Bonds and Brands: Foundations of Sovereign Debt Markets, 1820-1830

Abstract

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.

Keywords: intermediaries, reputation and signalling, sovereign debt, intitial public offerings

JEL Classification: G15, G23, N23, N26