Few Americans even remember that from the time of the American Revolution until the Civil War, a major source of artificial lighting was the whale oil lamp. No one needed a congressional commission to predict that the supply of whale oil could not forever keep pace with the demand of a growing nation.

The tragedy of our Civil War disrupted whale oil production, and its price shot up to $2.55 a gallon, almost double what it had been in 1859. Naturally, there were cries of profiteering and demands for Congress to "do something about it." The government, however, made no move to ration whale oil or to freeze its price, or to put a new tax on the "excess profits" of the whalers who were benefiting from the increase in prices. Instead, prices were permitted to rise. The result, then as now, was predictable. Consumers began to use less whale oil and the whalers invested more money in new ways to increase their productivity. Meanwhile, men with vision and capital began to develop kerosene, other petroleum substitutes, and innovations based on technology. The first practical generator for outdoor electric lighting was built in 1875, the forerunner of an entire new industry that would change

Examples abound, but the great OPEC oil crisis is a classic case in point. When OPEC first embargoed some oil shipments and dramatically lifted crude oil prices in 1974, the air was heavy with forebodings of doom. The schism between economic interdependence and political independence was thrown into stark relief. There was a horror movie for every taste, ranging from the specter of a worldwide blackout to the more modest suggestion that massive defaults would occur in loans to less developed countries. Front-page stories in respected newspapers suggested that massive defaults would in turn pull down international financial institutions. The world, we were told, was in for a rerun of the Great Depression of the 1930s. This doomsday story was told with great skill, and told over and over again. It sold a lot of newspapers and not a few books, but it overlooked the fact that individuals and nations can, and do, act and react to protect what they perceive to be their own self-interest. This is what makes the adjustment process work.

Actually, the energy crisis was made in Washington. A scarcity of energy in the United States was assured as early as

When the first OPEC oil crisis occurred in 1973, there was immense anxiety over both a shortage of domestic oil and a surplus of money flowing to the Middle East oil-producing states. What happened, of course, is that the OPEC countries deposited their cash surpluses in American and European banks, which re-lent them to borrowers in other countries, especially developing countries that had no other means of meeting their increased oil bills. Along with these funds, members of the international banking community became the recipients of much gratuitous advice, usually from the same people who were devising new ways to regulate the oil markets, urging us in the financial markets to follow their example. Had we done so, the world's financial markets would have become as chaotic as the world's oil markets, and it is entirely possible that everyone's worst fears might have been realized. Instead, we adhered to what we knew were traditional principles of sound banking, and the successful adjustments to the quadrupling of oil prices in 1973 and 1974 became one of the most dramatic episodes in economic history. There was no historical precedent for such a massive transfer of financial assets, and the majority of commentators, including most of the "experts," were pessimistic about the future of the world international monetary system.

The world, however, refused to follow the doomsday scenario. The annual OPEC surplus-which increased tenfold in a single year-began declining in 1975 and disappeared by 1978. After the initial jolt, the developing countries' economies were soon growing nearly as fast as before. The widely prophesied catastrophe failed to materialize, because the

There is nothing wrong, or even unusual, about that ratio. Countries import capital in order to speed their economic development. The capital inflow permits a higher level of domestic investment and more economic growth than would have occurred without it. It adds to the countries' capacity to repay at the same time that it increases their external debt. This is the regular situation of a successful private firm-and of a successful developing country. It is an accurate description of the United States of America from colonial days up to about 1915. It is a hallmark of progress.

The caveat is that the imported capital must be used to create new domestic economic activity sufficient to at least cover the carrying charge on the debt. What worried many analysts after the first oil shock was that even the most successful countries would now use so much of their borrowed money to pay for oil that they would not generate the economic growth needed to service the debt.

There was a period of two years-1974 and 1975-when these fears might have appeared justified. The current account deficit of the major LDCs increased nearly eighteen billion dollars. The oil price rise accounted for about a third of that deterioration; the other two-thirds was due mainly to the prolonged recession in the United States, Europe, and Japan, which cut prices and held down the volume of LDC exports.

But at the same time, the OPEC countries began spending their surpluses rapidly. During 1974-1978, imports of goods and services by the OPEC countries were roughly equal to

All this was exactly what an old-fashioned economist might have predicted. But somehow it came as a great surprise to a remarkable number of other people-especially to the people whose business in life is to regulate, and who still do not understand that the world has become one huge financial marketplace.

At the time of the first OPEC price increases, there was already in place a Eurocurrency market and a Eurobond market capable of absorbing both the short-term and the long term investments of the newly rich oil producers many times over.

As a result, the sixty-billion-dollar increase in the OPEC surpluses found itself quickly absorbed into a market estimated in gross terms at more than three hundred billion dollars at that time, where it caused hardly a ripple-to the astonishment of those who had not anticipated the growth of Euromarkets any more than they had anticipated the oil price increases.

Because projections of disaster were so pervasive at the time of the oil shock, even some of the greatest professionals in the business have expressed mild surprise at the speed and relative smoothness of the adjustment process. The former managing director of the International Monetary Fund, Johannes Witteveen, remarked that the problem of the oil crisis was overcome "rather better than we thought possible at the time."

One reason is that world trade continued to grow faster than world commodity output. The value of world exports by 1981 was almost two trillion dollars. The continued growth of world trade and international capital markets produced a raidly

While markets were straining to handle the unprecedented transfers of financial reserves, and doing it successfully, each nation reacted to the oil crisis in its own way. No one decision or policy was right for every nation stunned by the oil shock. Some oil-importing countries retrenched their economic development plans, to ride out the storm. Others, like Brazil, turned to global capital markets for financial support while permitting their internal policy adjustments to take effect, Not every nation had in place the requisite economic policy that could attract and hold private capital to bridge the gap. But those that took on the added burden of the oil crisis, yet pressed ahead with sound internal economic development plans, have not regretted it. While each nation reacted in its own way, each learned from others. This is so because every nation on this earth that is successful in advancing the welfare of its people borrows heavily on the experience, technology, and capital of others. What cannot be borrowed, of course, is the determination, the self-confidence, and the courage to manage a crisis.

One of the most reassuring omens for the future is the abundant self-confidence and determination demonstrated by the oil-dependent economies of the less developed countries in meeting that challenge of higher energy costs.

Despite predictions to the contrary, all the wealth of the world did not wind up in OPEC hands. The international reserves of the non-oil-producing LDCs did not decline but rather increased and the current account surplus of OPEC fell sharply in the aftermath of the first oil shock. The second OPEC price increase, in 1979, was followed by a similar reduction in the OPEC surplus, and by 1982 the current account surplus was near zero. This reality was very different from the strident forecasts of doom; in fact, just the opposite happened. The non-oil developing countries increased their export earnings from $82 billion in 1973 to $327 billion in 1981. In the course of this extraordinary explosion of exports, coupled

Instead, a rather different problem developed. The counterpart of oil import dependency is, of course, oil export dependency. As we struggled with our problems of import dependency, oil-exporting countries perceived a need to reduce their excessive dependence on oil exports. In 1977, oil accounted for about 97 percent of all merchandise export revenues for the Gulf states and approximately 87 percent for the other OPEC countries. Awareness of this heavy reliance led various OPEC countries to undertake costly industrial development programs while they still had enough oil in the ground and assured markets around the world.

As OPEC's annual spending on imported products, consultants, freight, contractors, and other services began to exceed its rate of increase in oil revenues, its so-called oil surplus shrank accordingly. What could not be usefully spent on imported goods and services was made available for international investment. By year-end 1981, about $450 billion had been reinvested directly or indirectly in the economies of other countries.

Large international commercial banks contributed to fostering this trend by extending credit across national border to private, quasi-private, and governmental borrowers. This credit took the form of short, medium, and long-term financing in the form of loans, letters of credit, guaranties, and securities underwriting and distribution, all subject, whatever the form, to the adjustment mechanisms should trouble arise.

The expansion in international commercial bank loans (excluding interbank loans) was about 20 percent a year, adjusted for inflation, between 1964 and 1978. In the same period, world trade grew 7.5 percent a year and world production 5.25 percent a year, also adjusted for inflation. Since 1978, all of these magnitudes have grown more slowly, but international

Since international lending is such an important part of the global economy, it might be interesting to examine some of the technical aspects of how credit and the adjustment mechanisms operate.

Usually a transaction starts with an institutional borrower in one country approaching one or more private commercial banks in another country for a loan. It may well happen that banks will organize several syndicates and offer prospective borrowers competing financing proposals. The borrower may be a private corporation, an agency of a government, or a government itself. The terms of the loan proposal are reviewed, negotiated, agreed upon, and put in writing. The documentation will state the purpose, currency, and principal amount of the loan; the interest payable; the repayment terms; the nature and extent of any guaranties or collateral; and the respective additional promises or restrictions to be observed by the borrower.

The loan agreement, depending on the laws involved and the complexity of the transaction, can run from one page to hundreds of pages. Whatever the length, the loan agreement almost invariably provides that if the borrower-whether private corporation, governmental agency, or government-fails to comply with one or more of its obligations, then a "default" occurs. That default has no significance in itself-it has either occurred or it has not occurred.

A default can come about in several ways-a failure to pay principal or interest when due, a failure to observe a covenant, or a failure in payment of indebtedness owed to other lenders. In any such event, the lending bank or banks have several

Whichever course the lenders follow, the debt remains outstanding. If the lending bank or banks elect to accelerate the debt and the debtor does not pay in full, they have available a number of remedies. If they hold deposits of the debtor, they can "set off" these deposits up to the amount of the debt -that is, subtract the amount owed from the borrower's bank balances on deposit. This was the case in the Iranian debt acceleration. If the banks hold guaranties or collateral for the debt, they can proceed against the guarantors or foreclose on the collateral. If they have neither deposits, guaranties, nor collateral, the banks can try to locate property belonging to the debtor and attempt to seize and sell it by appropriate legal process. The acceleration of debt by one lender, or group of lenders, will almost certainly lead to the acceleration by other lenders as they take similar steps to protect their position as creditors.

Whether the debtor is a private corporation, government agency, or government, the lending banks can use all available legal remedies both in and out of the debtor's domicile. However, since legal proceedings brought in local courts of the borrower's country may, for reasons of national interest, be ineffective (or at best slow), the banks usually include in the loan agreement provisions by which the borrower agrees to submit to legal action in courts outside the debtor's home country. These provisions often include waivers of the defense of sovereign immunity, consents to attachment, and agreements that a "neutral" body of law will apply to these external legal actions. Increasingly, as disciplines in the international lending arena tighten, banks are insisting on provisions of this type and government agencies and governments that seek

Private corporate borrowers and some incorporated government-agency borrowers that find themselves unable to pay their debts or to persuade their lenders to reschedule, on their own initiative or that of the lenders, may become subject to bankruptcy proceedings. These proceedings, usually conducted in the courts of the borrower's home country-and possibly subject to motives of national self-interest-may result in either a mandatory rescheduling of the debt or a liquidation of the borrower and a distribution of its assets to its creditors.

However, there is simply no mechanism for a national government to be thrown into bankruptcy proceedings. This is inherent in the nature of national governments, which are not liquidated even under the most adverse financial situations. They often find themselves in extremely weak financial situations, with all kinds of domestic and international repercussions. However, they do not cease to exist. They are not liquidated. Sooner or later they get their act together, often because better financial managers are brought into the government. At such times, the International Monetary Fund is very useful in suggesting creative fiscal and monetary policies for the government borrower and suggesting a debt rescheduling as part of these policies. The whole process is, however, voluntary.

On occasion, into this rather orderly world of the legalities of international bank lending there may enter unanticipated events which dramatically change the nature of the relationships between the lender banks and the borrowers. For example, governments, usually as a result of a revolution or other internal disturbance, enact domestic laws disavowing or making it illegal to pay external debts of the former government. Russia did this in 1917, Germany in 1934, and Cuba in 1960. Or governments having jurisdiction over some lender banks may use the credit and deposit relationship with a foreign government and its corporations to exert economic pressure. England did this with Rhodesia in 1962, and the United States

But usually after a period of time, which may be as short as a few years as in the case of Iran, or as long as several decades as in the case of Germany and Russia, intergovernmental or private agreements are reached under which debt service is resumed on an adjusted basis or the debt is settled at a reduced amount. The result of a governmental borrower's refusal to pay or settle its debts is exclusion from the international credit system, an option borrowers can ill afford over the long haul. An illustration of a typical trade transaction in today's interdependent world shows why this is so. Natural gas owned by Indonesia's oil agency, Pertamina, flows out of a well discovered by Royal Dutch Shell into a liquefaction plant designed by French engineers and built by a Korean construction company. The liquefied gas is loaded onto U.S.flag tankers, built in U.S. yards after a Norwegian design. The ships shuttle to Japan and deliver the liquid gas to a Japanese public utility, which uses it to produce electricity that powers an electronics factory making television sets that are shipped aboard a Hong Kong-owned containership to California for sale to American farmers in Louisiana who grow rice that is sold to Indonesia and shipped there aboard Greek-flag bulk carriers. All of the various facilities, ships, products, and services involved in the complex series of events are financed by U.S., European, and Japanese commercial banks, working in some cases with international and local governmental agencies. These facilities, ships, products, and services are insured and reinsured by U.S., European and Japanese insurance companies. Investors in these facilities, ships, products, and services are located throughout the world. This illustration is not only factual, it is typical of transactions that take place over and

Finally, it is worthwhile to understand how commercial banks and their regulators deal with the financial reporting of international loans, both those in good standing and those not so.

International commercial loans, as well as all other loans, are carried on the asset side of a bank's balance sheet at 100 percent of principal amount, and the interest on them is accrued periodically on the bank's income statement, irrespective of the dates of actual interest payment so long as the loans are not in default on payment of principal or interest.

If an international commercial (or, for that matter, any other) borrower fails to make an interest payment on schedule, the loan is put on a so-called nonaccrual or nonperforming basis for income reporting purposes. Unless there is specific reason to believe that the principal of the loan will not ultimately be paid in full, the loan (even if on a nonaccrual basis) will continue to be carried at 100 percent of principal amount as an asset on the balance sheet.

When a loan, international or otherwise, fails to meet both interest and principal payments, the lender bank, and its regulators and auditors, face a judgment call as to whether the loan should properly be regarded as an asset at full principal amount. If they feel the loan is unlikely to be paid in full, they will "reserve against" it on the balance sheet. This is done by charging (reducing) the bank's bad-debt reserve by an amount equal to the doubtful portion of the loan and at the same time reducing the assets on the bank's balance-sheet doubtful portion on the loan-or "writing off" the doubtful amount. As rapidly as possible, the bad-debt reserve is replenished by making charges against the bank's profits. This would affect the bank's stockholders, but not impact the financial system since the bad-debt reserves are ample for almost any contingency.

If repayment of the entire amount of the loan is in doubt, the process is the same, except that the loan is totally removed

However, the legal treatment of a loan that has been "reserved against" or "written off" is fundamentally different from its accounting treatment.

For accounting purposes, the loan's "nonaccrual," "reserved against," or "written off" status is reported to regulators, depositors, and investors of the bank at a conservative but fair evaluation of the troubled loan.

For legal purposes, however, the loan continues to exist as a debt of the borrower-without regard to how the bank chooses to treat it in its accounting. The bank is free to continue efforts to reschedule or collect the loan in any way it can for as long as it wishes. Historically, at least 40 percent of such loans is ultimately collected. Only when the bank judges the expenses involved in collecting a loan to exceed the potential recovery is a loan completely abandoned. Even then, if the abandoned loan is to a government, the memory of the defaulting borrower's behavior and costs to the bank remain.

Not surprisingly, it is this last intangible factor-the memory of past poor credit behavior-that is probably the best deterrent against the temptation of governments, which cannot go bankrupt, to default or repudiate their debts. Access to international credit markets is essential to countries so that their citizens can obtain the wealth of goods, materials, services, and technology that is available in the world. It is impossible, as a result of the telecommunications revolution, to keep people from knowing what is produced and available in other parts of the world. If governments, through their own mismanagement, ruin their international creditworthiness and thus their access to world markets, it is not unlikely that their citizens will someday choose to select governments with better management capability.

These realities are well known to international borrowers -be they governments, government agencies, or private corporations- and

The central lesson to be learned by looking back at the early days of the oil crisis from the perspective of a dozen years -and at the other problems that have arisen since then-is that it proves once again that tomorrow will not simply be today twenty-four hours older. Tomorrow will be the product of a vast number of pragmatic decisions, random events, and minor moves, all of which, when taken together, build or destroy our global economy.

The lesson is almost as old as history: Any country that continues to make the difficult decisions needed to control inflation, and that opens its economy to global markets and lets the market price mechanism function, will continue to find willing partners among the world's major commercial banks, and the banks will find them worthy credit risks.

To say that there are reasonable grounds for expecting the debt burden of the developing countries to remain manageable is not to say that we have nothing to think about. Private lenders are unlikely to forget the Middle East war and the Iranian revolution and the political turmoil in Central America. They may be expected to build those memories into their credit policies and the interest rates they charge. That is known as evaluating risk, and it is what bankers get paid for. Events of the past dozen years would seem to suggest that we have been doing our job reasonably well. Remember, it was not the highly publicized LDCs that caused the huge loan write-offs at the banks in the 1970s; it was the made-in-America real estate investment trusts. While the pundits were predicting horrendous defaults in loans to LDCs, the American banking system instead was writing off billions of dollars of bad loans on good old American real estate. Somehow, that never made as good copy as the losses that did not occur. From the first round of OPEC price increases until today, U.S. banks

Discussing these matters early in 1980, the chairman of the board of governors of the Federal Reserve System, Paul Volcker, concluded his remarks with an observation with which I agree:

I cannot leave this subject without commenting on the enormous problems of economic management in the United States, and in every oil-consuming country....Even without the difficulties caused by recent pricing and production decisions, we would have needed to accommodate a vast change in the way we use and produce energy .... The recycling process has worked smoothly to date-the real process of adjustment less so. Let us not delude ourselves: financial flows cannot fill indefinitely a gap that must be covered by conservation, production, and new forms of energy. Our past success in recycling-and the role it can play today-must not lead us to stretch that process to the breaking point.

What Mr. Volcker was saying, if I understand him correctly, is that you cannot expect your banker to solve all your problems. Nor, I might add, can they be solved by getting angry at Arabs or at Texas oil companies. They will only be solved when the industrialized world finally faces up to the fact that the golden age of cheap oil is gone forever.

What really happened in 1973 and 1974 is that we finally got a long-overdue bill. We paid it, and now we are engaged in a process of learning to live within our means. It is not the end of the world. In fact, the old copybook maxim used to tell us that this was the first prerequisite for getting rich. It still works.

As it turned out, what we saw was that the world money markets now have the necessary flexibility and strength to sustain almost any economic adjustment process. Furthermore, the world's total financial structure is now a unified

There could scarcely be a sharper contrast with what happened then, and since, in the world's oil markets. In the United States, the crude oil entitlements program enacted in 1973, for instance, was supposed to distribute the benefits of low-cost domestic oil to all refiners. One of the first results was to subsidize the importation of foreign oil and remove most of the incentive for oil refiners to search for new domestic sources, because they believed that, in the end, the government would effectively make crude oil available to all refiners at roughly the same price.

Every year some 2,500 ships discharge crude oil into more than 600 U.S. refineries and import terminals. Just moving the crude around to get the right grades to the right locations requires dozens of trades. If the government continues down the path of substituting central planning in Washington for the interplay of forces in the market, the lines in front of the gas stations we witnessed in 1973 and again in 1979 may be remembered as part of the good old days. The gas lines, you may recall, were largely the result of the Department of Energy's action in mandating the refining of too much heating oil instead of gasoline, then allocating the available gasoline to politically influential groups such as farmers, and finally allocating what was left in such a way that ski resorts were awash with gasoline in June while nobody along the coasts could drive to the beach.

This is the same wisdom that many would like to see brought to the world's financial markets. So far, however, the world capital markets have managed systematically to readjust themselves and preserve the world's economic balance without waiting for governments to tell them how to do it. This is extremely fortunate, because what can be done by a free market is almost always far more than the planners and regulators believe possible.

The oil crisis was not the first, nor will it be the last, dislocation in our global economy that produces headlines. Indeed, in quick order during the following years, flurries of concern surfaced over the external debt of Zaire, Nicaragua, Costa Rica, and Turkey, rising to higher levels of anxiety over Iran, then Poland, and most recently Argentina, Brazil, and other South American countries.

All of these events immediately triggered a series of actions which put the infinitely complex adjustment process in motion. Equilibrium is restored in the system in ways that planners can never foresee. It is difficult to conceive of a computer program which could even record, let alone factor in, the infinite variety of actions and reactions which will be taken by individuals and nations in their own self-interest. But, during the early days of those crises, anyone who did not join in the cry to "do something" was perceived as either a person who did not understand the problem or a Pollyanna. Being a Pollyanna and a successful banker are mutually exclusive. Sound banking is based on assembling as many reliable facts as possible. Instead of joining the chorus of despair, we examine and reexamine our international lending criteria. We watch and study how the markets are adjusting. Other responsible international bankers do the same. We stay in the business and together with the international monetary agencies supply funds to buy time for the adjustment process to work.

We have long since passed the fork in the road of history where the world can return to economic nationalism and isolationism. We know with great clarity that a major event anywhere in the world will impact us all. Our fates are inextricably intertwined and the beggar-thy-neighbor policy of times past has lost whatever doubtful utility it may once have had.

The reality of economic interdependence in no way lessens the importance of independent initiative by men and by nations. Each nation has to evolve its own system that is right for it in bettering the human condition of its own people. We have on this planet every kind of political system, from a tribal

In between the Mayflower Compact of 1620 and today, we have experienced in the United States everything from a destructive civil war, which brought with it martial law, to decades during which whole areas of our western frontier had no law at all. The oceans, which helped to protect our isolation, have long ceased to be barriers. In short, the luxury of economic independence is substantially gone from the world, and all kinds of political and economic systems are caught in the same web of interdependence.

What, then, is the lesson of the last dozen years? Certainly we cannot assume that tomorrow will be any more safe and uneventful than yesterday. On the contrary, all history validates the prophecy in the Scriptures that "in the world ye shall have tribulations." The shape of coming events is unknown, and we have all learned that the balance of the world's economy can be suddenly and severely disrupted. We have also come to realize that even under crisis conditions the global adjustment process works. It is what saved us in the past and gives us confidence in the future.