Published by EH.NET (January 2010)

Richard J. Salvucci, Politics, Markets, and Mexico?s ?London Debt,? 1823?1887. New York: Cambridge University Press, 2009. xiii + 326 pp. $85 (hardcover), ISBN: 978-0-521-48999-7.

Reviewed for EH.NET by Aldo Musacchio, Harvard Business School.

In his new book, Richard Salvucci, Professor of Economics at Trinity University, provides a detailed financial history of Mexico?s long default on its ?London Debt,? from 1827 to 1887. The book is a meticulous history of the negotiation and renegotiations of Mexico?s London Debt and the intricacies of public finance and international banking ?in the times of cholera.? The book ends looking at the circumstances that facilitated Porfirio Diaz?s renegotiations with foreign creditors, which led to the reestablishment of Mexico as a borrower in London (in 1887). The implicit argument of the book is that in order to understand the reasons why Mexico did not pay its debt (or debt service) one has to look carefully at history. One model or one single hypothesis does not explain the troubles and tribulations that Mexico went through in the nineteenth century.

The book is organized into six chapters. The introduction explains how the book is connected to Mexican history as a whole and provides a basic macroeconomic framework to think about the consequences of having a government running budget deficits with little to no foreign borrowing. The argument of the chapter is that Mexico?s stagnation of the first half of the nineteenth century perhaps stems from the fact that there were no domestic savings left to finance an expansion of gross capital formation. Yet without any evidence of this and of what was happening to the other factors of production the evolution of Mexico?s GDP during first half of the nineteenth century continues to be an enigma for which we only have informed speculations provided by the previous works of Salvucci himself.

Chapter one describes the process through which the Mexican government negotiated a series of debt issues and began to service its debts. It is a sort of political economy of the London debt in the 1820s. He looks at the opposing interests of actors and how the selfish behavior of some of those actors led to miscalculations on both sides (the bankers and the Mexican government) and, ultimately, to Mexico?s default. The data and analysis of this chapter show that in fact most actors ended up losing.

Chapter two focuses on the default of 1827 and the subsequent attempts by the Mexican government to restructure its debt until 1837. Salvucci describes the attempt of Lucas Alaman, minister of finance for a couple of years, to arrange a conversion in 1830 and its failure because of a fiscal crisis provoked by the separatist tendencies in the northern states of Mexico. In the late 1830s it was clear to most observers that Texas was becoming an independent territory. Thus, the Mexican government and its financial agent, Lizardi and Co., prepared a macabre deal with its bondholders in 1837 by which bondholders would get warrants to land in Texas and other northern states in exchange for a reduction in the principal of Mexico?s debt. When the deal was accepted, Mexico thought it had won British support in case any dispute with Texas and/or the United States would take place. What is perhaps more interesting for economic historians is the fact that the warrants Mexico offered had real assets as guarantees, thus solving one of the problems of many modern sovereign bonds: the lack of collateral. Chapter three concentrates on the period 1837 to 1862, an era of financial stress, failed renegotiations, loss of territory, bankruptcy, civil war, and foreign intervention in Mexico. Salvucci argues that the London debt linked all of these events. In this chapter it is clear that Mexico used the London debt and the Conversion of 1837 to try to get British support (and mediation) for its conflict with Texas and, in 1847, with the United States. Another theme running through this chapter, relevant to current debates about sanctions and reputation in sovereign debt markets, is the fact that the Mexican government used the compensation it got from the United States for its lost territory to pay its creditors according to the seniority that the Conversion of 1837 had stipulated. Even if Mexico wanted a fresh start after 1847, the cost was too high. Ignoring British bondholders, argues Salvucci, ?would have surely invited British intervention before the corpses of those killed in the War of 1847 had had time to grow cold.? Nonetheless, in the 1850s Mexico?s relation with its creditors deteriorated, especially with the suspension of payments in 1854. Chapter four examines the French Intervention in Mexico, its motivations, and consequences. In particular, it examines Napoleon III?s deals with the British to consolidate the Cobden-Chevalier treaty in 1860 and the role that Mexico?s British creditors played in it. The ?fiscal looting? of Maximilian (the Emperor of Mexico while the French Intervention lasted) and the debt problems that it carried ended when Benito Ju?rez and ?the liberals? defeated the imperial government. As president, Ju?rez ? one of the biggest national heroes in Mexico ? broke off relations with England (for having supported Maximilian), thus freezing the renegotiations of the Mexican debt until the 1880s. It wasn?t until Porfirio D?az seized power, reorganized the public finances of Mexico, and created the Banco Nacional de M?xico, that an agreement to restructure the London Debt was reached.

The concluding chapter uses Mexico as a case study to provide lessons to students of international debt markets. For instance, it discusses the so-called ?debt intolerance, or default at relatively modest levels of indebtedness,? and agrees that Mexico is a good case study, since it defaulted with a debt to GDP ratio of approximately 15%. The reasons why Mexico defaulted are historical, Salvucci argues ? they have to do with the configuration of Mexico?s federation after independence. After independence, when Mexico was organized as a decentralized federation, the federal government was deprived of resources that it needed to pay its debt. Salvucci also demonstrates that Mexico suffered from ?debt overhang,? that is that its debt was growing faster than its output. Finally, the volume contributes to the discussion of wars and risk premia by arguing that war in Mexico many times got debtors excited because it brought to power politicians who were more willing to pay the debt.

Salvucci?s book is long, detailed, and full of fun stories. It is not a book that tests one hypothesis or defends one argument. It is a meticulous book with a complex web of hypothesis, statistical tests, historical narratives, and with many arguments. If the book were more organized it would be a terrific reference book on the history of Mexico and its debt. Instead, the book is written for experts on Mexican and financial history. Still, it will be a must for graduate courses of modern Mexico.

Aldo Musacchio ( is an associate professor and Marvin Bower Fellow at Harvard Business School. He is the author of Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882?1950 (Cambridge University Press, 2009). He is working on a monograph that examines the long-term impact of colonial institutions and commodity exports in Brazil. He is originally from Mexico.

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