Last week Treasury Secretary Nicholas Brady proposed a debt-restructuring plan that acknowledged that banks can not expect to receive back all the money they loaned to Third World countries during the late 1970s and early 1980s.

Under Brady's new plan, banks would accept a reduction in the debt owed them by the countries, allowing institutions such as the International Monetary Fund (IMF) and World Bank to loan money to the countries. Until now, creditors have been unwilling to loan money to countries that have deficits. The influx of money that the debtor-nations will receive, increased by the reduction of debt and the IMF money, will help their economies grow, experts say.

Most economic experts say the crisis began in 1982 when Mexico announced that it could not pay the interest on its external and private debt. The problem had its roots in a combination of factors, including banks rashly loaning money to Third World nations, the countries using the money for unneeded and bloated projects--usually called "white elephants"--the quick reduction of capital flowing to these nations, and most of all a crash in the prices of products the countries export. For example, the 1985 crash in tin prices helped crush Bolivia's economy, and the fall in petroleum prices restricted the flow of money into Mexico and Venezuela.

"Both lenders and borrowers expected trends to continue, but expectations were violated when the world turned out to be sharply different than the borrowers and lenders expected," says Richard N. Cooper, Professor for International Economics.

Cooper points to the recession in the United States in 1982, which he calls "the worst recession since the Great Depression," as an example of the world economic situation going sour.

The Brady Proposal comes in the wake of almost 10 years of a staunch U.S. policy towards debtor nations: that is, that all the money loaned must be paid back in full eventually. This was one of the parts of Secretary of State James A. Baker III's debt plan in 1985.

To adhere to the debt policy held by both the United States and the Western commercial banks, such as Citibank, debtor nations had to impose harsh austerity measures to garner capital. Austerity measures entail raising taxes and reducing expenditures, very often by slashing the budgets of state-owned industries, lowering the subsidies of government provided products and raising the prices of bus fares and other state-run services.

The problems escalate when nations print more money in order to pay back their debts, causing hyper-inflation. In Bolivia inflation grew to 24,000 percent. The government had to give its employees raises at a rate approaching that of inflation. They only took in taxes at properties assessed at the previous year's rate. For this reason, countries found themselves in even worse financial straits, with rapidly burgeoning deficits.

Last month Venezuela experienced three days of strife and rioting, when the government raised the price of gasoline by lowering the subsidy on the fossil fuel and increased urban bus fares by 30 percent. The chaotic days left 300 people dead, 2000 injured, and another 2000 in jail.

Professor Jeffrey D. Sachs '76 has blamed Western banks such as Citicorp for greedily refusing to allow countries to restructure their debts. He even alleges that one of the causes of the U.S.'s staunch debt policy under Baker was the former Treasury Secretary's vested interest in Chemical Bank.

"Baker was managing a grave crisis at times with a financial stake which he shouldn't have had," says Sachs.

Sachs also criticizes the United States for its debt policies preceding the Brady Proposal.

"I have believed ever since I set foot in Bolivia that the management of the debt crisis by the United States has been dismal, unfair, completely one-sided, reckless from a foreign policy perspective, so I've been writing and speaking and lecturing and traveling to make that point."

Sachs says he takes pride in the fact that the Brady Proposal has much in common with the plans he worked so hard to implement.