How does sovereign debt emerge? In the early nineteenth century, intermediaries' market power and prestige served to overcome information asymmetries. Relying on insights from finance theory, we argue that capitalists turned to intermediaries' reputations to guide their investment strategies. Intermediaries could in turn commit or else they would lose market share. This sustained the development of sovereign debt. This new perspective is backed by archival evidence and empirical data, and it suggests why strong but undemocratic states could borrow.“A good name is worth more than a gem.”Yiddish proverb

We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market. JEL Classifications: F34, G14, G24, N2Keywords: certification, primary bond market, sovereign debt crises, banks competition CEB Working Paper N° 10/017 Keywords: certification, primary bond market, sovereign debt crises, banks competition JEL Classification: F34, G14, G24, N2♣ . This is the revised draft of a paper presented at the NBER International Seminar on Macroeconomics, Cyprus, June 12-13, 2009. The authors are indebted to interviewees from origination departments of investment banks and institutional investors for field research conducted in New York (Winter-Spring 2007). Marc Flandreau is grateful to Carlos Medeiros (then head of IMF's Capital Markets division) for exchanges that proved very helpful at an early stage of this research and to the IMF for hospitality when several of the ideas in this paper took shape. We thank Sara Bertin (then at Moody's), Michael Dicks (then at Lehman Bros) and Javier Santiso (OECD) for sharing with us their lists of contacts and insights. Excellent research assistance from Thomas Dickinson in interviews in NY is also acknowledged. Authors are also grateful to bank archivists in London and Paris for providing them with generous access to an incalculable number of boxes and material and to the Librarian at the Graduate Institute Yves Corpataux for help and support. Thanks to Vincent Bignon for a careful, speedy, and expert feedback on the pre-first draft. Thanks to Lucrezia Reichlin and Ken West for the invitation. Thanks finally to Vincent Reinhart and Albrecht Ritschl for comments, suggestions and challenges. The views expressed here are those of the authors and should not be attributed to the Organization for Economic Co-operation and Development (OECD) or the National Bureau of Economic Research (NBER). ♠ . Marc Flandreau is Professor of International Economics, Professor of International History and Politics andAssociate Professor of Development Studies at the Graduate Institute of international and Development Studies in Geneva, and a research fellow at CEPR. Juan H. Flores is Assistant Professor in economic history, University of Geneva. Norbert Gaillard is Post Doctoral Fellow at Sciences Po, Paris. Sebastián Nieto-Parra is economist at the Development Centre, OECD, Paris. "Wow. I hadn't thought of it through a historical perspective."John Grisham, The Partner (1997, p. 452) In the past twenty years, dedicated research efforts have helped us expand our knowledge of how the int...

No abstract

This article provides foundations to Polanyi's famed argument that monopoly power in the global capital market served as an instrument of peace during the Pax Britannica~1815-1914!+ Our perspective is novel-we focus on the role of intermediaries and certification+ We show that when information and enforcement are imperfect, there is scope for the endogenous emergence of "prestigious" intermediaries who enjoy a monopoly position and as a result, control government actions+ They can implement conditional lending: they subject the distribution of credit to the adoption of peaceful policies+ Prestigious intermediaries act that way because of their concern with maintaining an unblemished track record when wars increased risks of default+ Our analysis, which brings together insights from different disciplines, provides a significant extension to, and departure from, recent research on how countries accumulate reputational capital+In the pantheon of international political economy~IPE!, Karl Polanyi's Great Transformation occupies a central position+ His famed conjecture that financiers were responsible for the "Hundred Years Peace" between the Congress of Viennã 1815! and the Austrian Archduke Franz-Ferdinand's assassination in Sarajevõ 1914! provides an early recognition of the interrelations between economics and politics+ Polanyi claimed that peace was the result of conscious actions by a subgroup of financiers, which he called "Haute Finance" and within which the House of Rothschild reigned supreme, "embodying the principle of abstract internationalism"~whatever is meant by that beautiful phrase!+ As he argued:The authors are grateful to Melanie Aspey from the Rothschild Archive, London, for her support and access to the Rothschild Frères Archive in the Centre d'Archives du Monde du Travail, Roubaix, France+ We thank Jim Alt, Chris Ansell, Gopalan Balachandran, Thomas Biersteker, Jerry Cohen, Jeff Frieden, Deirdre McCloskey, Ken Shepsle, and Stefano Ugolini for advice and suggestions+ This article also received extensive criticism from the editors of International Organization and three anonymous referees whose comments proved extremely helpful+ Errors and misinterpretation are ours+ Last, we warmly thank Jacqueline Larson for kind help and many useful suggestions for stylistic improvements+ We also gratefully acknowledge generous funding from Yves Mirabaud+ The views expressed do not implicate him, however, nor the Banque Mirabaud et Cie+International Organization 66, Spring 2012, pp+ 211-41

and the Bank of France is gratefully acknowledged. This article developed over a number of years and places. The authors are grateful to archivists from ING-Baring, Guildhall Library, Rothschild London, and Euronext (Paris Bourse) for their kind cooperation. We especially thank James Khedari for excellent research assistance. Larry Neal helped locate early editions of Wetenhall's Course of Exchange, and in many other ways, providing feedback, insights, and more. Lars Frederik Oksendal kindly provided data for Danish bonds quotes in Hamburg. We are grateful to European Historical Economics Society Lund Conference participants (June 2007