The formation of the Peruvian Corporation, the result of the 1887 Grace contract, ended Peru's debacle with the massive debts it accrued in the 1860s and 1870s. Yet contrary to the expectations of Peruvian policymakers, this settlement did not allow Peru to restore its international credit or facilitate new borrowing on a large scale. As we saw in Chapter 1, the hiatus in lending was mainly driven by international factors, accompanied by a shift from British and French lenders to American creditors in the 1920s. Thus, despite some outstanding problems that may have hurt Peru's ability to borrow, including conflict with French creditors, Peru was not alone in its failure to secure significant loans in the years before the First World War.

In the immediate post–World War I period, however, Peru's economy showed strong growth, led by exports of raw materials. Just as Balta and Pierola had attempted to turn guano into railroads in the 1860s, President Augusto Leguía decided to use foreign lending to promote the development of the Peruvian infrastructure. Taking advantage of the banks' eagerness to lend, especially American banks, Peru went on a major borrowing spree in the 1920s, securing just over $100 million in loans. By 1931, the Great Depression had thrown a heavily indebted Peru into default. Negotiations to resolve these problems continued off and on for over 20 years, until a final settlement was reached in 1953.

We consider seven periods of negotiations during this epoch.