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: doubts CountryYearYieldYield at issue Brazil18245%6.6% 18255%5.9% 18295%9.2% Buenos Aires18246%7% Chili18226%8.6% Colombia18226%7.1% 18246%6.8% Guatemala18256%9.5% Mexico18245%8.6% 18256%6.9% Peru18226%6.8% 18246%7.3% 18256%7.7%

FX clauses and credibility: further doubts Group I: Only exchange rate clausesGroup: II MixedGroup 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

Dynamics History vs Expectations How to get rid of fixed exchange rate clauses? Scandinavia vs the US

1880

1890

1900

1910

Policy Implications and Conclusions Governance and Institutions? ==> Very long run Markets and liquidity? ==> Short run