PART I
The next three chapters offer an introduction to the globalization of public credit, namely, the regular use of external finance for the purpose of government funding. Chapter 3 characterizes the first global financial market, 1816–1914, by documenting the expansion of capital exports and the secular decline of interest rates in sovereign lending. For the first time ever, countries in the core and the periphery, rich or poor, sovereign or dependent, had access to virtually unlimited cheap capital. In chapter 4, I investigate country-specific policy and institutions that contributed to the secular decline of the spread. After confirming the leverage of existing explanations with a multivariate regression analysis, I advance the extreme conditionality hypothesis to explain why countries with weak fundamentals and a history of default secured external capital at relatively favorable rates. After discussing enforceability issues, I show statistical evidence that pledges in sovereign bonds decreased interest rates of borrowed capital. The consequences of pledging and financial control for state building are discussed in chapter 5. Secondary sources and a case study of the Ottoman Public Debt Administration show that foreign management of state monopolies and tax administration did not improve state capacity. Last, I elaborate on the international and domestic causes leading to the scramble for concessions in late-Qing China, including the foreclosure of the most efficient tax administration in the country.
In sum, part I shows evidence of the globalization of public credit, the effect of extreme conditionality on the spread, and the fiscal consequences of foreign financial control. Building on this evidence, part II includes an assessment of the consequences of early access to cheap capital for short- and long-term state building and political reform.
3
Any government which claimed sovereignty over a bit of the earth’s surface and a fraction of its inhabitants could find a financial agent in London and purchasers of her bonds.
—JENKS (1927, P. 282)
A primary argument of this book is that easy access to external finance at early stages of development can distort rulers’ incentives to undertake state-strengthening efforts, causing persistent fiscal weakness. In this chapter, I review key stages in the formation of the first global market of public credit and examine a key assumption in the argument: that new and old-but-traditionally-isolated states accessed European capital at relatively favorable terms. To support this claim, I put together an original dataset about the conditions of external finance in the Bond Era, expanding time coverage and country samples and almost tripling the number of sovereign loans recorded in existing datasets. In this chapter, I show aggregate characteristics of the “lending frenzy,”1 and in chapter 4 I discuss country-specific pull factors. The perverse effects of easy money for state building are examined starting in chapter 5.
3.1 The First Globalization of Capital
The modern state, which is the most sophisticated organization ever put in place, provides security, regulates markets, enforces contracts, and redistributes income; it participates in space programs, leads cancer research, and secures mass public education among endless other contributions. This massive intervention of the state in the economy and society is relatively recent: before World War I, the scope of the state was significantly narrower, as were the types of expenses funded by the public.
One may safely say that before 1914, military expenses represented the lion’s share of government spending. Rulers (monarchs, princes, sultans, chiefs) resorted to a plethora of options to finance war from tributes to expropriation to the slave trade. War expenses, however, were often larger than the immediate revenue possibilities of the state. Commencing in the late medieval period (1250–1500), commercial city-states in Europe established the foundations of modern public credit, allowing rulers to accrue future taxes that could be paid gradually once war had come to an end. This was a major advancement in war policy inasmuch as it allowed city-states to outspend larger military rivals. Initially, territorial states relied on foreign commercial cities to issue public credit. Conditions were far from favorable, and monarchs paid high premiums for short-term loans.2
Beginning in the sixteenth century and compelled by the rising costs of military technology, territorial states switched focus to domestic lenders, often merchants and tax farmers and sometimes landed aristocracy as well.3 Although external finance never disappeared,4 it became marginal until the eighteenth century, when the British Crown floated new loans in Amsterdam to fund growing war expenses. This was, however, a somewhat limited international credit market, both in magnitude and geographic scope. The heyday of Dutch foreign lending was confined to the last decades of the eighteenth century and involved eight countries (compared to 90+ sovereign and colonial borrowers in nineteenth-century London). Dutch lending was also barely diversified: Roughly three out of four loans floated in Amsterdam went to the British Crown, and average maturities were 12 years long, indicating high aversion to international lending.5 Dutch capital dried up under French occupation in 1795, and England, which had enhanced its capacity to mobilize revenue since the Nine Years’ War (1689–1698),6 became the new and only financial capital of Europe and the world.
FIGURE 3.1. Net Capital Exports as Percentage of British GDP, 1816–1913. This figure shows the current account balance for Britain during the Bond Era. Sources: Imlah (1958) for net current account (nominal); Broadberry et al. (2012) for nominal GDP between 1816 and 1829; and Mitchell (2005) for nominal GDP between 1830 and 1913.
3.1.1 LONDON, THE WORLD’S BANKER
Having financed successive coalitions against Napoleon and improved its capacity to push capital overseas, London seized momentum to funnel surplus capital derived from the Industrial Revolution to the rest of the world.7 The openness of the British savings market was incremental and not exempt from boom-and-bust cycles caused by investment euphoria followed by a sudden collapse of lending. The setbacks did not stop the frenzy. In a matter of years, trading resumed and gave way to new and more expansive cycles.
Figure 3.1 plots the current account balance for Britain between 1816 and 1913. Between 1820 and 1850, approximately 1.5 percent of British GDP was invested overseas. External capital flows increased to 3 percent in the 1850s and 1860s and thereafter averaged 4.5 percent, peaking at 9 percent on the verge of WWI.8 These figures stand in clear contrast to 1990–2010, when the UK remained a net receiver of foreign capital.9
TABLE 3.1. External Capital Stock by Country in the Long Nineteenth Century
|
1825 |
1855 |
1870 |
1890 |
1914 |
|
|
Great Britain |
0.5 |
0.7 |
4.9 |
12.1 |
19.5 |
|
France |
0.1 |
— |
2.5 |
5.2 |
8.6 |
|
Germany |
— |
— |
— |
4.8 |
6.7 |
|
Netherlands |
0.3 |
0.2 |
0.3 |
1.1 |
1.2 |
|
United States |
0.0 |
0.0 |
0.0 |
0.5 |
2.5 |
|
Canada |
— |
— |
— |
0.1 |
0.2 |
|
All |
0.9 |
0.9 |
7.7 |
23.8 |
38.7 |
|
UK/All |
0.56 |
0.78 |
0.64 |
0.51 |
0.50 |
|
World GDP |
— |
— |
111 |
128 |
221 |
Source: Table 2.1 in Obstfeld and Taylor (2004).
Note: Values represent gross foreign assets in current USD billion.
Back in the nineteenth century, London was the undisputed financial capital of the world. Despite the existence of other financial centers, the vast majority of foreign securities were channeled through the London Stock Exchange (LSE).10 “Whoever the capitalists engaged in government loan business and from whatever source their initial capital was derived, they did not long delay in establishing financial residence in London.”11
Table 3.1 reports the gross value of foreign assets for major capital exporters in the nineteenth century. At its peak, the British share of total global foreign investment was almost 80 percent, far exceeding the combined capital exports of its nearest competitors.12 In order to appreciate the high leverage of British finance in the world, these figures should be compared to the United States’ share of global assets in 2000 at 25 percent or with its maximum share of 50 percent circa 1960. That Britain was known as the “world’s banker” in the nineteenth century should come as no surprise.
FIGURE 3.2. Government Loans by Region from 1865 to 1914. These data show the regional breakdown of total government loans issued in Britain as they appear in Stone (1992).
Paris and Berlin joined the money market decisively in the last decades of the nineteenth century.13 Whereas British financiers invested in both government securities and private projects, French and German investors specialized in sovereign loans to Southern and Eastern Europe plus North Africa.14 In total, France and Germany invested 2.5 and 1 percent, respectively, of their GDP overseas, still a remarkable figure.15
Quantitatively, capital flows from the three European financial capitals to the rest of the world were unprecedented and remained unseen until after the end of the Cold War.16 On average, between 1816 and 1913 4 percent of world GDP crossed borders in the form of capital investment, twice the levels for 1945–1995.17 And relative to world GDP, the volume of cross-border loans was still three times smaller in 1980 than in 1880, a hundred years earlier.18
In terms of geographic specialization, British capital diversified the most. Data collected by Irving Stone and reproduced in figure 3.2 show that British capital in the form of government loans reached all continents. These loans were issued by sovereign states and colonial subjects, British or not. Relative to other financial capitals, British investment dominated French and German capital in North and South America, Asia, and North and South Africa; that is, everywhere except Southern and Eastern Europe.19 By 1914, 64 percent of total foreign investments in North America emanated from Britain (Germany was the runner-up with 10.4 percent); 42 percent in Latin America (US, 18.5 percent), 96 percent in Oceania (France, 4 percent), 50 percent in Asia (France, 17.6 percent), and 60.5 percent in Africa (France, 22.2 percent).20
Lending was a private business despite growing diplomatic interference in capital markets. Government-to-government loans were rare, and multilateral official lending nonexistent. Until the 1860s, much of the lending business was in the hands of a group of selected underwriters, key among them the Rothschilds and the Barings.21 Large underwriters negotiated loans on behalf of foreign governments, and tender was bought by a relatively small group of investors, only in the hundreds, mostly based in London.22 Sovereign loans were then sold to atomized, inexperienced investors in secondary markets. The small investors numbered in the tens of thousands and occasionally in the millions (e.g., Russia’s loans in the early twentieth century were owned by 1.6 million Frenchmen).23 The acceleration of foreign lending in the second half of the nineteenth century offered new opportunities to lesser underwriters to broker sovereign loans.24 Some of them specialized in governments with weaker fundamentals and shaky debt records, a risky business that major houses preferred to avoid.25
3.1.2 WHO BORROWED?
As the opening quotation in this chapter suggests, all nations were welcome to float loans in the London Stock Exchange (LSE), sovereign or not. France and Germany, the main rivals to British hegemony, would market sovereign bonds in London too, normally as part of larger issues floated simultaneously in other capitals. However, the vast majority of loans went to new and old-but-traditionally-isolated sovereign states in North and South America, Southern and Eastern Europe, East and Southeast Asia, the Middle East, and Northern and Southern Africa. British capital also flowed into Spanish, Dutch, Turkish, French, and German colonies, but only occasionally.
British colonies floated loans in the LSE on a regular basis, and they did so on favorable terms because of the so-called empire effect. Accominotti, Flandreau, and Rezzik argue that colonies were treated as de facto British “provinces,” implying that the metropole would do everything in its capacity to avoid default, hence the perceived lower risk of this venture.26 Ferguson and Schularick concur, while claiming that colonies were also more likely to implement Gladstonian economic policy—namely, favoring sound money, balanced budgets, and openness to trade.27 Consistently, most colonies were considered a fiscal drain and were subjected to tight fiscal supervision.28
By the late 1870s, most of the self-governing colonies or “dominions” (all territories in modern-day Australia, Canada, New Zealand, and South Africa) were able to borrow on the open market without the direct support of the British government. From 1881 onward, the dominions were declared fiscally autonomous and deprived of imperial guarantees except for emergencies. The larger group of colonies, including the Crown colonies, protectorates, and India, were deemed “dependent,” that is, without real autonomy to issue debt because they required the explicit approval of the British government.
All colonial stock was originally managed by the Crown agents. Based in London, the agents acted as plenipotentiary finance ministers—both bankers and national debt commissioners of the colony.29 They decided when and how much debt to issue and how to pay it back. They worked with local governments but were not accountable to them.30
Colonies were generally poor. To overcome investors’ reluctance to underwrite them, colonial governors may have been tempted to float loans at excessively low prices, leading to fiscal imbalances and ultimately to default. The Crown agents, drawing from experience and reputation, were expected to overcome low demand for colonial stock and avoid moral hazard due to temptation by colonial governors, hence their key role in colonial investment.31
From 1881 onward, the Crown agents represented dependent colonies only. The colonial authority “established the highest permissible rate of interest, fixed the amount desired, and set what other conditions it saw fit. The secretary of state then authorized the Crown agents to see the loan on the best terms possible.”32 On behalf of the colony, the agents shopped for underwriters in the LSE and hired individuals they trusted. The agents were considered truthful representatives of the colonies.33 In fact, the terms that agents were able to negotiate on behalf of colonies were so attractive that self-governing colonies requested to work with them after 1881. The British treasury objected—“fiscal autonomy came with responsibility.”
After the Colonial Loans Act of 1899 and the Colonial Stock Act of 1900, the dependent colonies gained the same trustee status as the benchmark British government perpetual bond, the consol, hence virtually free access to funds at highly subsidized rates.34 Loans floated by dependent colonies almost tripled within 10 years, from £7.4 million from 1890 to 1899 to £18.4 million from 1900 to 1909.35
In the French Empire, colonial stock was closely monitored by the Ministry of Finance, and new issues required the approval of the French Parliament. Representation of colonial interest, however, was decentralized to currency boards and commercial banks, which also served as underwriters of colonial issues.36 Because colonial loans were tightly monitored, French colonies borrowed extensively and at favorable terms, generally under 4 percent.37
The relationship between international finance and imperialism intensified in the last decades of the nineteenth century. But the globalization of credit was not a by-product of colonial lending. Capital flows to colonies represented a small proportion of total international lending.38 Based on my calculations, British capital exports within the British Empire between 1816 and 1913 (measured as issue amount spent on sovereign debt) were three times smaller than capital exports out of the empire.39 In France, investment in colonial securities represented 4.3 percent of all French foreign investments from 1852 to 1881, and 9 percent in 1913.40
Most international lending in the Bond Era went to sovereign countries, newly created (e.g., Peru) or recently integrated into the Western sphere (e.g., Japan). As is made clear in chapter 4, the conditions accepted by (or imposed on) sovereign states grew favorable to European lenders over time as a result of imperial competition between the Great Powers, among other reasons.
The Bond Era came to a halt with WWI. The surge in demand for liquidity to finance the Great War caused a series of financial disturbances that permanently disrupted global financial markets.41 The concatenation of WWI with the Great Depression and World War II prevented international markets from stabilizing during those years. After 1945, however, the market specialized in private debt, specifically foreign direct investment (FDI). The euphoria over foreign bonds stopped in 1914, but its consequences are still felt.
3.1.3 BORROW FOR WHAT?
Public external finance in the Bond Era served three purposes: defense expenditure, debt conversion (i.e., refinancing old debt with new debt), and major infrastructure projects. External finance for military expenses and debt conversion falls within the category of “revenue finance” and in principle does not grow the local economy.42 The long-term consequences of revenue finance for state building are discussed in detail in part II of the book. Here I reflect upon the third leg of foreign loans, that is, capital borrowed for productive uses, or “developmental finance.”43 Foreign investment can help developing economies overcome barriers to economic growth caused by market failures and local capital shortage. In the nineteenth century, railroad investment was the paramount example of developmental finance, consuming a third of total British investment overseas and reaching more than 70 countries and colonies.44
At least on paper, railroads had it all. First, they connected production sites to trade ports, reduced transportation costs, and increased export competitiveness. Second, railroads created a demand for labor, coal, steel, and financial services. Third, by growing the economy, railroads stimulated consumption of imported goods and increased tariff receipts. At its best, steam locomotion was good for both the local economy and the treasury.45
Railroad construction exceeded the financial means of the periphery. Governments in the Global South actively sought to attract foreign capital to finance the construction of this revolutionary technology.46 Demand met supply. In Latin America, for instance, 75 percent open railway miles in 1900 were owned by foreign firms, 70 percent of them British.47
To attract capital, governments in the periphery were compelled to offer European investors a plethora of preferential provisions, including but not limited to profit guarantees, tariff exemptions for construction materials,48 ease in expropriating land,49 and network monopolies. These clauses increased the expected return of investment and served to attract foreign capital, but carried perverse effects too. For instance, profit guarantees, the meaning of which is self-explanatory, created serious stress on the local treasuries, requiring the issue of revenue loans to meet the conditions of developmental finance.50 Guarantees also weakened incentives of foreign concessionaires to construct and maintain high-quality railroads, accelerating their obsolescence.51 Network monopolies, another common clause in railroad loan contracts, sought to limit competition as a means to secure profits; however, they also prevented the design of a nationwide rational network, reinforcing economic and political fragmentation, which was bad for the economy and state building.52
The overall economic impact of railroad investment should be assessed in light of its forward and backward linkages. The former point to the contribution of railroads to lowering costs of transportation and commodity exports, whereas the latter focus on new industrial and financial sectors derived from railroad investment. Forward linkages are often sized by their social savings, namely, the resources that reductions in transportation costs free up relative to alternative means of transportation.53 In some peripheral countries, social savings were vast—equivalent to 26 percent of GDP in Argentina,54 18 percent in Brazil,55 38 percent in Mexico,56 and 16 percent in India.57 However, forward linkages were modest (or null) in many other economies, including Colombia,58 Peru,59 Uruguay,60 and Venezuela in Latin America,61 and Spain,62 China,63 and Turkey elsewhere.64
For state building, backward linkages may be even more important. In Britain, France, Germany, and the United States, railroad expansion had positive externalities on other sectors of the economy.65 Demand for finance, steel, engineering, and fuel was largely met locally, fostering innovation and growing the economy and the tax base. The railroad networks connected economic sectors and distant regions, enabling the central government to extend its reach beyond the capital, hence increasing the effective tax base.66
In the periphery, backward linkages were largely absent, even in countries experiencing record social savings.67 Railroads inputs (financial and material) were regularly imported from Europe and the US. This had a direct negative effect on the balance of payments. The rapid generation of foreign exchange generated by foreign capital inflows drove the overvaluation of the exchange rate, adding another hurdle to industrial development (i.e., backward linkages).68 Because tariff exemptions to intermediate inputs were necessary to attract foreign finance for railroad construction, the imports of highly valuable goods (locomotives, wagons, steel) did not yield tariff revenue, which was key to servicing foreign debt.69 Overall, large shares of railroad social savings were “leaked” overseas in the form of input imports and interest rates, and with them the capacity to diversify the economy and expand the tax base. In Mexico, for instance, roughly a quarter of total export earnings were lost to European financiers in the form of railroad operations, imports, and debt service.70
The absence of backward linkages led to an export-led growth model with little diversification, exposing developing nations to “commodity lotteries,” namely, abrupt changes in the international price of export staples, which regularly hurt economic and fiscal performance.71 Railroads, the quintessence of developmental finance, brought economic growth to the periphery but also underdevelopment.72
More generally, the perils of external finance for state building that I advance in this book are not limited to revenue finance (i.e., war and debt consolidation). Developmental loans in the periphery often generated perverse economic and political incentives, the consequences of which limited, or even canceled, their potential contribution to economic growth and state building.
3.2 Causes of Lending Frenzy
Sovereign lending (i.e., loans to foreign government) played a crucial role in the rise of global finance. Wars of independence in Latin America in the 1810s and 1820s set the stage for the century to come. Brazil, the province of Buenos Aires, Chile, Colombia, Mexico, Peru, and smaller countries in Central America floated loans in London to equip their armies and terminate colonial rule.73 Loans were easy to market. The first foreign security mania—to which loans to Austria, Denmark, Greece, Naples, Portugal, Prussia, and Spain contributed74—ended within years, when many of these countries interrupted debt service.75 Foreign government securities regained momentum in the mid-1830s and grew thereafter. In 1853, foreign government bonds accounted for 6 percent of all listed securities on the LSE; by 1913, they represented an unprecedented 21 percent.76
FIGURE 3.3. Share of Countries in Default from 1800 to 1913. Only independent nations at the time of default are considered. Source: Reinhart and Rogoff (2009).
The lending frenzy in the nineteenth century might be surprising in light of the global cycles of sovereign default that characterize that era. Figure 3.3 shows that the proportion of countries in default during any given year in the nineteenth century was over 20 percent, with peaks as high as 45 percent. How are both phenomena compatible? Some suggest irrational behavior on the lenders’ side; others, informational asymmetries between investors and borrowers; and still others, market-based explanations. Next, I briefly survey these explanations and then introduce an original dataset on long-term sovereign loan rates with two goals in mind: the new data documents the lending euphoria in an unprecedented way (based on the sample size and time coverage), and it allows me to test the notion of extreme conditionality, which sheds light on the apparent paradox in the continuation of sovereign lending despite massive default episodes.
3.2.1 IRRATIONAL AND FRAUDULENT BEHAVIOR
Charles Kindleberger is a leading proponent of irrational behavior as an explanation for the first financial globalization. Speculation and manias “close to mass hysteria and insanity” distorted interest rates, driving a wedge between prices and economic fundamentals.77 Some accounts are indeed compatible with the notion of irrational lending. For instance, Feis refers to reckless loans in the 1860s to the Khedive, as the Egyptian government was known at the time. This country lacked an annual budget, an official register, and an ordered tax apparatus; however, the Khedive quintupled external debt between 1863 and 1879.
The ordinary [European] investor did not realize the financial state of the country. Banks were willing to take the risk of loss for larger return and special pledges.… When one banking group retired, another entered the field.78
This quotation leads to a related cause of the lending frenzy: blatant fraud. Floating a foreign bond involved three players: borrowers (countries), private investors, and issue houses or underwriters. The latter played a key role in the Bond Era, negotiating the bond covenant on behalf of borrowers, circulating the prospectus that stipulated the terms of the loan, advancing funds to the borrower, and selling the bonds to individual private investors.79 Borrowers paid underwriters large commissions for their service; indeed, Jenks came to the conclusion that “the real profits of the loan business went to the[se] contractors.”80
Large underwriters were careful and cultivated a reputation for marketing safe products, but second-tier underwriters and promoters took advantage of information asymmetries to trade lemons.81 The “art of puffing”—the promotion of bubbles—was a general practice in the LSE well into the 1870s.82 Taking advantage of the unscrupulous economic press (more below), promoters engineered loans to make them look like safe bets. Flandreau offers various textbook examples of “white-collar criminality” occurring in the LSE—ponzi schemes benefiting promoters and vulture investors specializing in sovereign debt restructuring, often the same individuals.83
In the early 1870s, a parliamentary investigation took place in Westminster to address the blatant fraud and disastrous outcomes of sovereign loans to smaller Central American countries.84 This report revealed the unscrupulous practices that issue houses pursued to market their products; however, foreign rulers might have seen this as an opportunity, too:
So governments quite unacquainted with the mysteries of finance, like Morocco in 1860, learned from roving agents how easy it was to arrange loans in London or in Paris. Politicians desirous of looting their country’s treasury decently and without ostentation discovered how readily the matter could be arranged by way of a floating debt.85
In the same vein, Rippy concludes that British bankers and more than a few Latin American governments alike were “scandalously dishonest.”86 They all profited “at the expense of [small] British investors.” Fraud was an extended problem because it benefited foreign investors and irresponsible local rulers, as discussed in chapter 2.
3.2.2 INFORMATION ASYMMETRIES
Fraud was possible because investors had limited access to real-time unbiased information.87 The submarine cable across the English Channel, that is, between the two world financial capitals, arrived only in 1851, thirty years into the Bond Era. The telegraph reached key overseas markets only in the late nineteenth century: Buenos Aires in 1878, Tokyo in 1900. In the meantime, investors based their decisions on the economic press published in London; however, this press did not establish full-time correspondents overseas until late in the game.88 For example, the Times, one of the most respected publications of the day, did not deploy a permanent correspondent in Argentina until the 1890s. In the meantime, the financial press relied for information on local investors who often had conflicts of interest.89
Information issues did not end there. Flandreau, Nye, and Taylor write of the structural capture of journalism by promoters: During the railway mania in the 1840s, for instance, specialized journals distorted information in return for advertising revenues.90 In 1872, the 28-year editor of the Times faced charges of fallibility and corruption originating in blatant conflict of interest. He happened to own shares of products his journal advertised.91 These scandals undermined the credibility of the financial press as a whole.92
Biased information was not only published regularly in the specialized press, but it was also present in the prospectuses circulated by issue houses on behalf of borrowers. Some prospectuses were blatant fabrications, chief among them the bond scheme of Poyais, a fictitious country in Central America that happened to quote two bonds in London in the 1820s secured upon all the revenues of the nonexistent government of Poyais. Other prospectuses were misleading or contained falsehoods about the record of debt service of countries in the past. Issue houses failed to disclose information in their possession that would have warned investors that the borrowing government was highly unstable and doomed to default.93 Winkler finds various examples of this when examining the fine print of prospectuses circulated among American investors during the first decades of the twentieth century.94 In the 1920s, for instance, prospectuses of Chilean national debt claimed falsely and repeatedly that “Chile had been borrowing for 95 years and has never defaulted on its loans.” In reality, Chile had defaulted twice in the nineteenth century—first in the 1820s and later in the late 1870s—accumulating a total of 26 years of exclusion. Regardless, Chilean loans were successfully quoted in 1921 and 1922 only to be defaulted eight years later.
3.2.3 SEARCH FOR YIELD
Some authors argue that the lending euphoria can be explained by market forces. On one hand, in the absence of local credit markets, emerging markets required strong inflows of foreign capital to finance basic government operation.95 On the other hand, investment overseas resulted (and was perceived as) more profitable than domestic investment. The unusually high profits of railroads and other social overhead investments in the emerging primary product economy in the Americas (but also South Africa and Australasia) pushed British savings overseas.96 In a recent piece, Meyer, Reinhart, and Trebesch show that the real return of external sovereign bonds was 7.87 percent in 1815–1869 and 6.19 percent in 1870–1914, surpassed only in 1995–2016 at 9.12 percent.97 The highest return was for bonds of serial defaulters, which yielded 3.4 percent excess return relative to the British consol in 1815–1869 and 4.2 percent in 1870–1913.98
To secure profits, British lenders invested in export-related infrastructure and natural resource projects (e.g., railways and mines). These investments were meant to grow the local economy, tax receipts, and exports, hence foreign reserves with which to serve external debt.99 Investment in foreign government loans was risky business, however: Lindert and Morton compute the spread relative to the British consol for 10 emerging economies from 1850 to 1914 and find that nominal rates were clearly larger than home government bonds, but bonds issued between 1850 and 1914 barely broke even with British consols.100 This is, however, an average for a sample of countries with starkly different experiences with sovereign lending; whereas Japan, Australia, Canada, and Egypt (only after financial intervention) always repaid, others like Mexico and Russia interrupted debt service after the revolutions, lowering the average aggregate return.
All things considered, the frenzy in capital markets is probably explained by a combination of all three factors: poor information, fraud, and higher margins overseas. An additional reason for the lending euphoria may be the bondholders’ ability to seize assets and sources of revenue in case of default, hence limiting risk. In the next two chapters, I articulate this argument, test for it, and discuss the implications of foreign financial control for long-term state building. In the remainder of this chapter, I introduce an original interest rate dataset to quantify the breadth of international lending and the relatively low price of credit in the long nineteenth century.
3.3 Access to International Finance
To shed light on the favorable terms of external finance in the Bond Era, I put together an original dataset of international loans or bonds—until the mid-twentieth century both terms were used interchangeably—floated between 1816 and 1914 in London, the world’s banker. Existing datasets are limited to a subset of countries and specific decades of the nineteenth century or both. Two of the three most ambitious datasets assembled to date by Accominotti, Flandreau, and Rezzik and Ferguson and Schularick list the spread of 32 and 57 countries, respectively, in secondary markets in London from 1880 to 1913.101 Of extreme value for the study of the spread in the most intense era of lending, these datasets cannot characterize the first 65 years of the Bond Era, 1815–1880. A third dataset, and closest to the one I put together, is assembled by Suzuki, who records new quotations (or primary market) data for 53 countries from 1870 to 1913.102 In total, Suzuki’s dataset lists 329 loans issued in London.
Guided by Suzuki’s example, I collected primary market data from primary and secondary sources for a larger number of countries, 92 in total, as early as 1816 and up to 1914. I considered all central government and government-guaranteed loans irrespective of their purpose (e.g., war, debt refinancing, and infrastructure).103 In all, the new dataset includes 944 loans, virtually tripling Suzuki’s collection. For each bond, I collected data on nominal interest rate, price of quotation, maturity, purpose, and name of the underwriter.104 With the new dataset, I seek to advance understanding of the first globalization of capital and simultaneously solidify a key assumption of the main argument of this book: capital was abundant and relatively cheap for both consolidated and new economies.
3.3.1 DESCRIPTIVES
Key primary sources of the dataset are The Stock Exchange Loan and Company Prospectuses and Wetenhall’s Course of the Exchange (first day of quotation of calendar years from 1825 to 1871), both kept at the archives of the London Stock Exchange, now held at the Guildhall Library, City of London. Secondary sources are Dawson; Hobson; Jenks; Marichal; Mauro, Sussman, and Yafeh; and Suzuki. In addition, I draw from Ayer, from Fenn’s Compendium of the English and Foreign Funds, Debts and Revenues … (1838, 1855, 1869, 1883, 1898),105 and selectively from the Annual Reports of the Council of the Corporation of Foreign Bondholders, vol. 1 (1874)–vol. 45 (1917).
Table 3.2 shows some descriptive statistics to illustrate the spread of British capital exports, followed by a breakdown of the number of loans per country. The total amount issued in loans was almost £4 billion, equivalent to $600 billion in today’s dollars but in a world economy one-tenth as large. Capital flowed to every continent, beginning with Europe and the Americas, and eventually Africa, Asia, and Oceania. Issue amount in Europe may seem disproportionally large, but that reflects varying income levels. Relative to local economies, borrowed quantities were substantial in Latin America, Asia, and Africa.
3.3.2 NOMINAL INTEREST RATES IN HISTORICAL PERSPECTIVE
David Stasavage has produced the most ambitious deep-historical dataset to date of sovereign borrowing in early-modern Europe.106 He shows that public credit in that continent followed two tracks.
The city-states took the faster route. Venice and Siena, for instance, were able to issue long-term debt at low interest rates as early as the thirteenth century. Commercial city-states lived on long-distance trade and banking. Medieval European merchants had made their initial fortunes in risky activities like long-distance trade; once established, they became rentiers by shifting their fortunes into fixed income, either public or private.
TABLE 3.2. Descriptive Statistics of Sovereign Bonds, 1816–1913
|
Region |
Countries |
Loans |
Issue amount in million £ (% of total) |
Earliest loan |
|
Africa |
15 |
102 |
301 (8%) |
1860 |
|
Americas |
33 |
279 |
1,100 (28%) |
1822 |
|
Asia |
10 |
128 |
544 (14%) |
1854 |
|
Europe |
25 |
252 |
1,700 (43%) |
1816 |
|
Oceania |
9 |
183 |
285 (7%) |
1859 |
|
Total |
92 |
944 |
3,940 |
Note: Countries in the sample with number of loans in the sample in parentheses: Antigua and Barbuda (1), Argentina (41), Austria (10), Bahamas (1), Barbados (1), Belgium (7), Bolivia (2), Brazil (31), Bulgaria (4), Canada (30), Cape of Good Hope (27), Chile (30), China (30), Colombia (6), Confederate States of America (1), Costa Rica (6), Cuba (8), Denmark (15), Dominican Republic (7), Ecuador (2), Egypt (20), El Salvador (3), Fiji (1), Finland (1), France (9), Germany (5), Ghana (3), Greece (22), Grenada (2), Guatemala (6), Guyana (4), Haiti (2), Hawaii (1), Hesse (1), Honduras (5), Hong Kong (2), Hungary (13), India (28), Iran (2), Ireland (5), Isle of Man (1), Italy (12), Jamaica (8), Japan (13), Liberia (4), Mauritius (7), Mexico (17), Montenegro (1), Morocco (1), Naples (4), Natal (21), Netherlands (8), New South Wales (30), New Zealand (29), Newfoundland (13), Nicaragua (2), Niger (1), Nigeria (3), Norway (8), Orange Free State (1), Paraguay (4), Peru (11), Portugal (20), Poyais (1), Prussia (6), Puerto Rico (1), Queensland (29), Romania (9), Russia (44), Saint Lucia (2), Serbia (3), Sierra Leone (4), Singapore (4), South Africa (3), South Australia (30), Spain (16), Sri Lanka (Ceylon) (10), Sweden (16), Switzerland (2), Tanzania (1), Tasmania (18), Thailand (2), Tonkin (1), Transvaal (4), Trinidad and Tobago (10), Tunisia (2), Turkey (36), Great Britain (10), United States of America (7), Uruguay (9), Venezuela (5), Victoria (23), and Western Australia (22). See text for sources.
Territorial states took the slower track. Long-term debt appeared only in the early sixteenth century; until then, English, French, or Castilian monarchs relied on short-term debt (usually one or two years) and paid higher interest to their lenders, often Jewish or Italian bankers (e.g., the English monarch Edward III issued loans in Florence and Genoa to finance the Hundred Years’ War, 1337–1453). Only in the early sixteenth century, pushed by pressing costs derived from the military revolution, did territorial states issue long-term loans.107
Figure 3.4 plots Stasavage’s data from 1250 to 1800.108 The pattern speaks for itself: a secular decline occurred in nominal rates over five centuries; however, differences between territorial states and city-states were lasting. Average nominal rates in the seventeenth century in France and England were 6.14 and 7.78 percent, respectively, compared to 4.5 and 2.6 percent in Barcelona and Genoa, respectively. It took an additional century for nominal rates to converge around 5 percent. In figure 3.4, I plot the newly collected interest rates for the long nineteenth century. Far from a structural break, the secular decline continued after 1815 despite entry of unseasoned countries in capital markets and repeated default episodes.
FIGURE 3.4. Nominal Interest Rates before and after 1800. This figure plots nominal interest rates for 1,198 sovereign bonds from 1200 to 1800 for 31 polities (light gray Xs for city-states, dark dots for territorial states) as drawn from Stasavage (2011), and newly collected nominal interest rates for 944 bonds in the period from 1816 to 1913 for 92 countries (light gray circles). A lowess line is superimposed.
Low interest rates in the nineteenth century are not a statistical artifact derived from pooling seasoned and unseasoned countries into the same chart. Figure 1.1 shows that the nominal spread between European and non-European countries was under 100 basis points at the beginning of the nineteenth century and converged to 0 by the turn of the century.
British colonies were favorably treated in capital markets because they were perceived by investors as British provinces—the empire effect discussed earlier. The low spread in figure 1.1, however, is not a by-product of having British colonies in the non-European sample. Figure 3.5 shows that when dependent colonies and self-governing colonies before 1881 (when they lose access to colonial agents) are excluded, the results are qualitatively similar. The near convergence between European and non-European countries happens later, but the spread remains under 100 basis points throughout—a quantity substantially lower than that between territorial states and city-states a hundred years earlier. Did emerging economies bear very short maturities in return for relatively inexpensive credit?
FIGURE 3.5. Comparison of Nominal Interest Rates Excluding British Dependencies. In this test, Crown colonies are excluded from the non-Europe sample. Self-government colonies before 1881 are also excluded because their loans were marketed by Crown agents (see text for details). After 1881, self-governing colonies are considered financially independent and listed along other non-European borrowers. Squares are used to indicate loans of non-European countries and circles those of European countries. A dashed lowess line is superimposed for the European sample and a solid line for the non-European sample. Compiled by author from multiple sources.
3.3.3 MATURITY EXTENSION
Short maturities allow lenders to discipline borrowers: the threat of exclusion is expected to incentivize borrowers to enact prudent macroeconomic policy, hence debt service.109 Long maturities express confidence in the borrowers’ ability and willingness to repay. Because credibility issues were rampant in territorial states in medieval Europe, loans matured after one or two years.110 Repeated defaults by unseasoned and politically unstable polities occurred in the nineteenth century; however, maturities were long and remained so until World War I, 31 years on average before 1870 and 38 years afterward.111 These figures are high relative to early-modern Europe as well as current times. Responding to the massive defaults in the 1980s and 1990s, maturities for emerging economies were between 5 and 10 years in the early 2000s.112
3.3.4 EFFECTIVE INTEREST RATES
The lending frenzy was manifested in historically low nominal interest rates and long maturities. Now I focus on effective interest rates. These can be measured in various ways: I follow Mauro, Sussman, and Yafeh and use the ratio of the coupon to the price, or yield at issue, which measures the income an investor receives on a bond as a percentage of the price of the bond.113 Importantly, this ratio emulates the way investors regarded bond profitability.114
In order to compute the yield at issue, I was able to compile the price at issue for 803 bonds, 87 percent of the sample.115 Using the price at issue has advantages and disadvantages: On the positive side I can analyze loans issued before standardized series were published in economic journals, hence the entire nineteenth century instead of only its final three decades, the period analyzed in virtually all existing research. The disadvantage is that the data generation process is endogenous: borrowers may issue a new loan when conditions are favorable and they anticipate cheaper credit. As a method of validation, I correlate the yield at issue in the primary market with yield in secondary markets, which operates continuously between new quotations. To implement this test, I draw yield in secondary markets from Ferguson and Schularick, who gathered data on the spread over British consols for securities from 57 independent countries, colonies, and self-governing territories of the British Empire from 1880 to 1913.116
FIGURE 3.6. Primary and Secondary Bond Markets Compared, 1880–1913. Secondary market values, which are yearly averages, are log-transformed to cope with abnormal observations. Primary market data compiled by author. Secondary market data from Ferguson and Schularick (2006).
The distribution of prices in the secondary market has a long tail due to anomalous values. The linear correlation of yield at issue in primary markets and the original and log-transformed yield in secondary markets are 0.6 and 0.7, respectively, suggesting that the ratio of the coupon to the price—the contemporary investors’ shortcut—is genuinely informative of the future valuation of the bond in secondary markets. For reference, figure 3.6 plots the primary against the log-transformed secondary market yield.
To conclude the descriptive characterization of the Bond Era, I investigate regional differences of yield at issue. The horizontal dotted line in figure 3.7 shows that the average yield at issue between 1816 and 1913 was at 5.19 percent. All regions except Oceania, which had disproportional representation of British colonies, experienced effective rates within 1 percentage point of the sample average, consistent with the convergence of nominal rates in figures 1.1 and 3.5.117
FIGURE 3.7. Average Yield at Issue by Region, 1816–1913. Yield at issue available for 803 bonds. Sample average represented with dashed line. Primary market data coded by author.
Figure 3.7 suggests that economies around the world paid modest premiums relative to the very seasoned economies in Europe. The spread of emerging economies in the Bond Era contrasts with the spread charged in secondary markets in the 1990s and early 2000s, which went as high as 800 basis points in times of crisis, or relative to the 300 basis points between 2002 and 2008, the most liquid and stable financial period since 1914.118 The long-term consequences of early access to cheap capital for state building are the focus of later chapters in the book.
3.4 Conclusion
This chapter offers an original quantification of the first globalization of capital, one that includes the largest number of polities and longest period of time to date. The descriptive statistics indicate that the lending frenzy in the Bond Era was manifested in historically low nominal and effective interest rates and long maturities, all of which contributed to a culture of cheap money. In the next chapter, I study country-specific determinants of the spread by testing existing models and advancing an original hypothesis: the ability to impose financial control over countries in case of default, or extreme conditionality. This hypothesis sheds light on the puzzling coexistence of regular, massive defaults and the rapid recovery of capital exports that followed and illuminates the perverse effects of cheap external capital on long-term state building.
1. Taylor (2006).
2. See Stasavage (2011) for a seminal account of the origins of public credit in Europe and the evolution of city- and territorial-states’ public credit.
3. Tracy (2014) for an overview.
4. Philip II of Spain (r. 1556–1598) and before Edward III of England (r. 1327–1377) borrowed from Italian bankers, but those operations remained fairly uncommon.
5. Loan operations and maturity in Riley (1980, pp. 84 and 35, respectively).
6. See Brewer (1988) for the expansion of fiscal capacity in eighteenth-century England.
7. Hobson (1914); Jenks (1927); Obstfeld and Taylor (2004); Rippy (1959).
8. Although the current account pools public and private capital, its evolution is “closely tied to the trends and cycles of foreign lending” (Taylor, 2002, p. 726).
9. OECD (2017).
10. Michie (2006).
11. Jenks (1927, p. 267).
12. Clemens and Williamson (2004).
13. Feis (1930) for an overview, and Esteves (2008, 2011) for a disaggregated list of French (2011) and German (2008) investment overseas.
14. Feis (1930); Fishlow (1985); White (1933).
15. Edelstein (1982, p. 3).
16. Bordo, Eichengreen, and Kim (1998, pp. 3–4).
17. Estimates computed with Jordà, Schularick, and Taylor’s (2016) data.
18. Eichengreen (1991, p. 150).
19. Esteves (2011, table 1).
20. Woodruff (1966, table IV/3, p. 154).
21. Flandreau and Flores (2009).
22. Mauro, Sussman, and Yafeh (2006, p. 136).
23. Suter (1992, p. 45).
24. Flandreau (2020). The market share of big merchant houses declined from 53% in the 1870s to 35% in the 1910s (Cottrell, 1976, p. 30).
25. Flandreau, Flores, Gaillard, and Nieto-Parra (2009).
26. Accominotti, Flandreau, and Rezzik (2011).
27. Ferguson and Schularick (2006).
28. Frankema and van Waijenburg (2014); Gardner (2012); Herbst (2000).
29. Kesner (1977, p. 314).
30. Davis and Huttenback (1986).
31. Sunderland (2004, p. 150).
32. Davis and Huttenback (1986, p. 185).
33. Davis and Huttenback (1986); Kesner (1981); refer to Sunderland (1999) for a competing view.
34. Ferguson and Schularick (2006, p. 286).
35. Davis and Huttenback (1986, p. 168).
36. Flandreau (2006).
37. Feis (1930, p. 143).
38. Kesner (1981, p. 44).
39. Calculations draw from the newly collected data for this book, presented later in this chapter. The anticolonial bias in international lending is corroborated by Davis and Huttenback (1986).
40. Cameron (1966, tables 3 and 4).
41. Neal (1990, ch. 11).
42. Fishlow (1985).
43. The distinction between revenue and developmental finance is somewhat exaggerated because military considerations played a key role in the construction and nationalization of railroads in the Bond Era (Bogart, 2009; Onorato, Scheve, and Stasavage, 2014; Pratt, 1916). The argument here omits this important nuance.
44. Stone (1992, pp. 13–14).
45. Bignon, Esteves, and Herranz-Loncán (2015).
46. Lewis (1983).
47. Sanz Fernández (1998, p. 377).
48. For instance, tariff exemptions were incorporated into foreign loans to the Spanish government. The exemptions were applied to railroad investment in both the Spanish peninsula and colonial Cuba (Comín, 2012, pp. 170–171).
49. During the Porfiriato (1876–1910), nearly 11% of Mexican territory was given over to the land survey companies in compensation (Salvucci, 2006, p. 273).
50. The largest external loan floated in Venezuela in the nineteenth century sought to secure the profit guarantees of the largest investor of the Gran Ferrocarril de Venezuela, the Disconto Gessellschaft, a Germany-based bank. This 1896 loan increased the outstanding external debt of Venezuela by 70% (Harwich Vallenilla, 1976, pp. 222–227). Refer to chapter 9 for profit guarantees in the case of Argentina.
51. The F. C. Central del Norte in Argentina is a good example. After being sold to foreign investors in 1888, no additional tracks were built in the next five decades (Scalabrini Ortíz, 1972, p. 230). In Venezuela, only 20% of the 7% guaranteed projects were put in motion (Santamaría García, 1998, p. 481).
52. The persistence of fragmentation in the presence of railroads is found in small and large economies: from Cuba (Zanetti and García, 1998, ch. 5) to China (Köll, 2019, ch. 3).
53. Fogel (1963). See Chaves, Engerman, and Robinson (2014) for a concise critical assessment of the assumptions under social savings estimates. Notice also that social savings calculations do not account for investment costs.
54. Summerhill (2001).
55. Summerhill (2003).
56. Coatsworth (1981).
57. Donaldson (2018).
58. McGreevey (1971, p. 266) estimates social savings in Colombia in 1924 on the order of 3.2% of gross domestic product. Ramírez (2001) finds virtually identical estimates.
59. The most favorable estimate of social savings by 1914 in Peru is in the range of 2% to 7% (Zegarra, 2013). Passenger savings were under 0.5%. Refer to Bonilla (1972) for similar conclusions.
60. Herranz-Loncán (2011) estimates are on the order of 3.8% of GDP for freight and 1.9% for passenger transportation.
61. Although no social savings estimate exists for Venezuela, Harwich Vallenilla (1976), Santamaría García (1998), and Polo Muriel (1998) conclude that railroads did not foster economic growth in Venezuela. General surveys of uneven economic returns of railways in Latin America can be found in the edited volumes by Kuntz Ficker (2015) and Sanz Fernández (1998).
62. Herranz-Loncán (2003, 2006) shows that the average social savings of railroad development in Spain was not statistically different from zero. This type of investment experienced strong heterogeneity in performance: the earlier lines connecting preexisting industrial areas did well, whereas later lines built for political reasons (and possibly speculation) were economically inefficient, pushing the average social savings to zero.
63. Huenemann (1984) estimates social savings as low as 0.5% of GDP.
64. Quataert (1977). Sub-Saharan countries, independent or colonial, barely attracted railroad investment in the Bond Era.
65. See Hawke (1970, p. 211) for Britain; Fishlow (1965, ch. 3) for the United States; Caron (1983) for France; and Fremdling (1983) for Germany.
66. See Mann (1984) for the role of railroads in articulating the “infrastructural powers” of the state in Europe; and Cermeño, Enflo, and Lindvall (2018) for a recent application in Sweden.
67. Refer to Summerhill (2005) and Coatsworth (1979) for the absence of backward linkages in Brazil and Mexico, respectively.
68. Salvucci (2006, p. 288) for the Dutch disease preventing industrialization in Argentina.
69. Tax leaks were magnified when investors built railroads on privately owned land. That was the case, for instance, of foreign-owned sugar monopolies in Cuba (Zanetti and García, 1998, p. 404).
70. Coatsworth (1981, p. 181).
71. Blattman, Hwang, and Williamson (2007). Fluctuations in global capital markets remain a major hurdle to the consolidation of social benefits in modern-day Latin America (Wibbels 2006).
72. This conclusion is shared by Coatsworth (1981), Kaur (1980, p. 698), and Zanetti and García (1998, pp. 99–100), among others.
73. Marichal (1989).
74. Flandreau and Flores (2009).
75. Reinhart and Rogoff (2009, p. 91).
76. Michie (2006, table 3.3). These estimates do not include government-guaranteed railroad bonds, hence they are a lower-bound estimate of total sovereign lending.
77. Kindleberger (1996, p. 20).
78. Feis (1930, p. 383).
79. Eichengreen (1991, p. 151).
80. Jenks (1927, p. 49).
81. See Flandreau and Flores (2009) and Flandreau, Flores, Gaillard, and Nieto-Parra (2009) for extensive research on issuing houses’ prestige.
82. Flandreau (2016, p. 8).
83. Flandreau (2016, chs. 4–5).
84. Select Committee on Loans to Foreign States, Report from the Select Committee on Loans to Foreign States: With the Proceedings of the Committee, House of Commons, London, 1875.
85. Jenks (1927, p. 273).
86. Rippy (1959, p. 32).
87. Neal (2015, pp. 166–167). See Mauro, Sussman, and Yafeh (2006, ch. 2) for a competing view.
88. Jones (1979).
89. Jones (1979).
90. Flandreau (2016), Nye (2015), and Taylor (2015).
91. The management of the 1890 financial crisis is illuminating. Despite having inside information on Barings’ and Argentina’s imminent bankruptcy, the Times and the Economist retained that information and called instead for plans for an orderly rearrangement of Argentina’s finances (Nye 2015, p. 217). Substantial losses followed.
92. Nye (2015); Taylor (2015).
93. Borchard (1951, pp. 143–144).
94. Winkler (1933, ch. 5).
95. Mauro, Sussman, and Yafeh (2006, p. 11).
96. Edelstein (1982, p. 7) and Neal (2015, p. 155).
97. Meyer, Reinhart, and Trebesch (2019, table 3).
98. Meyer, Reinhart, and Trebesch (2019, table 5).
99. Fishlow (1985). This is consistent with Flandreau and Zumer (2004), who show that local economic growth decreased the spread of peripheral countries.
100. Lindert and Morton (1989).
101. Accominotti, Flandreau, and Rezzik (2011); Ferguson and Schularick (2006).
102. Suzuki (1994).
103. In chapter 6, I elaborate on the fungibility of external capital in the national budget, and why for the study of state building we should contemplate all sovereign bonds regardless of their official use.
104. I stop data collection for a given territory as soon as it integrates into a larger sovereign jurisdiction, for example, the province of Buenos Aires after reuniting with Argentina in 1861.
105. Ayer (1905); Dawson (1990); Fenn (1838, 1855, 1869, 1883, 1898); Hobson (1914); Jenks (1927); Marichal (1989); Mauro, Sussman, and Yafeh (2006); Suzuki (1994).
106. Stasavage (2011). This paragraph follows chapter 2 in that work.
107. Public credit took the form of annuities (e.g., the French rentes) to evade usury laws.
108. Stasavage (2011).
109. See Diamond and Rajan (2001) and Jeanne (2009) for a formal treatment.
110. Stasavage (2011, p. 34).
111. I collected maturity extensions for 496 loans. My estimates are between those in Mauro, Sussman, and Yafeh (2006), who argue that maturities were around 20 years in the period from 1870 to 1913, and those of Meyer, Reinhart, and Trebesch (2019), who estimate average maturity between 1815 and 1869 in 46 years (30 countries) and in 42 years (45 countries) for 1870–1913.
112. Borensztein et al. (2004); Mauro, Sussman, and Yafeh (2006).
113. Mauro, Sussman, and Yafeh (2006). The assumption underlying this ratio is that interest rates will remain at the current rate and do not allow for any appreciation or depreciation that an investor receives at disposal (Brown, 1998, p. 23).
114. Mauro, Sussman, and Yafeh (2006, p. 41). Traders today apply sophisticated formulas for the valuation of bonds, one reason being the quality of information at hand.
115. Missing observations come mainly from bonds collected from secondary sources. In subsequent analyses, I dropped two bonds, one for Spain and another for Puerto Rico, due to abnormal yield values: 19.2 and 33.3, respectively.
116. Ferguson and Schularick (2006).
117. These results are consistent with Bordo and Rockoff (1996). They size the spread of emerging economies between 1870 and 1914 between 200 and 300 basis points relative to British consols; for reference, the spread of the United States was 100 points.
118. Cruces and Trebesch (2013) for the 1900s to the early 2000s; Özmen and Doğanay Yaşar (2016) for 2002–2008 data.