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

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  • MAURER, NOEL
  • GOMBERG, ANDREI

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 government's hands. 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 the government refrained from confiscating all their assets (let alone repaying their debts) less than twice a decade, they would break even.

Suggested Citation

  • Maurer, Noel & Gomberg, Andrei, 2004. "When the State is Untrustworthy: Public Finance and Private Banking in Porfirian Mexico," The Journal of Economic History, Cambridge University Press, vol. 64(4), pages 1087-1107, December.
    • Handle: RePEc:cup:jechis:v:64:y:2004:i:04:p:1087-1107_04
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    Cited by:

    1. Enrico Perotti & Marcel Vorage, 2010. "Bank Ownership and Financial Stability," Tinbergen Institute Discussion Papers 10-022/2, Tinbergen Institute, revised 11 Sep 2010.
    2. Noel D., Johnson & Mark, Koyama, 2012. "Standardizing the fiscal state: cabal tax farming as an Intermediate Institution in early-modern England and France," MPRA Paper 40403, University Library of Munich, Germany.
    3. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
    4. Leonardo Weller, 2013. "Stretching the financial boundaries: how Mexico fostered competition among foreign banks and borrowed cheaply in 1899, 1904 and 1910," Working Papers 13023, Economic History Society.
    5. Zuazu, Izaskun, 2019. "The growth effect of democracy and technology: An industry disaggregated approach," European Journal of Political Economy, Elsevier, vol. 56(C), pages 115-131.
    6. Noel Maurer & Stephen Haber, 2007. "Related Lending: Manifest Looting or Good Governance? Lessons from the Economic History of Mexico," NBER Chapters, in: The Decline of Latin American Economies: Growth, Institutions, and Crises, pages 213-242, National Bureau of Economic Research, Inc.
    7. Stephen Quinn, 2008. "Securitization of Sovereign Debt: Corporations as a Sovereign Debt Restructuring Mechanism in Britain, 1694-1750," Working Papers 200701, Texas Christian University, Department of Economics.
    8. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.
    9. Johnson, Noel D. & Koyama, Mark, 2014. "Tax farming and the origins of state capacity in England and France," Explorations in Economic History, Elsevier, vol. 51(C), pages 1-20.
    10. Stephen H. Haber & Aldo Musacchio, 2013. "These Are the Good Old Days: Foreign Entry and the Mexican Banking System," NBER Working Papers 18713, National Bureau of Economic Research, Inc.
    11. Stephen Haber, 2008. "Differential Paths of Financial Development: Evidence from New World Economies," NBER Chapters, in: Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy, pages 89-120, National Bureau of Economic Research, Inc.

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