New paradigms and old promises: central banks and the market for sovereign debt in the interwar period

Abstract

This paper analyses the motives behind the establishment of central banks during the interwar period. We argue that most governments with difficulties in accessing financial markets established central banks, as this was a general recommendation provided by contemporary money doctors. However, even if central banks served to facilitate the issue of foreign loans on the New York financial market, we find that governments with central banks did not obtain more favorable terms for those loans. Our analysis further demonstrates that investors concentrated on macroeconomic achievements such as inflation and monetary stability, and whether a lender-of-last resort facility existed, regardless of whether or not this was pursued by a central bank.