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Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century

Author

Listed:
  • Flandreau, Marc
  • Sussman, Nathan
Abstract
This Paper challenges a popular explanation for ?original sin? - the default prone borrowing of long term debt in foreign exchange by emerging markets - that emphasizes the lack of credibility and commitment of governments that prevents them from borrowing in their own currency. Basing our account on the history of emerging market borrowing in the nineteenth century, we offer an explanation based on historical path dependence. We document that almost all IPO?s of governments in foreign markets were in foreign exchange, or with foreign exchange clauses, independent of those countries? institutional features. We show that a small number of countries could circulate debt denominated in their own currency in secondary markets, again irrespective of their constitutional set-up. We argue that market liquidity can explain both phenomena. Having an internationally circulating currency allows countries to circulate their debt in secondary markets. Going for an IPO in a large financial centre is an attempt to tap the greater liquidity of that centre?s money market and currency. It makes perfect sense to borrow then, in that centre?s currency. The evolution of vehicle currencies and liquid money markets has more to do with historical evolution of trade, going back to medieval times, rather than with institutional reform. Escaping from original sin requires that the country emerge as a leading economic power - a rare historical event, reserved for the US of the nineteenth century and Japan of the twentieth century.

Suggested Citation

  • Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4248
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    References listed on IDEAS

    as
    1. Marc Flandreau, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865-1871," Post-Print hal-03416539, HAL.
    2. Flandreau, Marc, 1996. "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870–1880," The Journal of Economic History, Cambridge University Press, vol. 56(4), pages 862-897, December.
    3. Marc Flandreau, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865-1871," Post-Print hal-03416540, HAL.
    4. Michael D. Bordo & Eugene N. White, 1990. "British and French Finance During the Napoleonic Wars," NBER Working Papers 3517, National Bureau of Economic Research, Inc.
    5. Oppers, Stefan E., 1993. "The Interest Rate Effect of Dutch Money in Eighteenth-Century Britain," The Journal of Economic History, Cambridge University Press, vol. 53(1), pages 25-43, March.
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    7. Bordo, Michael D. & White, Eugene N., 1991. "A Tale of Two Currencies: British and French Finance During the Napoleonic Wars," The Journal of Economic History, Cambridge University Press, vol. 51(2), pages 303-316, June.
    8. Sussman, Nathan & Yafeh, Yishay, 2000. "Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 442-467, June.
    9. Flandreau, Marc R, 2002. ""Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 491-519, May.
    10. Marc Flandreau, 2002. "'Water Seeks a Level”: Modeling Bimetallic Exchange Rates and the Bimetallic Band," Post-Print hal-03416703, HAL.
    11. Flandreau, Marc, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865–71," Financial History Review, Cambridge University Press, vol. 7(1), pages 25-44, April.
    12. Neal, Larry, 2000. "How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648 1815," Financial History Review, Cambridge University Press, vol. 7(02), pages 117-140, October.
    13. Marc Flandreau, 1996. "The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870-1880," Post-Print hal-03416270, HAL.
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    More about this item

    Keywords

    N32; Original sin; Exchange clauses; Sovereign debt; Key currencies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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