In 1931, Alfred Lansburgh, editor of Die Bank, realized that Germany’s reliance on foreign debt required it to shape its foreign policy accordingly. He wrote “[B]ut if credit is so integral to the operation of an economy as it is to the German, then it is the obvious duty of [government] policy to take consideration of this fact; and if the credit originates from abroad, then it is foreign policy which must make allowance for it.” Germany ignored this connection when it broke off reparations payments on June 5, 1931. This led foreigners to withdraw credits from Germany. This caused interest rates to rise in order to retain foreign capital, and it depressed business activity. This no doubt had numerous political ramifications.
The U.S. government is in a similar situation. As recently as 2000, the national debt held by foreigners was “only” $1 trillion. It is now $5 trillion. This credit is essential to the operation of the U.S. government and thus the U.S. economy, because the government is such a large portion of the American economy. The amount held by foreigners is about one-half of the official national debt. It means that the U.S. government must shape its foreign policy so as to retain its foreign sources of finance from Great Britain, China, Japan, and others. It means that the U.S. government has lost degrees of freedom in conducting foreign policy. Any misstep by which the Executive branch fails to make such accommodations risks a severe disturbance to U.S. government financing and the economy.
