Category Archives: Institutions

Contingencies of Company Law: On the Corporate Form and English Company Law, 1500-1900

The Development of English Company Law before 1900

By: John D. Turner (Queen’s University Belfast)

Abstract: This article outlines the development of English company law in the four centuries before 1900. The main focus is on the evolution of the corporate form and the five key legal characteristics of the corporation – separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership. The article outlines how these features developed in guilds, regulated companies, and the great mercantilist and moneyed companies. I then move on to examine the State’s control of incorporation and the attempts by the founders and lawyers of unincorporated business enterprises to craft the legal characteristics of the corporation. Finally, the article analyses the forces behind the liberalisation of incorporation law in the middle of the nineteenth century.


Ditributed by NEP-HIS on: 2017-02-19

Review by Jeroen Veldman (Cass Business School, City University)


The article provides an overview of the development of English company law in the four centuries leading up the 20th century, showing how five key legal characteristics, i.e. separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership developed.

What may be most striking about Turner’s account is the way in which it shows the contingency of the development of these distinct concepts and the configurations in which they appear. As Woodward (1985a: 12), quoted by Turner, says it is “shocking how non-laissez-faire are the roots of the corporation – a quintessentially laissez-faire institution”. Turner shows how James I needed the money from corporate charters, as they provided an attractive source of revenue for the Crown that allowed to bypass Parliament. (Turner, 2017: 5), making the grant of such corporate charters the object of an ongoing war between Crown and Parliament in the 16th and 17th Century. Subsequently, he shows how the Bubble Act in the 18th Century was not so much a means to keep companies from forming, but rather  a means “… to limit alternative investment opportunities so that capital would be diverted towards shares in the South Sea Company.” (Turner, 2017: 8).


Arms of the East India Company (New York Public Library. Digital ID: 414409). Retrieved from

The contingent development of company law is also apparent in the use of corporations as an important instrument for colonial administrative organization overseas and the use of trading monopolies as a key instrument in foreign policy (Turner, 2017: 5). Furthermore, the establishment of specific Companies, such as the Bank of England in 1694 was pivotal for the lending of money to the State, and the raising and administration of the public debt (Turner, 2017: 9). The conceptual development of the modern corporation was thus connected to and contingent upon the simultaneous development of ideas about sovereignty, the state, and the representation of group rights and obligations (Kantorowicz, 1997; Maitland, 2003).

Turner then shows how the further development of the corporation in the 19th century is driven largely by the growing power of an emerging enriched middle class looking for outlets and protection for its investment. The development of the five key legal characteristics provided an architecture for the public corporation that functioned as an excellent vehicle to accommodate the wealth accruing to this new class, as it allowed to drop managerial obligations and to focus on a liquid share market instead (Ireland, 1996 and 1999; Veldman and Willmott, 2017).

Turner concludes by saying that “…the common law judiciary in the 18th and 19th centuries was extremely conservative and did not respond in a dynamic fashion to the new business environment which had arisen” (Turner, 2017: 22). His account therefore shows how, contrary what is commonly believed in the law and economics debate, common law did not develop as a highly dynamic and pragmatic practice-following type of law. What Turner convincingly shows, then, is that the development of English Company Law started to change from the 19th century, that this development led to development and acceptance of the five key legal characteristics and that the specific configuration of these elements that come together in the modern corporation. He also shows how the changes in English Company Law that allowed for these elements and their configuration were related to the institutionalization of particular political and economic interests.

In relation to the contingent development of the elements and configuration that make up the core characteristics of the modern corporation that Turner describes we may ask a number of questions of the specific model of the modern corporation that was developed during the 19th century and which still provides a template that is very much followed worldwide.

The first question is whether we can imagine a coherent alternative, in which the elements and their configuration had developed differently. Can we imagine limited liability, perpetuity, transferable joint stock with fully paid up shares and a secondary share market, the removal of ultra vires, separate legal personality, the development of delegated and professional management, rentier investment by shareholders with a shielded position largely external to the architecture of the modern corporation and, later, the development of holding companies and transnational operations as the outcome of the institutionalization of legal privileges for specific groups? And can we still imagine the institutionalization of these privileges as contingent and conditional?

The second question is whether we can rethink the presumed optimality of the current configuration of the corporation. It may be argued that the arrangements developed for the modern public corporations were developed in a specific political and economic context that provided a strong background for the development of ideas about minority shareholder protection at the time (Freeman et al., 2011; Johnson, 2010), for instance. The question is, how the specifics of that configuration relates to more recent changes in the corporate governance environment, such as the phenomenal rise of institutional and activist investors, increases in foreign ownership and high frequency trading, and the development of transnational group structures.

More specifically, we may consider that the development of the elements and configurations of the core characteristics of the modern corporation have had large effects on subsequent macro-economic developments (Chandler, 2003; Hannah, 2010), and continue to impact on the distribution of social wealth (Ireland, 2005). Turner observes that “The evolution of corporate law after 1900 … was chiefly concerned with resolving the agency problems which arose out of conflicts created by the coming together of these characteristics, i.e., shareholders vs. managers, shareholders vs. shareholders, and shareholders vs. other constituents (e.g., creditors and employees).” (Turner, 2017: 3). Considering that the present configuration that defines the modern corporation is based on the interests of an emerging class of rentier investors in the mid-19th century we may need to consider whether those agency problems have been sufficiently resolved and whether the specific configuration that developed during the 19th century still delivers an optimal configuration for all parties involved in corporate governance arrangements and outcomes (Veldman et al., 2016).

In the light of the description of the contingent nature of the development of company law and corporate governance theory, it is interesting to note that Turner chooses to describe the development of ‘the corporate form’ and its five key characteristics as an almost teleological process in which “the evolution of company law in England up to 1900 was all about the struggle to enable business enterprises to have all five of the core structural characteristics outlined above” and that this evolution was hampered by “the efforts of the legal system and the political elite to stifle the development of particular characteristics during most of this era.” (Turner, 2017: 3). Such a teleological approach to the development of company law has been criticized more broadly as naturalizing the development of existing corporate governance configurations into a necessary or optimal end point, and ignoring the development of company law as the institutionalization of particular interests (Ireland, 2005; Johnson, 2010).

Turner’s account provides all the necessary ingredients to engage with the development of the five key legal characteristics and their configurations as the result of the capacity for countervailing powers to engage in the corporate governance debate. In this light, the continuous absence of particular characteristics and configurations in the debate pre-19th century can be viewed, not as the ‘stifling’ of a necessary or optimal ‘evolution’, but rather as the result of a different configuration of interests. Such a view of the development of the elements and configuration that make up the modern corporation as a contingent and interest-inflected development makes an interesting contribution to the current debate on corporate governance, and allows to relate the debate on the historical institutionalization of these choices to current debates on the broad opportunities and risks that are associated with choices about the institutionalization of privileges, rights and obligations for specific groups in a theory of corporate governance (Veldman and Willmott, 2016).



Chandler, A. D. (2002). The Visible Hand: The Managerial Revolution in American Business. Cambridge, USA: Harvard University Press.

Freeman, M., Pearson, R., & Taylor, J. (2011). Shareholder democracies?: Corporate Governance in Britain and Ireland before 1850. Chicago: University of Chicago Press.

Hannah, L. (2010). The Rise of the Corporate Economy. Oxon, UK: Routledge.

Ireland, P. (1996). Capitalism without the Capitalist: the Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality. The Journal of Legal History, 17(1), 41–73.

Ireland, P. (2005). Shareholder Primacy and the Distribution of Wealth. Modern Law Review, 68(1), 49–81.

Ireland, P. (1999). Company Law and the Myth of Shareholder Ownership. Modern Law Review, 62(1), 32–57.

Johnson, P. (2010). Making the Market: Victorian Origins of Corporate Capitalism. Cambridge: Cambridge University Press.

Kantorowicz, E. H. (1997). The King’s Two Bodies : A Study in Mediaeval Political Theology. Princeton ; Chichester: Princeton University Press.

Maitland, F. W. (2003). State, Trust and Corporation. (D. Runciman & M. Ryan, Eds.) Cambridge Texts in the History of Political Thought. Cambridge: Cambridge University Press.

Turner, J. D. (2017). The Development of English Company Law before 1900 (No. 2017–1). Belfast: Queen’s University Centre for Economic History. Retrieved from

Veldman, J., & Willmott, H. (2016). The Cultural Grammar of Governance: The UK Code of Corporate Governance, Reflexivity, and the Limits of “Soft” Regulation. Human Relations, 69(3).

Veldman, J., Morrow, P., & Gregor, F. (2016). Corporate Governance for a Changing World: Final Report of a Global Roundtable Series. Brussels and London: Frank Bold and Cass Business School.

Veldman, J., & Willmott, H. (2017). The Corporation in Management. In G. Baars & A. Spicer (Eds.), Critical Corporation Handbook. Cambridge, UK: Cambridge University Press.

Woodward, S. (1985). The Struggle for Fungibility of Joint-Stock Shares as Revealed in W.R. Scott’s Constituion and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720 (No. 377). UCLA Economics Working Papers. UCLA Department of Economics. Retrieved from


No man can serve two masters

Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets

By Catherine Schenk (Glasgow)

Abstract Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.

Business History Review, Volume 91 (1 – April 2017): 105-128.


Review by Adrian E. Tschoegl (The Wharton School of the University of Pennsylvania)

Since the 1974 rogue trading scandal at Lloyds’s Lugano branch we have seen more spectacular sums lost in rogue trading scandals. What Dr Catherine Schenk brings to our understanding of these recurrent events is the insight that only drawing on archives, both at Lloyds and at the Bank of England, can bring. In particular, the archives illuminate the decision processes at both institutions as the crisis unfolded. I have little to add to her thorough exposition of the detail so below I will limit myself to imprecise generalities.

Marc Colombo, the rogue trader at Lloyds Lugano, was a peripheral individual in a peripheral product line, in a peripheral location. As Schenk finds, this peripherality has two consequences, the rogue trader’s quest for respect, and the problem of supervision. Lloyds Lugano is not an anomaly. An examination of several other cases (e.g. Allied Irish, Barings, Daiwa, and Sumitomo Trading), finds the same thing (Tschoegl 2004).

In firms, respect and power come from being a revenue center. Being a cost center is the worst position, but being a profit center with a mandate to do very little is not much better. The rogue traders that have garnered the most attention, in large part because of the scale of their losses were not malevolent. They wanted to be valued. They were able to get away with their trading for long enough to do serious damage because of a lack of supervision, a lack that existed because of the traders’ peripherality.

In several cases, Colombo’s amongst them, the trader was head of essentially a one-person operation that was independent of the rest of the local organization. That meant that the trader’s immediate local supervisor had little or no experience with trading. Heads of branches in a commercial bank come from commercial banking, especially commercial lending. Commercial lending is a slow feedback environment (it may take a long time for a bad decision to manifest itself), and so uses a system of multiple approvals. Trading is a fast feedback environment. The two environments draw different personality types and have quite different procedures, with the trading environment giving traders a great deal of autonomy within set parameters, an issue Schenk addresses and that we will discuss shortly.

Commonly, traders will report to a remote head of trading and to the local branch manager, with the primary line being to the head of trading, and the secondary line being to the local branch manager. This matrix management developed to address the problem of the need to manage and coordinate centrally but also respond locally, but matrix management has its limitations too. As Mathew points out in the New Testament, “No man can serve two masters, for either he will hate the one, and love the other; or else he will hold to the one, and despise the other” (Matthew (6:24). Even short of this, the issue that can arise, as it did at Lloyds Luggano, is that the trader is remote from both managers, one because of distance (and often time zone), and the other because of unfamiliarity with the product line. A number of software developments have improved the situation since 1974, but as some recent scandals have shown, they are fallible. Furthermore, the issue still remains that at some point the heads of many product lines will report to someone who rose in a different product line, which brings up the spectre of “too complex to manage”.

The issue of precautionary or governance rules, and their non-enforcement, is a clear theme in Schenk’s paper. Like the problem of supervision, this too is an issue where one can only do better or worse, but not solve. All rules have their cost. The largest may be an opportunity cost. Governance rules exist to reduce variance, but that means the price of reducing bad outcomes is the lower occurrence of good outcomes. While it is true, as one of Schenk’s interviewees points out, that one does not hear of successful rogue traders being fired, that does not mean that firms do not respond negatively to success. I happened to be working for SBCI, an investment banking arm of Swiss Bank Corporation (SBC), at the time of SBC’s acquisition in 1992 of O’Connor Partners, a Chicago-based derivatives trading house. I had the opportunity to speak with O’Conner’s head of training when O’Connor stationed a team of traders at SBCI in Tokyo. He said that the firm examined too large wins as intently as they examined too large losses: in either case an unexpectedly large outcome meant that either the firm had mis-modelled the trade, or the trader had gone outside their limits. Furthermore, what they looked for in traders was the ability to walk away from a losing bet.

But even small costs can be a problem for a small operation. When I started to work for Security Pacific National Bank in 1976, my supervisor explained my employment benefits to me. I was authorized two weeks of paid leave per annum. When I asked if I could split up the time he replied that Federal Reserve regulations required that the two weeks be continuous so that someone would have to fill in for the absent employee. Even though most of the major rogue trading scandals arose and collapsed within a calendar year, the shadow of the future might well have discouraged the traders, or led them to reveal the problem earlier. Still, for a one-person operation, management might (and in some rogue trading scandals did), take the position that finding someone to fill in and bring them in on temporary duty was unnecessarily cumbersome and expensive. After all, the trader to be replaced was a dedicated, conscientious employee, witness his willingness to forego any vacation.

Lastly, there is the issue of Chesterton’s Paradox (Chesterton 1929). When a rule has been in place for some time, there may be no one who remembers why it is there. Reformers will point out that the rule or practice is inconvenient or costly, and that it has never in living memory had any visible effect. But as Chesterton puts it, “This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.”

Finally, an issue one needs to keep in mind in deciding how much to expend on prevention is that speculative trading is a zero-sum activity. A well-diversified shareholder who owns both the employer of the rogue trader and the employers of their counterparties suffers little loss. The losses to Lloyds Lugano were gains to, inter alia, Crédit Lyonnais.

There is leakage. Some of the gainers are privately held hedge funds and the like. Traders at the counterparties receive bonuses not for skill but merely for taking the opposite side of the incompetent rogue trader’s orders. Lastly, shareholders of the rogue traders firm suffer deadweight losses of bankruptcy when the firm, such as Barings, goes bankrupt. Still, as Krawiec (2000) points out, for regulators the social benefit of preventing losses to rogue traders may not exceed the cost. To the degree that costs matter to managers, but not shareholders, managers should bear the costs via reduced salaries.


Chesterton, G. K. (1929) ‘’The Thing: Why I Am A Catholic’’, Ch. IV: “The Drift From Domesticity”.

Krawiec, K.D. (2000): “Accounting for Greed: Unraveling the Rogue Trader Mystery”, Oregon Law Review 79 (2):301-339.

Tschoegl, A.E. (2004) “The Key to Risk Management: Management”. In Michael Frenkel, Ulrich Hommel and Markus Rudolf, eds. Risk Management: Challenge and Opportunity (Springer-Verlag), 2nd Edition;

Assessing the Determinants of Economic Growth in South East Asia

The Historical State, Local Collective Action, and Economic Development in Vietnam

By Melissa Dell (Harvard University), Nathaniel Lane (Stockholm University), Pablo Querubin (New York University)

Abstract – This study examines how the historical state conditions long-run development, using Vietnam as a laboratory. Northern Vietnam (Dai Viet) was ruled by a strong centralized state in which the village was the fundamental administrative unit. Southern Vietnam was a peripheral tributary of the Khmer (Cambodian) Empire, which followed a patron-client model with weaker, more personalized power relations and no village intermediation. Using a regression discontinuity design across the Dai Viet-Khmer boundary, the study shows that areas historically under a strong state have higher living standards today and better economic outcomes over the past 150 years. Rich historical data document that in villages with a strong historical state, citizens have been better able to organize for public goods and redistribution through civil society and local government. This suggests that the strong historical state crowded in village-level collective action and that these norms persisted long after the original state disappeared.


Circulated by nep-his on 2017/03/19

Review by Fernando Arteaga (George Mason University)

What was the impact of the ancient Vietnamese Dai Viet empire in promoting long-term economic development? That is the main question the authors try to assess. Their inquiry is embedded within the now large literature on the importance of culture and institutions, as deep determinants of growth. The contribution the paper makes is, however, not restricted to adding one more piece of evidence in favor of it, but, more importantly, in providing empirical support for a specific transmission channel: how state capacity can be built through time via the fostering of local self-organization capabilities.

The paper’s main story builds on the idea that two distinct meta-societies existed within East Asia, and idea around which, by the way, there is general agreement. One of these societies based on Chinese precepts, prevalent in the Northeastern region; and other spread in the Southeast throughout the Indian Ocean.  Societies of the former category were historically constituted around a sort of Weberian professional bureaucracy that consolidated the working of a central state. The latter depended more on informal networking mechanisms among local elites to survive, and hence, tended to promote hierarchical patriarchal relationships.

Today’s Socialist Republic of Vietnam (henceforth Vietnam) is an interesting case study precisely because it arose out of the union of those two distinct cultures. The northern part, the Dai Viet, is an example of a Sino-style state, while the southern part of Vietnam (initially part of the Champa State and later as part of the larger Khmer Empire) resulted from a Indo-style society.  Figure 1 below offers map of present day Vietnam aligned with the size of the historical Dai Viet empire. Figure 1 suggests the Dai Viet expanded southwards through time but ended up establishing its final frontier in 1698 (orange color). It is this border the authors think provides a natural experiment that allows a clean regression discontinuity (RD) strategy that permits the disentanglement of the effect of being part of a bureaucratized state vis a vis a patriarchal state.


Figure 1: Dai Viet Historical Boundaries (Dell et al., 2017)

The use of the RD design is appropriate, the authors argue, because the chosen border resulted from exogenous contingencies that do not reflect any difference in future economic potential. The 1698 demarcation was settled on the ridges of a river, but there was nothing else particular to it that made that boundary preferable to other potential borders. The Dai Viet stopped its expansion because of constrains imposed by a local civil war (something that has nothing to do with the river itself). Moreover, the environmental characteristics of both sides of the river are almost identical (or vary smoothly), so there is no important geographical difference either. The only thing that changes abruptly is that on the east shore of the 1698 border, Dai Viet settlers occupied and controlled the land, while Khmer villagers occupied and controlled the land to the west of the river. Another possible counterargument to the use of the 1698 border as a natural experiment is the relevance of migration: if settlers moved across villages (at any time after the establishment of the original border), then the boundary becomes inconsequential. The authors argue that, even though they do not have historical data to control for it, there is qualitative evidence that refers to negative attitudes towards outsiders within the villages, which constitutes an important constraint to any major migratory flow. Today, both sides are part of Vietnam. It is then possible to assess if Die Viet institutions still exert some type of effect in current economic outcomes.

Figure 2 portraits the main outcome of the paper. Using household expenditure data from recent censuses (2002-2012), the authors find that today, villages situated along the historical Die Viet side of the border earn a third more than those communities that are situated on the historical Khmer side (Within the figure, the darker the zone depict lower earnings).


Figure 2a: Household Consumption, RD Graph (Dell et al., 2017)

The authors, however, not content with establishing the effects on current outcomes, look for historical evidence too. They collect data from different periods of Vietnamese history: 1878-1921 for the French Colonization, 1969-1973 for the South Vietnam State, and 1975-1985 for the early Communist Period; and find that the pattern is persistent through time: The Diet Viet zone is, in general, more developed than the Khmer side.

How can these results be interpreted?  The income differences must be due to the Die Viet heritage of greater state capacity that acted through local community self-organization that made them more co-operative and facilitated the resolution of local collective action problems. To test whether this transmission channel matters, the authors looked for data on social capital. Their main sources were the surveys and census of the South Vietnamese period. What they find corroborates their story: villagers on the Diet Viet side were more prone to participate in community activities, to collect more taxes (that at the time were local responsibility, not provincial), to have greater access to public goods (health, school and law enforcement), to be skeptical of central government in favor of local, and to give more to charity.


All in all, the authors do a thorough job in assessing the robustness of their main story. They control for several of potential alternative stories and/or possible variables that could affect the results and mechanisms.  Any critique of it may sound redundant or unreachable.  Yet, I would point to three different aspects that may be important.

First, and perhaps most importantly, I would stress that although the argument makes sense, the narrative is unclear as to how specifically the Dai Viet, which supposedly was a centralized bureaucratized state, fostered local governance. As the authors mention in the introduction, the literature on social capital is ambivalent on its effects on economic outcomes. As it is, the paper’s contribution is the finding of empirical evidence on the presence of a particular transmission channel (from state to local governance), but without a clear model and/or an analytical narrative, we are left in the dark about how explicitly this mechanism worked its way throughout society.

Second, and pushing the level of pickiness even further, one can always speak of a potential omitted variable bias. I must ask then: what about genes? The authors minimize ethnic fragmentation as a problem because they find the studied area is cataloged as being almost entirely composed of homogeneously ethnic Vietnamese. The problem is that censuses and surveys may under-report true ethnicity, and cannot capture genetic differences at all. By the authors’ own account, we are told the Diet Viet State originated as, and remained for a long time, Chinese. Moreover, as Tran (1993) attests, Chinese ethnicity may conflate the results of the paper in other several ways:

  • the largest Chinese migration occurred between the late 17th century and early 19th century, just at the time that the Dai Viet-Khmer border was being established;
  • The Chinese settled mostly in southern Vietnam, the part that the authors use as study case;
  • Chinese early importance resided precisely in that they helped establish new villages and trade outposts. They (not merely the Diet Viet heritage) helped to build local governance structures.

If ethnicity has been underreported and/or Chinese genetics matter in fostering economic development in any way (as suggested by Ashraf-Galor, 20013a, 2013b) then the interpretation of the paper could dramatically change: the importance of the Dai Viet state would be downplayed in favor of just being more ethnic/genetic Chinese. After all, it is known that there is a correlation between having larger ethnic Chinese minority and larger economic growth (Priebe and Rudulf, 2015).

Third, related to the last point: one would expect that given the importance of the result – the long-term reach of Diet Viet institutions–, its impact would feel more broadly across all the territory, not only in the immediate zones of the frontier which were the last to be incorporated into the state.  Figure 3, for example, shows the level of poverty in Vietnam (Epprecht-Heinmann,2004). It is visible that the area under study (along the last border of the historical Diet Viet) has the lowest share of poverty in the whole country. The immediate area to the left (which coincides with the area that historically belonged to the Khmer Empire) is poorer indeed. But the differences are minor if we compare them to the rest of current Vietnam, which belonged almost entirely to the Diet Viet, and has the largest poorer areas.  The RD design may be identifying a non-observable variable that is concentrated in the southern part (like ethnicity or/and genes) and is not broadly distributed across the rest of Vietnam.


Figure 3: Incidence of Poverty in Vietnam (Epprecht-Heinmann, 2004: 155).

Additional References

Ashraf, Q., Galor, O., 2013a. Genetic Diversity and the Origins of Cultural Fragmentation. The American Economic Review: Papers on Proceedings 103, 528–533.

Ashraf, Q., Galor, O., 2013b. The “Out of Africa” Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review 103, 1–46.

Epprecht, M., Heinemann, A., 2004. Socioeconomic Atlas of Vietnam: A depiction of the 1999 Population and Housing Census. Swiss National Centre of Competence in Research, Bern.

Priebe, J., Rudolf, R., 2015. Does the Chinese Diaspora Speed Up Growth in Host Countries? World Development 76, 249–262.

Trần, K., 1993. The Ethnic Chinese and Economic Development in Vietnam. Institute of Southeast Asian Studies, Singapore.

How do we eliminate wealth inequality and financial fragility?

The market turn: From social democracy to market liberalism

By Avner Offer, All Souls College, University of Oxford (

Abstract: Social democracy and market liberalism offered different solutions to the same problem: how to provide for life-cycle dependency. Social democracy makes lateral transfers from producers to dependents by means of progressive taxation. Market liberalism uses financial markets to transfer financial entitlement over time. Social democracy came up against the limits of public expenditure in the 1970s. The ‘market turn’ from social democracy to market liberalism was enabled by easy credit in the 1980s. Much of this was absorbed into homeownership, which attracted majorities of households (and voters) in the developed world. Early movers did well, but easy credit eventually drove house prices beyond the reach of younger cohorts. Debt service diminished effective demand, which instigated financial instability. Both social democracy and market liberalism are in crisis.


Distributed by NEP-HIS on: 2017-01-29

Review by: Sergio Castellanos-Gamboa, Bangor University


This paper emerged from Avner Offer’s Tawney Lecture at the Economic History Society’s annual conference, Cambridge, 3 April 2016 (the video of which can be found here).

In this paper Offer discussed two macroeconomic innovations of the 20th century, which he calls “the market turn”. These are the changes in fiscal policy and financialisation that encompassed the shift  from social democracy to market liberalism from the 1970s onwards. Social democracy is understood as a fiscal innovation which resulted in the doubling of public expenditure (from aprox. 25 to 50 per cent of GDP between 1920 and 1980). Its aim was reducing wealth inequality. Market liberalism encompassed a monetary innovation, namely the deregulation of credit which allowed households to increase their indebtedness from around 50 to 150 per cent of personal disposable income, mainly for the purpose of home ownership. According to Offer the end result of market liberalism was increasing wealth inequality. See Offer’s depiction of this process in the graph below.

Two macroeconomic financial innovations in the 20th century, UK calibration. (Note: Diffusion curves are schematic, not descriptive.)

Two macroeconomic financial innovations in the 20th century, UK calibration.
(Note: Diffusion curves are schematic, not descriptive.)

Offer considers that both social democracy and market liberalism are norms captured by the single concept of a “Just World Theory” (Offer & Söderberg, 2016).The ideals behind social democracy are said to be supported by ideas found in classical economics, while the ideals behind market liberalism are said to have emerged from a redefinition of the origins and nature of economic value found in neoclassical economics. Contrasting the ideas behind social democracy and market liberalism brings about  questions such as:

  • Where does value come from?,
  • Is it from production or is it from personal preferences and demand for the good/service?,
  • What is just and fair?,
  • What do we as individuals deserve as reward?, and
  • Is there really a trade-off between equality and efficiency?

Answering any of these question is not simple and heated debates abound around them. Offer, however, rescues the idea of life-cycle dependency, where the situation of the most vulnerable individuals is alleviated through collective risk pooling rather than financial markets. According to Offer,  life-cycle dependency was the dominant approach to reducing poverty in most developed countries until the oil crisis of the early 1970s. Then collapse of the Bretton Woods accord that followed, led to the liberalization of credit by removing previous constraints. This in turn resulted in the “market turn”.

Avner Offer

Professor Avner Offer (1944). MA, DPhil, FBA. Emeritus Fellow of All Souls College, Oxford since 2011.

Offer then turns to analyse the events after the collapse of Bretton Woods that led to the increase of household indebtedness while focusing on the UK. The 1970s was a very volatile decade for Britain.  For instance, oil price increases and the secondary banking crises of 1973 resulted in the highest annual increase of the inflation rate on record. Offer argues, while citing John Fforde (Executive Director of the Bank of England at that time), that the Competition and Credit Control Act 1971 was as a leap of faith in the pursuit of greater efficiency in financial markets. This Act was accompanied by a new monetary policy where changes in interest rates (the price of money) by the central bank was to bring about the control of the quantity of money. Perhaps unexpectedly and probably due to a lack of a better understanding of the origins of money, that was not the case. Previously lifted credit restrictions had to be reinstated.

Credit controls were again lifted in the 1980s. This time policy innovations went further by allowing clearing (ie commercial) banks to re-enter the personal mortgage market. The Building Societies Act 1986  allowed building societies to offer personal loans and current accounts as well as opened a pathway for them to become commercial banks (which many did after 1989 and all those societies that converted  either collapsed or were taken over by clearing banks or both). Initially and up to the crash of house prices in September, 1992, personal mortgage credit grew continuously and to levels never seen before in the UK. According to Offer, during this period both political parties supported the idea of homeownership and incentivised it through programs like “Help to Buy”. However, the rise in the demand for housing combined with the stagnation in the supply of dwellings pushed up house prices, making it more difficult for first-time buyers to become homeowners. Additionally, according to Offer, the wave of easy credit of the 1980s brought with it an increase in wealth inequality and an increase in the fragility of the financial system. As debt repayments grew as proportion of income, consumption was driven down, with subsequent effects on production and services. On this Offer opined:

“In the quest for economic security, the best personal strategy is to be rich.” (p. 17)

The paper ends with possible and desirable futures for public policy initiatives to deal with today’s challenges around wealth inequality and mounting personal credit. He argues that personal debt should be reduced through rising inflation,  a policy driven write-off or a combination of both. He also argues to reinstate a regime where credit is rationed. He states that financial institutions should not have the ability to create money and therefore the housing market funding should return to the old model of building societies. He has a clear preference for social democracy over market liberalism and as such argues that austerity should end, since it is having the exact opposite effects to what was intended.

Brief Comment

Offer’s thought provoking ideas comes at a time when several political and economic events are taking place (e.g. Brexit, Trump’s attack on Dodd-Frank, etc.) which, together, could be of the magnitude as “the market turn”. Once again economic historians could help better inform the debate. Citing R. H. Tawney, Offer opened the lecture (rather than the paper) by stating that:

“to be an effective advocate in the present, you need a correct and impartial understanding of the past.”

Offer clearly fulfils the latter, even though some orthodox economists might disagree with his inflationary and credit control proposals. As per usual his idea are a great contribution to the debate around market efficiency in a time when the world seems to be in constant distress. Perhaps we ought to generate more and better research to understand the mechanisms through which market liberalism generated the current levels of wealth inequality and financial instability that Offer describes. More importantly though, is analysing if social democracy can bring inequality down as it did in the past. In my view, however, in a world where productivity seems to be stagnated, real wages are decreasing, and debt keeps growing, it is highly unlikely that the public sector can produce the recipe that will set us in the path of economic prosperity for all.

Additional References

Offer, A., & Söderberg, G. (2016). The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn. Princeton University Press.
(Read an excellent review of this book here)

What about the periphery? Swedish wealth-income ratios in historical perspective

Wealth-Income Ratios in a Small, Developing Economy: Sweden, 1810–2014


Daniel Waldenström (Paris School of Economics and Research Institute of Industrial Economics

ABSTRACT: This study uses new data on Swedish national wealth over the last two hundred years to examine whether the patterns in wealth-income ratios found by Piketty and Zucman (2014) extend to small and less developed economies. The findings reveal both similarities and differences. During the industrialization era, Sweden’s domestic wealth was relatively low because of low saving rates and instead foreign capital imports became important. Twentieth century trends and levels are more similar, but in Sweden government wealth grew more important, not least through its relatively large public pension system. Overall, the findings suggest that initial conditions and economic and political institutions matter for the structure and evolution of national wealth.


Distributed by NEP-HIS on 2016-10-17

Review by Anna Missiaia

This paper looks at the evolution of wealth-income ratios in Sweden over the last two hundred years. Wealth-income ratios have gained increasing attention as an aftermath of the release of Capital in the 21st Century by Thomas Piketty as well as the more specific paper by Piketty and Zucman (2014). The trajectory of wealth-income ratios in core economies such as the US, the UK, Germany and France shows a U-shape pattern over the last two hundred years, with a level of 600-700% of wealth over income in the 18th and 19th centuries, a low point of 200-300% in the 1970s and a subsequent increase up to 400-600% today. The U-shape is, in the interpretation of Piketty and Zucman, the consequence of the two world wars and the creation of the welfare state while in the last decades we are seeing a reversal and a “return to historical norms”. The come back of capital is potentially interesting as wealth accumulation can have different effects on the economy and the society, depending on weather the additional wealth is in public or private hands. Also, the increase in wealth relative to income poses new questions on what the optimal taxation strategy should be. In terms of the scope of this line of research, at the end of their paper Piketty and Zucman call for a further effort to cover new and non-core countries in the analysis. Identifying the components of wealth driving the increase in the ratio is also a worthwhile next step.

The work by Walderström goes in this direction in two ways. First, it looks at a “small, developing economy” such as Sweden, which represents at least part of the periphery that is missing in previous research. Moreover, it discusses to some extent the determinants of Swedish wealth in comparison with other core countries, suggesting that the composition of wealth can dramatically change the interpretation of the ratio.

The inclusion of small economies in the analysis is important because theory predicts a different evolution of wealth-income ratios during industrialization depending on the size of the country.  In particular, large economies (like the ones studied by Piketty and Zucman) are expected to increase their wealth while small economies are expected to increase capital imports. Moreover, Sweden is an excellent case-study for looking at the effect of a social democratic welfare state and its political institutions on the accumulation of national wealth.

The empirical analysis in the paper is grounded on a new body of evidence that, as it often happens with Sweden, provides very detailed information compared to other countries. In this case, the Swedish National Wealth Database (SNWD)  provides information on the household sector, the public sector and national, private and public savings following the same structure of Piketty and Zucman (2014).


Swedish farmers before the creation of the universalistic welfare-state system

The results of the paper are the following: Sweden in the 19th century had a much lower ratio (about half) compared to core countries such as the UK, France and Germany but it had a very similar level compared to the US. The author then goes on and asks whether 19th century Sweden is really comparable to the US in terms of national wealth dynamics. The answer is no. Sweden had a low ratio because of its low level of savings due to low incomes. The US had a low ratio because of a high level of income growth that was dominating wealth growth. For this reason, Sweden had to rely much more heavily on capital imports to sustain its industrialization. The 20th century shows again a much lower ratio for Sweden compared to the core countries (this time both European countries and the US alike) but the explanation lays this time in the increasing role of the Swedish Government and the creation of the well-known universalistic welfare-state system which redirected resources from private wealth to provision of public goods. In this sense, the discussion on the emergence of the public pension system, which is neglected by the analysis of national wealth in core countries by Piketty and Zucman, is most interesting. In short, the argument is that creation of a public pension system with a large share of unfunded pensions financed by taxation led to a decrease in saving for retirement and thus wealth. The figure below shows the low ratio for Sweden over the last two hudred years.


Private welath-income ratios in comparison.

The main contribution of this work is showing that the patterns of core countries, that are often at the core of the research and speculation Piketty and coauthors, are far from being exhaustive in explaining national wealth at world level. Also, as the same wealth-income ratio can hide very different underlying structural differences, the use of a more detailed breakdown of public wealth that includes pensions is also much appreciated. On the other hand, it is clear that because of its very peculiar history (see the non-participation to the world wars and the early formation of such a strong welfare state) Sweden cannot be considered as fully representative of the entire periphery. More research on other countries is needed to capture the entire picture.



Piketty, T. (2014) Capital in the 21st century, Cambridge, MA: Belknap.

Piketty, T. and G. Zucman (2014) Capital is back: Wealth-income ratios in rich countries, 1700–2010, Quarterly Journal of Economics, 129(3): 1255–1310.

Waldenström, D. (2015), Wealth-income ratios in the small economy: Sweden over the past two centuries, Vox post,



Neoliberalism: A Cultural Social Construction

Crisis Without End: Neoliberalism in a Globalized Environment

by Richard N. Rambarran (University of Hyderabad)

Abstract: Since the 1970’s, both politically and theoretically, neoliberalism as an ideology has been on a persistent rise to the point where, in the twenty first century, it has garnered hegemonic dominance. Despite several recurring crises in countries since the ascendance of neoliberalism, we yet remain reluctant to point out the political economy philosophy as a root cause of the crises. Instead, many of the academics within Economics prefer to offer bouts of highly technical reasons for the downturn – this is especially true and almost solely applicable to those who practice within the ‘neoclassical’ conjecture of Economics. In a typical Marxian sense, one would have to look no further than the economic system to determine both economic and social outcomes of a country. What dictates that economic system however is the political philosophy of the leaders who guide the economic system – the policy makers. This paper attempts to show the neoliberal political philosophy, as the common thread for major crises within the last two decades. It also proposes a societal trinity for which change is driven through complex interactions among the political, economic and social spheres.


Circulated by nep-his on: 2015-10-25

Revised by: Stefano Tijerina

Richard Rambarran joins an emerging group of scholars that are spearheading an aggressive global criticism of modern capitalism, and particularly the impact that neoliberalism has had on its most recent methods of implementation within the international system. Thomas Picketty’s Capitalism in the Twenty-First Century has lead the way in recent times. Nevertheless Rambarran’s contribution to the discussion is welcomed because it points out that the economic political philosophy behind the social construction of neoliberal ideals is the determinant factor in preserving <status quo, even after numerous economic crises.

Richard Rambarran Research Fellow at The Social Economy Research Group (SERG)

From Rambarran’s point of view, the neoliberal principles have become an “ingrained” ideology fomented by economists, local politicians and bureaucrats, domestic and multilateral institutions, academic institutions, mass media, corporations, and the consumer.[1] He further argues that today’s mainstream professional economist has perpetuated this social construction using its mathematical and econometric technical rhetoric to distance itself not only from the public sphere but also from the critical role once played by the “Classical economists.”[2] The complacency in the professional sphere has permeated the public sphere, where the collective political and social conscience is more concerned in pursuing the possibility of “wealth and great opulence,” occasionally reacting to economic crises like the one in 2008 only to quickly return to the initial passive approach once individual financial issues are partially resolved.[3]

Rambarran centers on the 1997 East Asian crisis and the 2008 Global Financial Meltdown in order to illustrate how the economic political philosophy has come to dictate “the very mechanics of our lives” through its systemic and institutional framework. He argues that contrary to the views of many scholars that the rise of neoliberalism came with the emergence of political leaders Ronald Reagan and Margret Thatcher, the foundations of the political philosophy and its social construction emerged in the post Great Depression era.[4] The solutions to the 1997 and 2008 crises therefore represent a series of theoretical models constructed since the first modern global financial crisis in order to scientifically justify the perpetuation of neoliberalism.

'Well what a coincidence! I'm a financial regulator too!'

‘Well what a coincidence! I’m a financial regulator too!’

The ingrained idea that “human well-being and social welfare” are best advanced by the deregulation of the institutions, programs, and norms that once regulated the capitalist machine, seems to be an unquestionable thought. [5] To get to this social reality, argues Rambarran, classic liberal ideas of John Locke, Adam Smith, David Ricardo and the like had to be dismantled in order to neoliberalism to surge. According to Rambarran, neoliberalism is “not simply a minutely revised version of classic liberalism,” it is a new version of capitalism that reduces the role of the state to its minimal.[6] The business-government alliance that pushed neoliberalism forward after the 1930s slowly twisted the idea that “liberating individual and entrepreneurial freedoms and skills” through institutions, programs, and a normative systems “characterized by strong private property rights, free markets, and free trade” were actually responsible for the debacle of the market system in 1997 and 2008, and that greater privatization of services and deregulation for the business sector was the only solution moving forward.[7] These are the principles of nation state building under globalization, the basic political economic structures of nations that welcome open market and free trade, the minimal parameters for participating in the global market system; ideas that, as indicted by Rambarran, are part of the subconscious decision making dynamic between politicians, the private sector, and consumers.[8]

The current realities of this “macroscopic trinity” indicate that the business class, defined by Rambarran as the “intellectual class,” heavily influences political, economic, and social perceptions of nation building under a globalized system.[9] An intellectual class responsible for the cultural social construction of neoliberal principles that originated in the industrial world during the first half of the twentieth century and that began to spread across the developing world after the Second World War.

Macroscopic TrinityNeoliberal economists obsessed with breaking the chains of state regulatory systems and interested in returning to the deregulated conditions of the pre Great Depression era used theoretical models to debunk Keynesian economics.[10] During the 1970s and 1980s neoliberal principles became the formula for stagflation in the highly developed countries, and the remedy for the increasing external debt crisis across the developing world. The effective release of the forces of the market justified the dismantling of the social welfare state and the institutional and programmatic bodies that awarded citizens levels of accountability within the triangular dynamic of government-business-constituent relationships across the world. Nationalist development models based on Import Substitution Industrialization were dismantled and replaced by the principles of deregulation, privatization, and the strengthening of private property rights.

According to Rambarran, the implementation of the neoliberal experiment across the world produced mixed results, but the ability of the intellectual class to market success stories through its propaganda machine in order to justify the long-term preservation and expansion of neoliberal principles across the world gave birth to the Asian miracle.[11] Foreign direct investment and the “inflow of speculative money” would be the driving force behind the miracle, as capitalists in the industrial world shifted their production and manufacturing operations to newly unregulated regions of the world while at the same time taking advantage of the liberalization of capital accounts, escaping the already fragile regulatory systems in their own nation states, and setting the tone for the initial stages of accelerated “neoliberal globalization.”[12] Once the “speculative bubble…popped” foreign investors quickly pulled their money from the region, decreasing confidence in the East Asian region.[13] The neoliberal experiment had revealed the need for regulatory systems in order to impede the emergence of new unregulated speculative markets across the world under a more interdependent global market system, but the reshuffling of capital back into the industrial economies allowed the neoliberal propaganda system to quickly market the success of Free Trade zones.

Crisis 1997 Rambarran misses the opportunity to explain the historical developments that took place between the Asian crisis of 1997 and the 2008 Global Financial Crisis that pushed neoliberalism further into the collective subconscious. Discussions about the emergence of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement, and the consolidation of the European Union would have allowed the author an opportunity to illustrate how neoliberal intellectuals engineered and marketed to their constituents the illusion of a globalized economy for the sake of the consumer and the domestic worker.

The author’s lack of historical evidence makes his argument less convincing. The 1997 and 2008 crises help illustrate how neoliberal forces are able to perpetuate their principles even after severe global economic, political, and social damage, but he is not able to explain how the intellectual forces within his “macroscopic trinity” were able to create the social cultural construction that turned neoliberalism into an unquestionable economic political philosophy.

For example how neoliberal economists such as Milton Friedman and Lauchlin Currie together with multilateral organizations engineered the expansion of neoliberalism to markets across the world. How marketing and public relations intellectuals such as Philip Kotler and Daniel Edelman perfected the use of mass media in order translate the principles of neoliberalism to consumers, distancing them from their role as constituents and shifting their agency toward the world of consumption. How the roles of politicians and bureaucrats was redefined by Thatcher and Reagan in order to reinvent the democratic relationship between representative and constituent, and how the educational system at all levels was reengineered in order to replicate and export neoliberal ideals across the world.

A more detailed explanation of the concepts behind his “social trinity” would have clarified the dynamics between the intellectual class, and political, economic, and social actors. Why is there a one-way communication dynamic between economic actors and society? Why is the communication between political and economic actors a one-way dynamic? And why is the intellectual class not present within the political, economic, and social realms but separate from them? I would argue that the success of the expansion of neoliberal thought is that they now represent government, economic policy, and the collective social conscience. It is why it is more prevalent then ever before to see private sector representatives running for office, managing government institutions, and redefining the nature of once sacred social institutions such as universities. It is not a phenomenon of the industrial world but a common trend across the global system.


Duménil, G. & Levy, D. “Neoliberal (Counter) Revolution.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 9-19.

Harvey, D. A Brief History of Neoliberalism. London, United Kingdom: Oxford University Press, 2007.

Rambarran,R. “Crisis without End: Neoliberalism in a Globalized Environment Modeling the Historic Rise of Neoliberalism and its Systematic Role in Recent Economic Downturns,” Munich Personal RePEc Archive, October 22, 2015.

Palley, T. I. “From Keynesianism to Neoliberalism: Shifting Paradigms in Economics.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 20-29.

Picketty, T. Capitalism in the Twenty-First Century. Cambridge MA: Harvard University Press, 2014.

[1] Rambarran, “Crisis without End”, p. 1.

[2] Ibid.

[3] Ibid.

[4] For more information see Harvey 2007, Palley 2004 and Dumeril & Levy 2004.

[5] Rambarran, 2.

[6] Ibid.

[7] Ibid., 3.

[8] Ibid.

[9] Ibid.

[10] Ibid., 4.

[11] Ibid., 10.

[12] Ibid., 11.

[13] Ibid., 13.

Who Pays the Bills?

Sovereign Debt Guarantees and Default: Lessons from the UK and Ireland, 1920-1938

By Nathan Foley-Fisher (Federal Reserve Board) and Eoin McLaughlin (St. Andrews)

Abstract We study the daily yields on Irish land bonds listed on the Dublin Stock Exchange during the years 1920-1938. We exploit structural differences in bonds guaranteed by the UK and Irish governments to find Irish events that had long term effects on the credibility of government guarantees. We document two major events: The Anglo-Irish Treaty of 1921 and Ireland’s default on intergovernmental payments in 1932. We discuss the political and economic forces behind the Irish and UK governments’ decisions. Our finding has implications for modern-day proposals to issue jointly-guaranteed sovereign debt.


Distributed by NEP-HIS on: 2015-05-16

Review by Sarah Charity (Queen’s University of Belfast)

This working paper abets us in shedding some light on the financial implications for current economic events. One that dominated the headlines most prominently was Scotland’s decision to vote on independence in their recent referendum. Hard-line fiscal policy makers held their breath while questions simmered such as; would an independent Scotland continue debt repayments to Britain? What if they defaulted on these payments? The authors investigate how public debt in Ireland was dealt with during their severance from the political state of the United Kingdom in the early 20th century, focusing on the implementation of UK- and Irish-backed land bonds over this period of significant Irish land reform, when ownership was transferred from landlords to tenants. From this episode in Irish history, we can draw comparisons and learn lessons for today.


Foley-Fisher and McLaughlin look to previous studies in which yield spreads between UK and Irish government bonds are analysed, such as that of Nevin (1963) and Ó Gráda (1994). They contribute to the existing literature by concentrating on land bonds. They base their methodology on the idea of particular structural breaks occurring in their time-series data. They build on the discoveries of Willard et al. (1996) who defined breaks as a change in the intercept of the time series – ‘a shift in the mean’ (p.11-12), while Zussman et al. (2008) also searched for ‘breakpoints’ (p.4) in their methodology. They analyse the shifts in ‘perceived value of sovereign guarantees’ (p.11) by looking for changes in the mean of the yield spreads.

The impact of bond spreads ‘diffused’ (p.15) around three significant events. The first break coincides with the Anglo Irish Treaty passing in 1921 while the second occurred a decade later when the default by Ireland on land bond payments beckoned. Around this time, Eamon De Valera, founder of Irish political party Fianna Fáil, announced the ‘Free State would not honour the bi-annual payments due under various financial agreements between Ireland and the UK’ (p.14). The final break came at the end of the sample period, however this is discounted as irrelevant due to trade war negotiations being ‘unlikely…(to be) sufficient’ (p.15).

Parliamentary acts sanctioned the used of generous government guaranteed land bonds to finance state mortgages, rather similar to the volatile mortgage backed securities of the recent credit crisis, allowing farmers to borrow significant amounts of credit at lower rates. The idea was to curtail the Irish Nationalists, however it proved unsuccessful and the ‘hardline republicans’ (p.6) received independence through the signing of the Treaty in December 1921. A new dawn was on the horizon, bringing with it the promise of a new government – but it was lamentably overshadowed by the onset of the Irish Civil War. The newly established Free State was released from its obligation towards UK public debt in return for permanent partition; however it agreed to maintain annuity payments along with issuance of more land bonds.

The authors calculate the credibility of UK guarantees, otherwise known as sovereign risk, post-independence using yield spreads controlling for risks of inflation and exchange rate alternations. They acknowledge other scholars in assessing the importance of credibility in economic features such as the ‘cost of government finance’ (p.5) as investigated by Flandreau & Zumer (2009) and the estimated behaviour of the government as a ‘counterparty in other contracts’ (p.5) as seen in Cole & Kehoe (1998). Foley-Fisher and McLaughlin found the spread over UK government bonds to be 60 basis points indicating a low credit risk for the UK- and Irish-backed land bonds. Through their estimations they suggested that the increased yield spread of the land bonds during the ‘benchmark’ years from 1921 to 1932 was highly significant. After Ireland defaulted, the land bonds were no longer considered risky and the spread on UK-backed land bonds returned to zero. The authors are perhaps slightly restricted by their sample period. Mercille (2006, p.3) tells us little research exists on the significant long-term costs related to yield spreads, forcing us to seek answers elsewhere.


Foley-Fisher and McLaughlin suggest that the cost of Ireland’s default was greater for their British counterparts. They give reasons for the UK’s intervention such as the insignificant cost to the UK Treasury, who continued making interest repayments to ensure bond holders remained intact; UK war loan negotiations and the fact land bonds were mostly held in the UK ensured Whitehall was an interested party. The authors provide us with a contrasting government reaction to default in another commonwealth country, using the contemporaneous case of Newfoundland, whose debt profile bore echoes of Ireland’s. As previously mentioned, the cost for the UK government of bondholders’ losses through passing on Ireland’s default far outweighed the benefits. In the Newfoundland example, the UK government’s reaction was to withdraw from the imminent burden of financial instability and force confederation of the Dominion with Canada, thus shedding the burden for bondholders’ losses – a consequence independence-seeking Scotland may have wanted to consider.

In the absence of case studies, Ireland’s historical sovereign break up ensures Foley-Fisher and McLaughlin’s ‘simple empirical strategy’ (C.R, 2014) is applicable to and useful in multiple current financial situations whether it be the aforementioned Scottish referendum, or the pending disintegration of Catalonia from Spain. Moodys (2014) discovered that 75% of the 17 country break ups which have occurred since 1983 resulted in sovereign default by the preceding or the new state – albeit these implications ‘cannot be easily applied’ (p.3) to more recent breakups, paving the way for this exploration of Ireland as the model to follow.

This paper describes apportioning fiscal liabilities as ‘complex’ and provides advice for states in the process of seeking dissolution – uncertainty is persistent. Debt must be paid and it may be guaranteed by the Treasury of the former union in the wake of default, but the ambiguity in the outcome remains. According to the blogger C.R., writing in The Economist (2014), it seems as if partition is more straightforward politically rather than financially or economically. From what Foley-Fisher and McLaughlin have taught us in their empirical study, the cost of default and fiscal uncertainty lingers long after secession. In conclusion, the exploits of our Irish ancestors from the previous century are what we, alongside other state governments, must contemplate when the sword of political state break-up strikes again.


Cole, H. L. & Kehoe, P. J. (1998), ‘Models of Sovereign Debt: Partial versus General Reputations’, International Economic Review 39(1), 55–70.

C.R (Feb. 21st 2014) The economics of Scottish Independence- a messy divorce, Blighty Britain Available at: (Accessed: March 22nd 2015)

Ferguson, N. (2006), ‘Political risk and the international bond market between the 1848 revolution and the outbreak of the First World War’, Economic History Review 59, 70– 112

Flandreau, M. & Zumer, F. (2009), The Making of Global Finance 1880-1913, Paris: OECD Publishing.

Hancock, W. (1964), Survey of British Commonwealth Affairs. Volume I Problems of Nationality 1918-1936, Oxford: Oxford University Press.

Mauro, P., Sussman, N. & Yafeh, Y. (2006), Emerging Markets and Financial Globalization, Oxford: Oxford University Press.

Mercille, J. (2006) ‘The Media and the Question of Sovereign Debt Default in the European Economic Crisis: The Case of Ireland’, University of Sheffield, Available at: (Accessed August 18, 2015).

Moodys (May 21st. 2014) When countries broke up, sovereign default risk spiked, Available at:–PR_299968?WT.mc_id=NLTITLE_YYYYMMDD_PR_299968 (Accessed: March 23rd. 2015).

Nevin, E. (1963), ‘The Capital Stock of Irish Industry’, Economic and Social Research Institute(ESRI) paper No. 17, Dublin. Available at: (Accessed August 18, 2015).

Ó Gráda, C. (1994), Ireland: A new Economic History 1780-1939, Clarendon Press, Oxford.

Willard, K. L., Guinnane, T. W. & Rosen, H. S. (1996), ‘Turning points in the Civil War: views from the Greenback market’, American Economic Review 86, 1001–1018.

Zussman, A., Zussman, N. & Nielson, M. O. (2008), ‘Asset Market Prespectives on the Israeli-Palestinian conflict’, Economica 75, 84–115.