Kevin Drum repeats a claim that I’ve heard elsewhere:
“By 1989, the Soviet Union was so far in hock to western banks that they basically had Gorbachev by the balls. He couldn't afford a repeat of 1956 or 1968, and when that became clear the jig was up. Hungary went first, Berlin followed, and within a few months the Iron Curtain was on the ash heap of history. In the end, it was hard currency, not ICBMs, that brought down the empire.”
I don’t understand this claim. There are two premises behind it which do not make sense to me. The first is that Western creditors would care if the Soviet Union cracked down in eastern Europe. Why would they? The only reason that I can think of would be if they believed that a crackdown made it more likely that Warsaw Pact regimes would default on their debts. But why would a Soviet crackdown make default more likely?
In fact, there seems to be some circular reasoning involved regarding Soviet debt. The USSR had a reasonable debt burden until April 1989, when perestroika allowed Soviet enterprises to borrow in hard currency. As a result, debt exploded. But Moscow stopped taking Budapest’s calls in March! The timing is off.
In 1990, the collapse of Comecon led to a collapse of Soviet trade with eastern Europe, worsening the problem. Except ... if the tanks had rolled, then Comecon would not have collapsed. See here and here for contemporary discussions of the debt problem.
Nor do I buy the possibility that creditors would have moral qualms. They didn’t care about Georgia last year; would they really have cared about Hungary in 1989?
But let us grant that creditors might have been upset at a crackdown. Violence in Eastern Europe might have been unsettling, I can imagine that. Only that brings us to the second premise of the “bankers killed Communism” argument, which is that western creditors held some sort of special leverage over the Soviet Union.
Considering the frequency of sovereign default, and the willingness to restart lending afterwards, I have trouble understanding what exactly that leverage would be. Say the Warsaw Pact countries defaulted in 1990. Why would regimes capable of using tanks against their own people have found the consequences so unpalatable? Perhaps they would fear economic sanctions ... but that gets us to a version of an argument in which Western governments killed Communism by their implied economic threats, not one in which bankers did it.
Truth be told, I tend to think that neither creditors nor Western governments had all that much to do with the fall of the Wall. (I did not always believe the latter, as some readers of this blog can attest.) But I could easily be wrong. I have, after all, heard the “bankers did it” story elsewhere. Is there a more sophisticated version that addresses my concerns?
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