Old Sins: Exchange clauses and European

foreign lending in the 19th century

By

Marc Flandreau,

Institut d’Etudes Politiques de Paris

and

Nathan Sussman,

Hebrew University

A typical international

bond: the Chinese Government

1913 Reorganization “Gold” Loan 

The fixed exchange rate clause

Goal: understanding the logic of these clauses

• Liability « goldization », « sterlingization », « francization », ….

• Widespread phenomenon• Dangerous (record of the 1890s)• More important problem than short term debt

Prehistory: some facts

• Very old practice: 18th century• 19th century development « Rothschild

packages »• Gold and silver clauses up to 1873• Triumph of gold clauses with spread of gold

standard• Key currencies: sterling, francs, marks, florins.

Contemporary explanations?

• Nominal illusion: « investors want fixed income in francs, sterling etc »

• Information asymetries: « investors do not understand exchange rate matters »

• Institutions and credibility: « currency clauses are guarantees ».

FX clauses and credibility: doubtsCountry Year Yield Yield at issue

Brazil 1824 5% 6.6%

1825 5% 5.9%

1829 5% 9.2%

Buenos Aires 1824 6% 7%

Chili 1822 6% 8.6%

Colombia 1822 6% 7.1%

1824 6% 6.8%

Guatemala 1825 6% 9.5%

Mexico 1824 5% 8.6%

1825 6% 6.9%

Peru 1822 6% 6.8%

1824 6% 7.3%

1825 6% 7.7%

FX clauses and credibility: further doubtsGroup I: Only exchange rate clauses Group: II Mixed Group III: domestic

Europe: Denmark, Finland, Greece, Hungary, Norway, Poland, Romania, Sweden.

Latin America: Argentina, Bolivia, Brazil, Chile, Columbia,Costa-Rica, Dominican Republic, Ecuador, Guatemala, Haïti, Honduras, Mexico, Paraguay,Peru, Uruguay, Venezuela.

Africa and Middle East:

Egypt, Liberia, Turkey, Tunisia, Transvaal.

English Speaking and Dominions:

USA, Canada, Australia, New Zealand, India, Other British colonies.

Asia: China, Japan

Europe:

Austria, Italy, Portugal, Russia, Spain, [France]

Europe:

Germany, [Belgium], Great Britain, Holland [Switzerland]

Primary markets, secondary markets, FX clauses

Getting the facts right:

• IPO and currency clauses

• Secondary markets and internationalization of bonds

Money markets quoted in London and Paris

Paris (1850) London (1844)

Amsterdam, London, Hamburg, (Berlin), (Augsburg), Frankfort, Madrid, Cadiz, (Bilbao), Lisbon, Oporto, Genoa, Leghorn, Naples, (Venice), Milan, Palermo, Messina, Antwerp, (Basel), Vienna, Trieste, Saint-Petersburg

Amsterdam, Rotterdam, Paris/France, Hamburg, Frankfurt, Berlin, Madrid,

Bilbao, Cadiz, Barcelona, Oporto, Lisbon, Genoa, Venice, Leghorn, Naples, Palermo, Messina, Antwerp, Vienna, Trieste, Saint.-Petersburg, Rio de Janeiro

Liquidity, Liquidity, Liquidity

• International currencies: ability to trade abroad

• International currencies: vast market at issue

Key currencies in 1890

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FRA UK GER BEL NLD ITL AH SUI ESP POR RUS US DMK SWE URU NOR BRA

Dynamics

• History vs Expectations

• How to get rid of fixed exchange rate clauses? Scandinavia vs the US

1880

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BEL FRA UK GER ITL AH NLD SUI RUS POR ESP BRA URU DMK NOR SWE US

1890

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FRA UK GER BEL NLD ITL AH SUI ESP POR RUS US DMK SWE URU NOR BRA

1900

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FRA UK GER BEL AH ITL NLD SUI ESP US RUS POR SWE DMK NOR BRA URU

1910

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FRA UK GER NLD AH BEL SUI ITL US RUS ESP POR SWE DMK NOR BRA URU

Policy Implications and Conclusions

• Governance and Institutions? ==> Very long run

• Markets and liquidity? ==> Short run