Tag Archives: history

How can there be a borrower from hell?

Posted on by

The joy of a four-day weekend – as well as cooking and gardening, I’ve read a thoroughly enjoyable economic history book with great relevance for the present debate on sovereign borrowing. It’s [amazon_link id=”0691151490″ target=”_blank” ]Lending to the Borrower from Hell: Debt, Taxes and Default in the Age of Philip II [/amazon_link]by Mauricio Drelichman and Hans-Joachim Voth.

[amazon_image id=”0691151490″ link=”true” target=”_blank” size=”medium” ]Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II (The Princeton Economic History of the Western World)[/amazon_image]

Part of my enjoyment was that I studied this period for my history A level (and almost read history at university before economics captured me), and so was absorbed in 16th and 17th century Europe during those impressionable teenage years. It’s extraordinary that so many Europeans know so little about it now – certainly, British schoolchildren jump from the Tudors straight to World War II and the Cold War. For a sense of how turbulent and decisive a period it was, the novel [amazon_link id=”0099439832″ target=”_blank” ]Q[/amazon_link] by the Italian collective Luther Blissett is hard to beat; I have the Wu Ming “sequel”, [amazon_link id=”1781681678″ target=”_blank” ]Altai[/amazon_link], on my in-pile now.

[amazon_image id=”1781681678″ link=”true” target=”_blank” size=”medium” ]Altai: A Novel[/amazon_image]

However, even if you don’t share my specific interest in the period, this is an essential book for economists interested in sovereign debt – and which of us is not at the moment? It fills in some important detail about an episode in debt history that features in the data set of the monumental [amazon_link id=”0691152640″ target=”_blank” ]This Time is Different[/amazon_link]. A large part of the achievement of the authors is the collection of a highly impressive data set on the debt issuance, repayments, revenues and expenses of Philip II of Spain, based on obviously extensive archival research as well as secondary sources.This was, of course, the period when New World silver started to reach the coffers of the Castilian crown in large quantities. [amazon_link id=”0691151490″ target=”_blank” ]The Borrower from Hell[/amazon_link] underlines the concept of resource curse.

[amazon_image id=”0691152640″ link=”true” target=”_blank” size=”medium” ]This Time Is Different: Eight Centuries of Financial Folly[/amazon_image]

Philip II has the reputation of being the Borrower from Hell because of the frequency with which he defaulted – there was a payment suspension more often than one year in every five during his reign. As the authors point out, the [amazon_link id=”0691152640″ target=”_blank” ]Reinhart-Rogoff data set[/amazon_link] shows 20% of countries in default on average in every year since 1800, so the reputation may be unfair; but the scale of the borrowing was large and Philip II defaulted a record-breaking 13 times in succession: “No country in recorded history has defaulted more times.”

So the question is why he got the opportunity to do so; why did bankers continue lending to him? How can there be a ‘borrower from hell’? The book carries out an IMF-type sustainability exercise on the historical data set and concludes that the debt burden was sustainable although there were liquidity crises due to events – usually a military loss. It also argues that the structure of the lending meant there was a kind of balance of power between king and lenders. The form the lending took was syndicated loans provided by a relatively small and tight-knit group of families; 130 people from 63 families lent Philip money over the years but 3 families accounted for 40% of all loans and 10 families for 70%. The banking network was stable and dominated the available funds. So whereas two hundred years earlier Philip IV of France had executed those who lent him money (Jews, Lombards, Templars) when he couldn’t pay, Philip II of Spain had a long relationship with his financiers. The ‘absolutism’ of the 16th and 17th centuries was in fact constrained, a useful fiction for both monarch and elites.

The data indicate that despite the defaults, holidays and renegotiations, the average return on the loans was highly favourable. The book argues that the lending was understood to be contingent and that a renegotiation would ensue if events turned out badly for the king. The negotiations were typically speedy, as was the return to lending. The bankers were sharing the risk with Philip, their return amply compensating them for it. It sounds not unlike Robert Shiller’s proposal for event-dependent sovereign loans in his book [amazon_link id=”0691120110″ target=”_blank” ]The New Financial Order[/amazon_link].

[amazon_image id=”0691120110″ link=”true” target=”_blank” size=”medium” ]The New Financial Order: Risk in the 21st Century[/amazon_image]

[amazon_link id=”0691151490″ target=”_blank” ]Lending to the Borrower from Hell[/amazon_link] is a useful reminder that, not only is sovereign lending wholly intertwined with the state, it can perform a useful rather than a solely destructive function. The book does not indulge in drawing lessons for modern finance, but it’s hard to escape the conclusion that the structure of modern financial markets deserves close scrutiny in evaluating lessons from the crisis. And that the balance of power between, say, the Greek government and Wall Street banks has been made completely clear by the terms of Greece’s “rescue”.

As for the resource curse, Drelichman and Voth conclude with a discussion of the reasons for later Spanish economic decline: “The inability to raise state capacity must ultimately be traced back to a resource windfall – silver. It kept the Crown fiscally sound without the need to strike a bargain that would have helped build a stronger, more capable state in the long run.”

A final note: this is a tremendously well-written book, a pleasure to read.

 

The borrower from Hell

Posted on by

A book has arrived that will probably have to wait until my summer holiday, or at least Easter, but it has me mightily intrigued. It’s [amazon_link id=”0691151490″ target=”_blank” ]Lending to the Borrower from Hell: Debt, Taxes and Default in the Age of Philip II[/amazon_link], by Mauricio Drelichman and Hans-Joachim Voth.

[amazon_image id=”0691151490″ link=”true” target=”_blank” size=”medium” ]Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II (The Princeton Economic History of the Western World)[/amazon_image]

I know, I know. But if I’d not quixotically decided to apply to study Philosophy, Politics and Economics at Oxford (to further my ambition of spending my life being a philosopher like [amazon_link id=”0007203942″ target=”_blank” ]Simone de Beauvoir[/amazon_link] in a Parisian cafe), and if I hadn’t got in, and if I’d not had a brilliant economics tutor in Peter Sinclair and so ended up being an economist, I would have done a history degree instead. At school we studied 16th and 17th century Europe – these were the days before British schools only taught the Tudors and the Nazis – and what times they were! [amazon_link id=”0099439832″ target=”_blank” ]Q[/amazon_link] by the Italian writing collective Luther Blisset gives a good flavour of it.

And as the intro to this book points out, in extraordinary times like 2008 and its aftermath, the long history of debt and default might hold useful lessons. Economists in general should pay more attention to economic history. History should be reintroduced as a requirement in all Econ PhD courses – I benefited greatly from courses by Barry Eichengreen and Steve Marglin in mine, possibly grumbling at the time, but young people don’t entirely know what’s good for them.

[amazon_image id=”0099439832″ link=”true” target=”_blank” size=”medium” ]Q[/amazon_image]

I’ve read the first three pages of [amazon_link id=”0691151490″ target=”_blank” ]The Borrower from Hell[/amazon_link] and am going to have to tear myself away….

Pursuits, grand and lesser

Posted on by

Sylvia Nasar’s [amazon_link id=”1841154563″ target=”_blank” ]Grand Pursuit: The Story of the People who Made Modern Economics[/amazon_link] was published in 2011, but I only picked up the paperback in the holidays and have just finished. It’s a rattling good read, as you would expect from the author of [amazon_link id=”0571212921″ target=”_blank” ]A Beautiful Mind[/amazon_link], and also very thoroughly researched. But I was disappointed, perhaps due to overly-high expectations. Some of the chapters are simply excellent, but the book doesn’t add up quite to the sum of its parts.

[amazon_image id=”1841154563″ link=”true” target=”_blank” size=”medium” ]Grand Pursuit: The Story of the People Who Made Modern Economics: A Story of Economic Genius[/amazon_image]

I did pick up lots of delightful new facts, always a pleasure to my magpie mind:

– Alfred Marshall was a feminist, to the extent that he financed an essay competition for female students and contributed a significant sum of £60 to the construction of Newnham, one of the first women’s colleges in Cambridge;

– Beatrice Webb influenced Winston Churchill to say at one stage (1906): “I should like to see the State embark on various novel and adventuresome experiments,” and went on to advocate nationalisation of the railways, a job guarantee and a minimum standard of living;

– a visit to a Carnegie Steel plant persuaded Beatrice Webb that technology would replace human labour;

– Keynes did not like the Webbs, especially in their pro-Soviet phase. On being asked to contribute an essay celebrating Beatrice’s 80th birthday, he said: “The only sentence that came to my mind spontaneously was that, ‘Mrs Webb, not being a Soviet politician, has managed to survive to the age of 80.'”

– Joan Robinson does not emerge as a likeable character either, but this comment of hers is amusing: “We cannot be recommended to overthrow anything merely because economists have talked nonsense about it.”

– the number of economists working in Washington rose from 100 in 1930 to 5,000 in 1938;

– Isaiah Berlin was in the British Embassy in Washington during World War 2, writing dispatches on the various activities of Keynes, on the one hand, and Milton Friedman, on the other. One of Friedman’s policy innovations was introducing the withholding of income tax at source by employers. It was, wrote home Berlin, “A tax bill of unprecedented dimensions.”

There is a lot of interesting material here. I think the problem for me is that it doesn’t hang together to tell the story of modern economics as promised. This is partly due to the selection of characters: was it really for reasons of gender balance that Beatrice Webb and Joan Robinson feature so prominently? But the others are obvious – Marx, Marshall, Hayek and Schumpeter, Keynes and Samuelson. I think Mill and other Victorians are a big omission – the book leaps straight to Marshall.

There is also so much good storytelling about the individuals that the big picture on the ideas front is lost in detail. It never quite emerges as either a linear history of thought or a clash of ideas (which [amazon_link id=”0393343634″ target=”_blank” ]Keynes-Hayek: The Clash That Defined Modern Economics [/amazon_link]did very effectively). Nor do you get the sense of a whole intellectual milieu, as in the brilliant [amazon_link id=”0571216102″ target=”_blank” ]The Lunar Men[/amazon_link] by Jenny Uglow (one of my all-time favourite books); the individuals are too prominent. Nasar has much more on the historical context of the ideas than does Heilbroner’s [amazon_link id=”0140290060″ target=”_blank” ]Worldly Philosophers[/amazon_link] but the links between the personal experiences of her subjects and their work don’t quite come off.

This is picky because it’s a good read and would be informative for students or newcomers to the history of economics. Looking back at a few reviews, it was obviously very well received when first published. I was just hoping for something better than [amazon_link id=”068486214X” target=”_blank” ]The Worldly Philosophers[/amazon_link], and it doesn’t live up to my hopes. [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving[/amazon_link] by Agnar Sandmo is the best recent book I’ve read on the history of economics, a really excellent account but perhaps too hard for newbies. Put it down to Seasonal Affective Disorder.

 

The hollow economy

Posted on by

Looking for the next small (pre-party) book, I picked up G.D.H. Cole’s little 1938 Pelican [amazon_link id=”B000SHWV16″ target=”_blank” ]Persons and Periods[/amazon_link] (I have a 1945 edition). It’s a collection of essays by the economist and leading Fabian intellectual on Daniel Defoe (somebody who would now be considered a leading economic journalist, a Martin Wolf of his day, as well as a famous novelist) and his times.

[amazon_image id=”B000SHWV16″ link=”true” target=”_blank” size=”medium” ]Persons & Periods[/amazon_image]

There are some amusing parallels with modern debates about the state of the nation. In Defoe’s writings, and evidently in 1938 too, people bemoaned the dominance of London. “In 18th century England all roads, by land or by water, seemed to lead to London. …. London was, in Defoe’s day, the only town in England that could be reckoned large. … No wonder London seemed to Defoe and his contemporaries a prodigious place. overshadowing the whole country with the multitude and wealth of its consuming public.”

The following chapter is about ‘Roads, rivers and canals.’ In the 18th century, as now, travellers constantly complained about the state of the transport network, although the roads were being improved. “The trouble was not that the roads were getting worse but that they were being called upon to carry a quite unprecedentedly heavy volume of traffic.” Cole argues that the 19th century development of the canals, launched by the Duke of Bridgewater, and then railways, changed the location of people and activity: “In effect, with the advent of the canals, England ceased to be hollow.” The era of the great manufacturing cities of the north and Midlands followed.

Lessons here for our current ‘hollow’ economy? For a rebalanced economy, where the new infrastructure goes will be important.

The (uncomfortable) lessons of history

Posted on by

I’m not going to add to the ink/electrons expended on the UK economic policy proposals emerging from the party conferences so far. Reading about them so far – and with more to come next week no doubt – sent me back to a couple of fascinating books I have on my shelves. One, published in 1958, is [amazon_link id=”B0000CK05Q” target=”_blank” ]British Economic Policy Since the War [/amazon_link]by Andrew Shonfield. The other is a 1984 book with the superb title [amazon_link id=”0140225021″ target=”_blank” ]The British Economic Crisis: Its Past and Future [/amazon_link]by Keith Smith (as if the country had transitioned from having an economy to having a permanent economic crisis – well, it can feel like that).

One of the dispiriting things is how much of the diagnosis seems relevant in successive generations.

Shonfield writes in his concluding chapter:

“The central failure of postwar Britain is inadequate investment. So many of our difficulties flow from this. Because our wealth grows more slowly than the wealth of other countries, our prices rise faster… the balance of payments is like a raw and exposed nerve… It is bad for the spirit of any country to live with so little room for manoeuvre. There is a noticeable meanness of attitude in the British approach to the arts, to public buildings, to almost any kind of cultural activity. … It is a great depressive to live in a constant atmosphere of ‘make do’, to exist in a place where almost any effort to do anything or go anywhere leads you pretty soon into a bottleneck of some kind.”

Obviously very much of its time, but many British readers now would feel a ping of recognition.

[amazon_image id=”B0000CK05Q” link=”true” target=”_blank” size=”medium” ]British economic policy since the war (Penguin specials)[/amazon_image]

Smith, nearly 30 years later, wrote:

“If output, employment and incomes are to grow in Britain, then the problems of low and poorly directed R&D activity and low industrial investment, which are at the core of Britain’s economic decline, must be overcome. … Britain’s manufacturing performance is so poor that consumption increases have not fed through into increased demand for British products, and hence to investment in British industry. Consumption increases have been spent quite disproportionately on imports.”

Which crisis would that be?

As others have pointed out – for example, Stumbling and Mumbling – UK business investment is weak, weak, weak. The balance of payments deficit was equivalent to 3.8% of GDP last year, the biggest gap since 1989.

I’d like to see the policy debate acknowledge the long-term context.