“High & Dry†: The Liquidity and Credit of Colonial and Foreign Government Debt and the London Stock Exchange (1880-1910)

We gather a new database to conduct the first historically informed study of the importance of liquidity and credit for government bonds between 1880 and 1910. We argue that colonial and sovereign debt markets were segmented owing to differences in underlying information asymmetries. The result was heterogeneous pricing of colonial and sovereign debt, and different market microstructures and clienteles, themselves influenced by political, institutional and financial arrangements. We find that sovereign spreads mainly reflected credit risks, while colonial spreads mainly reflected liquidity risks. Liquidity premia were economically large and significant, contributing between 10% and 39% of colonial spreads. These findings help understanding why the seemingly dry subject of colonial illiquidity inspired passionate disputes and ground-breaking reforms of financial imperial institutions.