When the State is Untrustworthy: Public Finance and Private Banking in Porfirian Mexico

Maurer Noel () and Andrei Gomberg
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Maurer Noel: Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)

No 402, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: All sovereign governments face a commitment problem: how can they promise to honor their own agreements? The standard solutions involve reputation or political institutions capable of tying the hands of the government. Mexico's government in the 1880s used neither solution. It compensated its creditors by enabling them to extract rents from the rest of the economy. These rents came through special privileges over banking services and the right to administer federal taxes. Returns were extremely high: as long as creditors believed that the government would refrain from confiscating all their assets (let alone repaying their debts) less than twice a decade, they would break even.

Date: 2004-02
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http://ftp.itam.mx/pub/academico/inves/gomberg/04-02.pdf First version, 2004 (application/pdf)

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Journal Article: When the State is Untrustworthy: Public Finance and Private Banking in Porfirian Mexico (2004)
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