How "Original Sin" Was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions

56 Pages Posted: 14 Jul 2003 Last revised: 24 Sep 2009

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Meissner

University of Cambridge - Faculty of Economics and Politics; National Bureau of Economic Research (NBER)

Angela Redish

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2003

Abstract

This paper examines the historical origins of "Original Sin" or why countries are unable to issue long term debt domestically or borrow abroad in terms of the domestic currency. We conduct an historical case study for a group of countries that had largely overcome the problem of Original Sin by the third quarter of the twentieth century. The group consists of several former colonies of Great Britain: the United States, Canada, Australia, New Zealand and South Africa. We trace out their debt history relating the currency to the place of issue, exploring the residency of those holding local and foreign currency debt and looking at the maturity of domestic debt in the nineteenth and twentieth centuries. We find that sound fiscal institutions, high credibility of the monetary regime and good financial development are not sufficient to completely break free from Original Sin. Conversely, poor performance in these policy realms is not, for the most part, a necessary condition for Original Sin. The factor we emphasize for the common movements across the five countries is the role of shocks such as wars, massive economic disruption and the emergence of global markets. The differences in evolution between the U.S. and the Dominions we attribute to differences in size, the traits of a key currency, which the U.S. possessed and the others did not, and to membership in the British Empire. The important role of major shocks suggests that the establishment of a bond market involved significant start-up costs, while the role of scale suggests that network externalities and liquidity were pivotal in the existence of overseas markets in domestic currency debt.

Suggested Citation

Bordo, Michael D. and Meissner, Christopher M. and Redish, Angela, How "Original Sin" Was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions (July 2003). NBER Working Paper No. w9841. Available at SSRN: https://ssrn.com/abstract=423314

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

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Christopher M. Meissner

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.econ.cam.ac.uk/faculty/meissner/index.htm

National Bureau of Economic Research (NBER)

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Angela Redish

University of British Columbia (UBC) - Department of Economics ( email )

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Vancouver, BC V6T 1Z1
Canada
604-822-2748 (Phone)
604-822-5915 (Fax)

National Bureau of Economic Research (NBER)

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United States

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