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Finance and Trade: Issue Linkage and the Enforcement of International Debt Contracts
Unformatted Document Text:  37 4. Evidence from other Historical Periods Having found almost no proof of linkage during the interwar period, where it was most likely to occur, I briefly consider data from other historical periods. Evidence from Diplomatic Correspondence After the Napoleonic wars, nearly all countries around the world issued bonds on the London capital market. Did the British government use the threat of trade sanctions to deter these countries from defaulting, and to punish nations that did not meet their obligations in full? We can gain valuable insight by analyzing the correspondence of the Foreign Office. In 1847, the Foreign Office presented the House of Commons with a collection of 354 letters relative to foreign loans. The correspondence, spanning the previous quarter-century, involved three types of parties: the British government, foreign powers, and disgruntled bondholders. It is hard to verify whether the collection was comprehensive, but even if the publication contained only a sample of letters, there are two reasons to use it for empirical analysis. First, the collection was extensive not only in the sheer number of letters but also in its geographic coverage. Documents pertained to the debts of Spain, Portugal, Greece, Mexico, Central America, Colombia, New Grenada, Venezuela, Ecuador, Peru, Argentina, and Chile, a good cross-section of sovereign borrowers. Second, any bias in the selection of correspondence would have favored the linkage hypothesis. If the British government truly sought to deter countries from defaulting, it would have published the most threatening letters: ones with the most explicit connections between default and trade. In fact, not one of 354 letters mentions trade sanctions. On the contrary, the British government strenuously refused to take any official role on behalf of b ondholders. At the

Authors: Tomz, Michael.
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37
4. Evidence from other Historical Periods
Having found almost no proof of linkage during the interwar period, where it was most
likely to occur, I briefly consider data from other historical periods.
Evidence from Diplomatic Correspondence
After the Napoleonic wars, nearly all countries around the world issued bonds on the
London capital market. Did the British government use the threat of trade sanctions to deter
these countries from defaulting, and to punish nations that did not meet their obligations in full?
We can gain valuable insight by analyzing the correspondence of the Foreign Office. In 1847,
the Foreign Office presented the House of Commons with a collection of 354 letters relative to
foreign loans. The correspondence, spanning the previous quarter-century, involved three types
of parties: the British government, foreign powers, and disgruntled bondholders.
It is hard to verify whether the collection was comprehensive, but even if the publication
contained only a sample of letters, there are two reasons to use it for empirical analysis. First,
the collection was extensive not only in the sheer number of letters but also in its geographic
coverage. Documents pertained to the debts of Spain, Portugal, Greece, Mexico, Central
America, Colombia, New Grenada, Venezuela, Ecuador, Peru, Argentina, and Chile, a good
cross-section of sovereign borrowers. Second, any bias in the selection of correspondence would
have favored the linkage hypothesis. If the British government truly sought to deter countries
from defaulting, it would have published the most threatening letters: ones with the most explicit
connections between default and trade.
In fact, not one of 354 letters mentions trade sanctions. On the contrary, the British
government strenuously refused to take any official role on behalf of b ondholders. At the


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