Independence and the Effect of Empire

Abstract

‘Sovereign’ bonds issued by colonies are often supposed to benefit from an implicit imperial guarantee. This guarantee is usually presented as the main reason why yields on colonial bonds are exceptionally low. This paper investigates investors’ perception of this guarantee during the interwar period, a period during which the guarantor faced financial turmoil and some colonies began their journey towards independence. On the basis of an original database tracking the yields of six colonial bonds we show that, in general, market participants believed the guarantee would be honoured. This general observation needs, however, to be nuanced. In 1931 when Britain left the gold standard, investors felt the British guarantee was less valuable. Furthermore, when colonies were facing extreme financial distress, markets reassessed the likelihood the guarantee would be honoured. This was also the case when it became clear that India would become independent.