How Are Sovereign Debtors Punished? Evidence from the Gold Standard Era Kris James Mitchener and Marc Weidenmier* September 2004 Using an augmented gravity model of trade and a new database of nearly 9,000 bilateral trade pairs, this paper examines how sovereigns were punished for defaulting on external debt during the classical gold standard period. We do not find that, in general, trade between creditor and debtor countries fell in response to a default – evidence that would be consistent with the presence of trade sanctions. During the period 1870-1914, a statistically significant decline in trade, as a result of default, was observed only when gunboat diplomacy was used by creditor countries. Indeed, the use of “supersanctions” during the gold standard era – instances where external military pressure or political control was imposed on defaulting nations – proved to be an effective means for punishing debtors and reducing ex ante default probabilities. Conditional on default, the probability that a country would be “supersanctioned” was greater than 30 percent. Codes: F10, F34, G15, N10, N20, N40 Keywords: sovereign debt, sovereign default, bilateral trade, sanctions, gunboat diplomacy * Mitchener: Department of Economics, Santa Clara University and NBER;
[email protected]. Weidenmier: Department of Economics, Claremont McKenna College and NBER;
[email protected]. We thank seminar participants at the 5th World Cliometric Congress and NBER-DAE Summer Institute for comments and suggestions. We thank Annalisa Yenne for valuable research assistance, and the Leavey Foundation, Dean Witter Foundation, and FS-RAP program 1 How Are Sovereign Debtors Punished? Evidence from the Gold Standard Era I. Introduction Why do sovereign debt defaulters ever repay? Unlike debt issued to public corporations, sovereign debt offers little legal recourse for creditors when a nation defaults.