How Are Sovereign Debtors Punished? Evidence from the Gold Standard Era

Using an augmented gravity model of trade and a new database of nearly 9,000 bilateral trade pairs, this paper examines how sovereigns were punished for defaulting on external debt during the classical gold standard period. We do not find that, in general, trade between creditor and debtor countries fell in response to a default - evidence that would be consistent with the presence of trade sanctions. During the period 1870-1914, a statistically significant decline in trade, as a result of default, was observed only when gunboat diplomacy was used by creditor countries. Indeed, the use of "supersanctions" during the gold standard era - instances where external military pressure or political control was imposed on defaulting nations - proved to be an effective means for punishing debtors and reducing ex ante default probabilities. Conditional on default, the probability that a country would be "supersanctioned" was greater than 30 percent.