Ability and Willingness to Pay in the Age of Pax Britannica, 1890–1914

Abstract

The paper explores sovereign debt repayment during the late 19th and early 20th centuries within the context of an ability and willingness to pay approach. The paper's ability to pay hypothesis is that state interventions which promoted national economic development fostered repayment by directing borrowing to productive use. The paper's willingness to pay hypothesis is that repayment was enhanced by debtors' trade ties with Britain, the principal creditor during the period. Bolstered by Britain's status as the world's preeminent power, the British bondholders' organization, the Corporation of Foreign Bondholders, employed a variety of enforcement strategies to increase the costs of default. Using a new data set, derived principally from Corporation of Foreign Bondholders' records, the paper presents an econometric test of the two central hypotheses.