Economists have long recognized a fundamental paradox at the heart of the international regime of sovereign lending: in the absence of a world government capable of enforcing cross-border debt contracts, why do heavily indebted peripheral states not default on their external obligations more often? Economic theory predicts that the absence of international enforcement should incentivize borrowers to accumulate as many debts as possible before repudiating them in toto. As rational lenders would respond by refusing to extend further credit, the result should be a wholesale collapse of international capital markets. Yet this is clearly not what happens: by and large, the expectation is that sovereign borrowers will repay. So how are international debt contracts enforced in a context of global “anarchy”?
In my doctoral thesis, I set out to answer this question through a comparative-historical approach building on in-depth case studies of sovereign debt crises in Mexico (1982-’89), Argentina (1999-’05) and Greece (2010-’15). My findings reveal a stark contrast between the prewar period, in which heavily indebted sovereign borrowers generally responded to balance-of-payment crises by unilaterally suspending foreign debt servicing, and the postwar period, in which debtors by and large refrained from such unilateral action. The contemporary case studies show that the traditional explanations proposed in the economics literature — centering on reputation, sanctions and institutions — are ill-equiped to account both for this historical contrast and for the continued variation in outcomes between cases.
Instead, the thesis spells out a political economy approach to sovereign debt crises that stresses the importance of distributional conflicts and power struggles over the burden of adjustment. In these conflicts, I argue, global finance possesses a unique advantage over indebted states: through their capacity to withhold the short-term credit lines on which the latter depend for their reproduction, lenders can inflict debilitating spillover costs that greatly limit the debtor’s room for maneuver. The thesis shows how this structural power of finance has increased markedly as a result of globalization and financialization. Yet it is by no means absolute: not only has it changed significantly over time; it also continues to vary from case to case. The main aim is therefore to identify the precise mechanisms through which the power of finance operates and the exact conditions under which it fails. Only such a dynamic approach can account both for the relative decline in default and the continued variation in outcomes.
In terms of these precise mechanisms and conditions, the findings of the case studies highlight the importance of debt concentration in the lending structure (which eases the formation of “creditors’ cartels,” thus influencing the strength of market discipline); the exposure of big banks and institutional lenders in core countries (which compels creditor states and international financial institutions to intervene as lenders of last resort and provide emergency loans under strict policy conditionality); and the systemic vulnerability and “bridging role” of domestic banks inside the borrowing country (which increases the government’s dependence on its own financial sector and generates an additional incentive to internalize fiscal discipline and repay external debts). The thesis concludes by spelling out the implications of these findings for the quality of democracy and the study of political economy more generally.
From the Medici to Goldman Sachs, conventional wisdom has long accorded “an extraordinary mystique of power” to the commanding heights of international finance.[i] The fallout of the global financial crisis has only reinforced this general perception, with scholars increasingly turning their attention to the role of finance in shaping important social and political outcomes.[ii] Yet despite a broad consensus on the growing weight of financial interests, a number of key questions remain unresolved: What exactly is the nature of this presumed financial power? What are its deeper sources? And why does it vary over time and between places?
This research project aims to answer these salient questions through a ground-breaking comparative-historical investigation that sets contemporary concerns about the social and political clout of Wall Street and the City against the background of the rise and fall of some of the most powerful banking houses in (early) modern Euro-pean history. The objectives of this study are twofold: first, to untangle the reasons for the recurring proximity between policymakers and private financiers, thereby generating a better understanding of the underlying sources of financial power; and second, to investigate how state-finance relations evolved over time and how the power of finance differs between places, thereby generating a better understanding of the sources of variation as well as the limits of that power in practice.
Building on Braudel’s insight, further developed by Arrighi, that there is a “certain unity in capitalism from thirteenth-century Italy to the present-day West,”[iii] the historical case studies explicitly insert themselves into a set of long-standing scholarly debates on the nature of the modern state and the sources of social power.[iv] With these debates firmly in mind, the proposed project intends to make a number of important contributions to the literature. First, it aims to contribute to the historical sociology scholarship on finance through a comprehensive reinterpretation of the rise and fall of the three banking houses under investigation. Rather than focusing on kinship or the personal actions and interpersonal connections of financial elites, as most sociological and historical studies have done to date, this project intends to situate powerful private banks within their appropriate political-economic context as the principal creators of credit and the most important financiers of government. Against overly personalized or narrowly “instrumentalist” views of power, in short, it proposes a structural power approach revolving around the historical co-evolution of credit markets, modern banking, and the public debt.
The second contribution relates to the theorization and operationalization of the notion of structural power. After falling out of favor in the 1980s, mostly due to its somewhat deterministic original formulation, this concept has recently experienced a revival in the political economy literature on the global financial crisis.[v] One of the main themes in this new wave of structural power scholarship has been the attempt to identify the sources of its variation over time and space. This research project sets out to make a key contribution to that effort by highlighting the importance of market concentration (on the supply side) and credit dependence (on the demand side). The main hypothesis is that the power of finance and the historically close relations between policymakers and financiers are an outcome of the expansion and centralization of credit markets in the course of capitalist development, and of the state’s increased dependence on these concentrated credit markets in times of fiscal crisis.
To test, develop and further refine these propositions, the study will rely on a comparative-historical case study method and systematic process analysis.[vi] One of the advantages of such a small-N research design is that it is well suited for tackling “big questions” and disentangling complex causal mechanisms. Combining cross-case comparisons with in-case process tracing, the study’s methodological approach involves a number of steps: first, the formulation of a set of brittle hypotheses and the plotting of a corresponding set of causal mechanisms connecting explanatory and intervening variables to the respective outcomes of interest; second, the gathering of original and secondary data from historical literature, archival documents and other sources; third, the examination of this data and the identification of diagnostic pieces of evidence within each of the cases; fourth, a careful assessment of the sequences and values of intervening variables in each of the cases and the testing of these observations against the hypotheses and mechanisms plotted in step 1; and finally a comparison of the outcomes and causal processes across the three cases.
The case study selection for this project is derived from the framework developed by Arrighi, who identified three cycles of “financial expansion” prior to the current era of financialization, centered on the Italian city-states, the United Provinces, and the United Kingdom, respectively. Each of these cycles witnessed the rise of a paradigmatic banking house that dominated international credit markets in its prime: the Medici Bank of Florence (1397-1494); Hope & Co. of Amsterdam (1720-1811); and N.M. Rothschild & Sons of London (1811-1913). By analyzing the historical process through which these firms rose to prominence and the precise mechanisms through which they acquired their influence, we should be able to arrive at a more nuanced understanding of the underlying sources of financial power, and the historical evolution of state-finance relations more generally. Similarly, by studying their decline, we should be able to identify the limits and sources of variation of that power.
It is expected that this ambitious research project will contribute not only to important theoretical innovations in comparative political economy and historical sociology, but also to new data generation in financial history. In terms of the latter, the study will greatly benefit from the investigator’s fluency in Dutch and Italian, which enables him to draw on a unique combination of historical literature and archival material that is not readily accessible to most other English-speaking researchers. The envisioned outputs of the project include a short 20,000-word theoretical book with Polity (at the invitation of a relevant series editor), an extensive 100,000-word monograph with a major university press, and a series of 10,000-word papers, to be delivered at relevant academic conferences and published in leading sociology and political economy journals. The intellectual fruits and historical lessons from this study are expected to be of foundational importance for the investigator’s envisioned follow-up project on the long-term evolution of state-finance relations in the United States.
[i] The quote is from Moran, M. (1981:399), ‘Finance Capital and Pressure-Group Politics in Britain’, British Journal of Political Science, 11(4): 381-404. For older studies, see the classics by Bagehot, Hobson, Hilferding, among others.
[ii] e.g., Krippner, G. R. (2011), Capitalizing on Crisis: The Political Origins of the Rise of Finance, Harvard University Press; Streeck, W. (2014), Buying Time: The Delayed Crisis of Democratic Capitalism, Verso; Van der Zwan, N. (2014), ‘Making Sense of Financialization’, Socio-Economic Review, 12(1): 99-129.
[iii] Braudel, F. (1984), The Perspective of the World: Civilization and Capitalism, 15th-18th Century, Vol. III, Harper & Row; Arrighi, G. (1994), The Long Twentieth Century: Money, Power and the Origins of Our Times, Verso.
[iv] e.g., Mills. C. W. (1956), The Power Elite, Oxford University Press; Dahl, Domhoff, G. W. (1967), Who Rules America?, Prentice-Hall; Miliband, R. (1969), The State in Capitalist Society, Merlin; Lukes, S. M. (1974), Power: A Radical View, Macmillan; Poulantzas, N. (1978), State, Power, Socialism, Verso; Block, F. (1980), ‘Beyond Relative Autonomy: State Managers as Historical Subjects’, The Socialist Register 17: 227-241; Mann, M. (1986), The Sources of Social Power, Vol. I, Cambridge University Press; Scott, J. (1991), Who Rules Britain?, Polity.
[v] e.g., Woll, C. (2014), The Power of Inaction: Bank Bailouts in Comparison, Cornell University Press; Culpepper, P. D. and Reinke, R. (2014), ‘Structural Power and Bank Bailouts in the UK and US’, Politics & Society 42: 427-454; Moran, M. and Payne, A. (2014), ‘Neglecting, Rediscovering and Thinking Again about Power in Finance’, Government and Opposition 49:3: 331-341.
[vi] Mahoney, J. and Rueschemeyer, D. (2003), Comparative-Historical Analysis in the Social Sciences, Cambridge University Press; George, A. L. and Bennett, A. (2005), Case Studies and Theory Development in the Social Sciences, MIT Press; Hall, P. A. (2006), ‘Systematic Process Analysis: When and How to Use It’, European Management Review, 3: 24-31; Collier, D. (2011), ‘Understanding Process Tracing’, Political Science and Politics, 44(4): 823-830.