Sovereign defaults during the Great Depression: the role of fiscal fragility

Andrea Papadia

Economic History Working Papers from London School of Economics and Political Science, Department of Economic History

Abstract: The debt crisis of the early 1930s was probably the largest and most widespread in history. The defaults of national and sub-national governments were pivotal events of the Great Depression and contributed to shaping post-World War II finance in the United States and worldwide. I study the role of a so-far largely unexplored factor - fiscal fragility - in the crisis. In order to do this, I construct and analyse a dataset comprising a new measure of default size and new estimates of the size and composition of public debts for around 25 countries. The data accounts for maturity structures, sub-national borrowing as well as other key characteristics of debt burdens. I show econometrically that the severe deterioration in public revenues experienced by national and sub-national governments in a number of countries was a key determinant of the defaults above and beyond the Great Depression income shock. Countries hardest hit by the slump were more likely to renege on their external debts at both the national and subnational level, but countries whose public revenues fell more moderately were able avoid or limit the size of default. I furthermore show that the collapse in public revenues was not part of an explicit strategy to counter the slump through an active fiscal policy. On the contrary, the evidence indicates that fiscally weak countries saw their public expenditures collapse alongside revenues.

Keywords: Great Depression; Sovereign Defaults; Public Debt; Local Borrowing; Fiscal Development (search for similar items in EconPapers)
JEL-codes: E32 F34 H63 H74 N10 N20 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2017-01
New Economics Papers: this item is included in nep-his and nep-mac
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