Hans-Joachim Voth

Mauricio Drelichman

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. Lending to the Borrower from Hell looks at one famous case--the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example. Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults--they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

Debt, Taxes, and Default in the Age of Philip II

Lending to the Borrower from Hell

What the loans and defaults of a sixteenth-century Spanish king can tell us about sovereign debt today Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. Lending to the Borrower from Hell looks at one famous case—the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, Mauricio Drelichman and Hans-Joachim Voth analyze the lessons from this important historical example. Using detailed new evidence collected from sixteenth-century archives, Drelichman and Voth examine the incentives and returns of lenders. They provide powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive. Drelichman and Voth also demonstrate that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The authors unearth unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, Lending to the Borrower from Hell offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

The extreme levels of stock price volatility found during the Great Depression have often been attributed to political uncertainty. This paper performs an explicit test of the Merton/Schwert hypothesis that doubts about the survival of the capitalist system were partly responsible. It does so by using a panel data set on political unrest, demonstrations and other indicators of instability in a set of 10 developed countries during the interwar period. Fear of worker militancy and a possible revolution can explain a substantial part of the increase in stock market volatility during the Great Depression. Keywords: Stock price volatility, political uncertainty, worker militancy, Great Depression. JEL Classification: G12, G14, G18, E66, N22, N24, N12, N14.

Evidence from 10 Countries During the Interwar Period

Why was Stock Market Volatility So High During the Great Depression?

Peter Temin

After 1688, Britain underwent a revolution in public finance, and the cost of borrowing declined sharply. Leading scholars have argued that easier credit for the government, made possible by better property-rights protection, lead to a rapid expansion of private credit, and see the Industrial Revolution as a result of the preceding revolution in public finance. In Prometheus Shackled, prominent economic historians Peter Temin and Hans-Joachim Voth examine this hypothesis using new, detailed archival data from 18th century banks. They conclude the opposite: the financial revolution led to an explosion of public debt, but it stifled private credit. This resulted in markedly slower growth in the English economy. Temin and Voth collected detailed data from several goldsmith banks - Child's, Gosling's, Freame and Gould, Hoare's, and Duncome and Kent. The authors look closely at Hoare's, founded by Sir Richard Hoare in 1672, because of its excellent records. Numerous entrants tried their hand at the new business of deposit banking; few survived and fewer thrived. Hoare's and a small group of competitors did both. Temin and Voth chart their growth in the face frequent wars and heavy-handed regulations. This new data allows insights into the interaction between financial and economic development. Government regulations such as setting a maximum interest rate caused severe misallocation of credit; a misguided attempt to lighten the nation's debt burden led directly to the South Sea Bubble in 1720 - analyzed in detail here - and frequent wars caused banks to call in loans, leading to sharply slower economic growth rate. Wartime borrowing crowded out investment. Far from fostering economic development, England's financial revolution after 1688 did much to slow it down - the Hanoverian "warfare state" was a key reason for slow growth during Britain's Industrial Revolution. Prometheus Shackled is a revealing new take on one of the most important eras of financial development.

Hans-Joachim Voth

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