In the early 20th century, Venezuelan dictator Cipriano Castro borrowed millions of dollars from Great Britain and Germany, but refused to repay the debt. Not surprisingly, these foreign creditors demanded repayment, but how did they make their point clear? In a move reminiscent of Vito Corleone in 1920s New York, they sent their muscle to Venezuela to press their outstanding financial claims. When their warships arrived on the Caribbean coast of Venezuela in December 1901, they delivered an ultimatum to Castro: pay or risk immediate military action. Castro balked, and Britain and Germany blockaded Venezuela's ports, seized its ships, and shelled its harbors for several weeks. In the wake of the war, the United States brokered a settlement, known as the Washington Protocol of 1903, where the creditor nations agreed to lift their blockades in exchange for Venezuelan debt repayment.

The scholarly verdict is out on the success of such gunboat diplomacy, but fortunately, creditor warships no longer appear on debtors' shores. Creditors tend to engage in more civilized tactics now, whether through board room negotiations or trading-floor computers. Nonetheless, in today's more deeply financially integrated world, creditors' choices have an even greater influence on the livelihood of debtor nations.

In Chapter 2, I outlined the foundations of the international component of political austerity theory, arguing that a country's debt structure has important implications for creditor-debtor relations, and ultimately a debtor nation's economic choices.