justification for meddling in the Caribbean Basin was to impose order so that other imperial powers would have no excuse for intervening with force–especially the excuse of collecting overdue
debts. That concern led to U.S. involvement in these
nations’ fiscal and financial affairs to guarantee that suf-
ficient revenues were available for debt servicing.
Intrusion in the management of foreign economies
involved the installation of U.S. institutions and proce-
dures. In extreme cases, U.S. officials were also
appointed, for example, to collect customs receipts and
regulate the money supply.
Another outcome of intervention was that it became
more convenient for the United States to have U.S.
banks become the primary lenders to these republics,
often arranging new loans to pay off dangling debts to
Europeans. The United States encouraged loans
because of their intrinsic profitability and because they
underwrote the purchase of U.S. goods. Those loans
were secured by a variety of safeguards, including
treaties, contracts, legislation, soldiers and money doc-
tors. The United States carried out the most thorough
financial sanitation in countries that became protec-
torates under treaties that conceded the U.S. the right to
intervention. Such treaties were in effect at various
times in Cuba, Panama, the Dominican Republic, Haiti
and Nicaragua. 3
In the opening decades of the 20th century, the U.S.
government found it increasingly efficacious to export
expertise through private agents rather than government
officials. By favoring independent missions hired volun-
tarily by host countries, Washington avoided any
appearance of complicity with advisers and lenders.
This “hands-off” policy defused anti-interventionist crit-
icism at home and abroad. The State Department knew
that the same advice would be more acceptable from pri-
vate economists than from official representatives of
U.S. government or business. Thus, missions legally
independent from Washington and Wall Street used per-
suasion in South America to replicate much of what U.S.
officials had achieved through force of arms in the
Caribbean Basin: exchange stability, fiscal rectitude,
modern banking, efficient customs administration, reli-
33
8
33 VOL XXXI, No 3 Nov/DEc 1997REPORT ON THE DEBT
able debt servicing and an “open door” and equal treat-
ment for foreign capitalists. 4
From the 1890s through the 1920s, every Latin
American country except Argentina and Brazil con-
tracted U.S. financial consultants. They did so mainly to
reassure U.S. lenders that they were safe investments.
The most successful economic ambassador was
Princeton University’s Edwin W. Kemmerer. From
World War I to the Great Depression, Professor
Kemmerer became a sort of one-man IME A champion
of central banking and the gold standard, he reformed
the monetary, banking, and fiscal systems of Mexico,
Guatemala, Colombia, South Africa, Chile, Poland,
Ecuador, Bolivia, China and Peru.
In the wake of Kemmerer’s reforms, private U.S.
investors engaged in massive lending to Latin American
governments. For U.S. private banks and financial inter-
mediaries, the lending frenzy of the 1920s generated
millions of dollars through bond issues on the New York
Stock Exchange. Through these channels, Latin
America received the greatest influx of U.S. private
finance capital prior to the 1970s. Then the Great
Depression laid waste to this “dance of millions” and to
Kemmerer’s free-market policy prescriptions.
With the Depression, the costs of continued compli-
ance with the rules of international finance came to out-
weigh the benefits, leading the governments of many of
the countries in the region to disobey the prescriptions
of the hegemonic power. Yet they did not do away with
the procedures and institutions imposed by money doc-
tors in the preceding decades. As foreign loans and
exchange evaporated, domestic pressures compelled
governments to halt payments on their foreign debt.
Rather than employing money doctors to attract outside
loans, Latin Americans used them to provide excuses
when, due to bankruptcy, they were forced to declare
moratoria on foreign-debt payments. Most countries
suspended payments for at least a decade until they
could be resumed after negotiated reductions. 5
At the end of World War II, the victors institutional-
ized money doctoring in the IMF The initial goal was to
restore the free-flowing international economy that had
prevailed prior to the Great Depression. In the ensuing
decades, the IMF and other newly created agencies pro-
vided economic advice and financial sanitation to Latin
America nations. These institutional sources of techni-
cal assistance included the Inter-American Development
Bank (IDB), the Export-Import Bank, the World Bank,
the United Nations (especially its Economic
Commission on Latin America), the U.S. Agency for
International Development (AID), the U.S. Federal
Reserve and other multilateral and bilateral agencies.
Like Kemmerer, the IMF normally helped design and
implement policies favored by Latin American as well
as North American
elites. The Fund made
its loans to clients
conditional on their
promise to carry out
the prescribed poli-
cies. Kemmerer and
the IMF tendered sim-
ilar recommendations:
equilibrate exchange
rates, control the mon-
ey supply and dis-
cipline government
spending. In reward-
ing those policies, the
IMF had more direct
influence than Kem-
merer, since it could
extend its own credits
as well as certify
Although
disagreeing with the
IMF at times, Sachs,
like most money
doctors, has generally
echoed its positions
in favor of monetary
stabilization,
government austerity
and free trade.
creditworthiness to private lenders.
From the 1950s onward, Latin American governments
began relying on national economists trained in univer-
sities in developed countries and endowed with credit-
worthy reputations in international financial circles.
Educated at the University of Chicago, the civilian
advisers to Chilean dictator Augusto Pinochet (1973-90)
gained notoriety for dismantling the statist and protec-
tionist policies that had accumulated in their country
since the Great Depression. Under their tutelage, Chile
was one of the most successful countries in attracting
foreign loans in the 1970s and one of the most adept at
managing the debt crisis of the 1980s. By the mid 1990s,
the fame of the “Chicago Boys” attracted flocks of
future economists from the rest of Latin America to
study at Chilean universities on scholarships from inter-
national organizations. 6
fter decades during which public funding
replaced private lending, conditions in the 1970s
came to resemble those in the 1920s. Private
loans to Latin American governments mushroomed.
Direct commercial bank credits-not bond issues in the
stock market-became the main source of finance capi-
tal. To acquire these loans or new ones to repay old
notes, countries increasingly had to obtain a clean bill of
health from the IME
Just as the 1970s in Latin America echoed the 1920s,
so the 1980s evoked comparisons with the 1930s. When
the international recession hit in the early 1980s, exter-
nal financing dried up and interest rates soared. The
hemisphere suffered the worst depression since the
Great Crash of 1929. As growth and employment plum-
meted, the 1980s became known as “the lost decade.”
Desperately short of resources, Latin American govern-
ments struggled to avoid default on their staggering for-
eign debts. 7 In the 1920s-1930s cycle of debt infusion
and hemorrhage, the U.S. government took essentially
the same laissez-faire position it would take in the
1970s-1980s cycle of accumulation and collapse. In
both eras, Washington officially argued that U.S.
investors and Latin American debtors took their own
risks in private transactions. The United States provided
no legal guarantee of protection or assistance.
During the 1980s and early 1990s, Latin American
governments often used visits by the Chairman of the
U.S. Federal Reserve Board, IMF officials and U.S. aca-
demics to certify the rectitude of their spartan policies.
They employed these wisemen to reassert their worthi-
ness as recipients of new private and public loans, which
have in turn allowed them to maintain at least token pay-
ments on their external obligations. Governments have
also capitalized on these experts to justify sacrifices to
their citizens and to lobby for leniency from their
bankers. They have claimed penury, and they have
counted on money doctors to legitimize the reduction or
suspension of their payments to foreign creditors.
Notwithstanding, First World bankers, governments,
and multilateral agencies as well as ruling groups in the
indebted countries have all agreed that full-fledged
default would be an unacceptable blow to the entire
international financial system.
Since the 1970s, many countries with debt or devel-
opment problems have turned to new academic money
doctors like Jeffrey Sachs for a variety of reasons. Some
governments have preferred these independents to get a
wider range of advice than that proffered by the IMF. In
VOL XXXI, No 3 Nov/DEc 1997
other cases, governments have not used the IMF because they are effectively in default
on their debt payments or because their cit-
izens are too hostile toward the Fund.
Noncapitalist countries that did not belong
to the IMF also engaged the services of
freelance money doctors. In many cases, the
problems set before these advisers were
broader and more severe than those usually
dealt with by the IMF or the World Bank.
Stanching hyperinflation or creating a mar-
ket economy proved more challenging than
stabilizing exchange rates.
In addition to Bolivia and Poland, Sachs
has worked for Ecuador, Venezuela, Peru,
Yugoslavia and Russia. In contrast with the
“Chicago Boys” in Chile, he has insisted on
advising only “democratic” governments.
Although disagreeing with the IMF at
times, Sachs, like most money doctors, has -1 4ll . : : r 4Pr f gen caiy ec1UU oe ts poMss 111 avor o monetary stabilization, government austerity and free
trade. In Bolivia, Sachs supported one of the most dra-
matic interventions ever implemented to stop hyperin-
flation. He departed from orthodoxy by also recom-
mending the reduction of the country’s foreign debt
obligation. Yet much like his predecessors, Sachs deliv-
ered technical expertise and international legitimation. 8
In a narrow sense, the most basic function of these
financial and fiscal physicians has been to transfer tech-
nology and institutions. Yet more than simply convey-
ing new knowledge, foreign economic advisers have
been a political device for a large number of actors in
both lending and borrowing countries. Whatever their
own motivations, these consultants have served three
interrelated political purposes: 1) they have helped
wealthier nations expand their influence over poorer
regions; 2) they have served the aims of political and
economic contenders within the host countries; and 3)
they have been used to justify and fund governmental
growth.
Ever since the 1890s, for example, Washington has
recognized that its economic and strategic interests could
be furthered by U.S. advisers operating overseas.
However indirectly, and whatever their motives, U.S.
health experts can induce foreigners to purchase U.S.
drugs and medical equipment, military trainers can
inspire them to buy U.S. arms and doctrines, agronomists
to prefer U.S. seeds and farm machinery, artists to con-
sume U.S. entertainment, educators to assign U.S. text-
books and intellectuals to imbibe U.S. ideas. No matter
how scientific, professional or altruistic the agents, their
presence has usually encouraged the adoption of the
technologies, systems and products of the United States.
The implementation
of principles and prac-
tices taken from U.S.
blueprints has reduced
uncertainties for inter-
national traders and
investors. Incorpora-
ting translations of
U.S. laws into the legal
codes of recipient na-
tions has compensated
for the lack of easily
enforceable interna-
tional regulations for
transactions. In addi-
tion, U.S. leaders have
hoped that technical
missions would gener-
ally improve relations
with the Third World.
experienced the most
success when helping
polish and legitimize
proposals already fav-
ored by the ruling
elites. In these cases,
the adviser’s primary
role is to deliver and
authenticate the ortho-
dox institutions and
ideas of the era.
Sometimes the foreign-
ers’ stature has elevated
certain ideas, institu-
tions and individuals
to almost untouchable
positions of power.
Some of their disciples
and converts in the host
country have become
They have also thought that buttressing economic even more zealous and rigid than the advisers them-
growth and political stability in low-income countries selves-one case in point being the Chilean “Chicago
would reduce the dangers of default, disorder or, worse, Boys.” 1 0
revolution. 9 Money doctors can increase a government’s prestige
While experts have helped external powers penetrate not only abroad but also at home. Faith in technocratic
and regulate less developed economies, their second solutions to national problems, especially when crafted
function has been to serve the aims of political and eco- by foreigners from more developed countries, has been
nomic interests within the host countries. Competing widespead in Latin America. Despite some nationalistic
domestic groups-such as bankers and industrialists- resentments, many Latin Americans have viewed for-
have capitalized on foreign missions to improve their eign technocrats as being above local partisan divisions.
standing vis-a-vis each other and foreign competitors. Seen as more trustworthy and better trained than local
They have also used those outsiders and their reputa- notables, these visitors have been able to discredit and
tions to tap international sources of credit. override internal opposition to authority and reforms.
Money doctors have had profound impacts on domes- New leaders have used the missions’ reports to blame
tic groups, power relations, governments and political their predecessors for mismanagement and have taken
developments within recipient countries. In many cases, advantage of the advising teams’ institutional reforms to
these advisers have promoted the concentration, urban- recast and restaff bureaucracies.
ization and institutionalization of Latin American Over the decades, the general content of the money
economies along paths previously traveled by the doctors’ recommendations has repeatedly endorsed eco-
United States. As a result, the republics have become nomic orthodoxy. Whether in the 1920s or the 1990s,
more deeply integrated into twentieth-century global foreign economic wizards have called for stable
capitalism; their economies more articulated and differ- exchange rates, restricted emissions of currency and
entiated as local elites respond to external opportunities, credit, corrections in the balance of payments, austerity
In many countries, the availability of international credit in government to balance the budget and dampen infla-
has given expanding urban sectors and governments tion and a general prescription of diet and discipline,
gains over traditional landed elites, partly to husband resources in order to repay external
Another function of foreign advisers has been to help debts. The very predictability of the pronouncements of
host governments justify, rationalize, organize and fund most of these savants has made them exceptionally
their capabilities for growth. Those governments have attractive to governments as trustworthy political instru-
become better able to collect revenues, control expendi- ments. And as long as Latin America covets financial
tures, manage the bureaucracy and obtain foreign loans, assistance from more affluent countries, money doctors
In the afterglow of a renowned money doctor, the state will probably continue to proctor those transactions,
is often better equipped to negotiate with foreign and especially at a time when the memory of the debt crisis
domestic capitalists. Normally, money doctors have of the 1980s still lingers just beneath the surface.
The Money Doctors
1. Riordan Roett, ed., The Mexican Peso Crisis: International
Perspectives (Boulder: Westview Press, 1996).
2. The best sources on foreign investments in Latin America are
provided by Carlos Marichal, A Century of Debt Crises in Latin
America: From Independence to the Great Depression, 1820-
1930 (Princeton: Princeton University Press, 1989), and Barbara
Stallings, Banker to the Third World: U.S. Portfolio Investment in
Latin America, 1900-1986 (Berkeley: University of California
Press, 1987).
3. Scott Nearing and Joseph Freeman, Dollar Diplomacy. A Study
in American Imperialism (New York: The Viking Press 1925).
4. Emily S. Rosenberg and Norman L. Rosenberg, “From
Colonialism to Professionalism: The Public-Private Dynamic in
U.S. Foreign Financial Advising, 1898-1929,” Journal of
American History 74 (June, 1987), 59-82.
5. Paul W. Drake, The Money Doctor in the Andes: The Kemmerer
Missions, 1923-1933 (Durham: Duke University Press, 1989). To
explore the 1930s debt debacle, see Rosemary Thorp, ed., Latin
America in the 1930s: The Role of the Periphery in World Crisis
(London: MacMillan 1984).
6. Patricio Silva, “Technocrats and Politics in Chile: From the
Chicago Boys to the CIEPLAN Monks,” Journal of Latin
American Studies, 23:2 (May, 1991), 385-410.
7. On the debt disaster of the 1980s, see Pedro-Pablo Kuczynski,
Latin American Debt (Baltimore:Johns Hopkins University Press,
1988); Rosemary Thorp and Laurence Whitehead, eds., Latin
American Debt and the Adjustment Crisis (Hampshire:
MacMillan/St. Anthony College, 1987); Robert Devlin, Debt and
Crisis in Latin America: The Supply Side of the Story (Princeton:
Princeton University Press, 1989); and Howard Handelman and
Werner Baer, eds., Paying the Costs ofAusterity in Latin
America (Boulder: Westview Press, 1989).
8. Jeffrey D. Sachs, Developing Country Debt and Economic
Performance (Chicago: University of Chicago Press, 1989).
Catherine M. Conaghan, “Reconsidering Jeffrey Sachs and the
Bolivian Economic Experiment,” in Drake, Money Doctors, 236-266.
9. Charles Lipson, Standing Guard: Protecting Foreign Capital in
the Nineteenth and Twentieth Centuries (Berkeley. University of
California Press, 1985).
10. Albert O. Hirschman, Journeys Toward Progress (Westport:
Greenwood Press, 1965). Lauchlin Currie, The Role of Economic
Advisers in Developing Countries (Westport: Greenwood Press,
1981).
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