How "Original Sin" was Overcome: The Evolution of External Debt Denominated in Domestic Currencies in the United States and the British Dominions

Michael D. Bordo, Christopher Meissner, Angela Redish

NBER Working Paper No. 9841
Issued in July 2003
NBER Program(s):Development of the American Economy, International Finance and Macroeconomics

This paper examines the historical origins of "Original Sin" or why countries are unable to issue long term debt domestically or borrow abroad in terms of the domestic currency. We conduct an historical case study for a group of countries that had largely overcome the problem of Original Sin by the third quarter of the twentieth century. The group consists of several former colonies of Great Britain: the United States, Canada, Australia, New Zealand and South Africa. We trace out their debt history relating the currency to the place of issue, exploring the residency of those holding local and foreign currency debt and looking at the maturity of domestic debt in the nineteenth and twentieth centuries. We find that sound fiscal institutions, high credibility of the monetary regime and good financial development are not sufficient to completely break free from Original Sin. Conversely, poor performance in these policy realms is not, for the most part, a necessary condition for Original Sin. The factor we emphasize for the common movements across the five countries is the role of shocks such as wars, massive economic disruption and the emergence of global markets. The differences in evolution between the U.S. and the Dominions we attribute to differences in size, the traits of a key currency, which the U.S. possessed and the others did not, and to membership in the British Empire. The important role of major shocks suggests that the establishment of a bond market involved significant start-up costs, while the role of scale suggests that network externalities and liquidity were pivotal in the existence of overseas markets in domestic currency debt.

download in pdf format
   (173 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9841

Published: Eichengreen, Barry and Ricardo Haussmann (eds.) Other People’s Money. Chicago: University of Chicago Press, 2004.

Users who downloaded this paper also downloaded* these:
Eichengreen and Hausmann w7418 Exchange Rates and Financial Fragility
Eichengreen, Hausmann, and Panizza Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the Same and Why It Matters
Eichengreen, Hausmann, and Panizza w10036 Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters
Bordo and Meissner w11897 The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997
Bordo w12393 Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu?
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us