The power of peripheral governments: coping with the 1891 financial crisis in Portugal*

Abstract

In 1891 a financial crisis led Portugal to abandon the gold standard and partially to default by cutting interest payments on domestic and foreign debt. As a consequence, the country was banned from borrowing in international financial markets until an agreement with foreign bondholders was reached in 1902. The financial crisis was the result of large current account and government deficits. Yet, the abandonment of the gold standard and default were not imposed only by financial difficulties. This article shows that such options were taken because of the growing domestic consensus regarding the need for a change in monetary policies. This concern about the domestic economy was more important to successive Portuguese governments than the fear of a negative reaction from foreign bondholders. Insufficient information about the sustainability of government debt and lack of co-operation between borrowers left Portuguese governments with space to manoeuvre according to their domestic political interests.