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Quentin Bruneau is Assistant Professor in the Department of Politics at the New School for Social Research and Eugene Lang College. He recently sat down with NSSR student and Robert L. Heilbroner Center for Capitalism Studies Communications Assistant Zoe Cole to discuss his new book, States and the Masters of Capital: Sovereign Lending, Old and New. The interview has been edited for length and clarity.

Zoe Cole: Tell us about your new book, States and the Masters of Capital.

Quentin Bruneau: It’s basically about the practice of lending capital to sovereign states by private financiers, as it evolved from the nineteenth century to the present; from the rise of an international sovereign bond market in the early nineteenth century to now.

There have been a lot of studies about the practice of lending capital to sovereigns, and how that works. And financial markets are obviously at the heart of those stories. But at the same time, financiers are almost nowhere to be seen in most of these accounts. So it’s like we have histories of sovereign debt and sovereign lending where the main protagonists are not there. They’re talked about as financial markets, in very abstract terms. The only real histories that deal with them are business histories of specific firms. What I wanted to do in the book is to put financiers back at the heart of the history of sovereign lending, focusing specifically on the question of how they think about sovereign states.

Cole: Summarize, if you can, the story your book tells.

Bruneau: Before I delve into this, it’s worth pointing out that there are two broad parameters to the study. First, I am primarily concerned with a small group of financiers who were involved in sovereign lending. It’s largely a Euro-Atlantic community, but with a very global reach. And the second parameter of the book is that I focus narrowly on sovereign lending—that is, lending to sovereign states.

Across the nineteenth century and until the mid-twentieth century, there are many kinds of political communities that fall short of full sovereignty. If you think about the legal structure of the international system in the nineteenth century, it’s got all these gradations, in legal terms, of actors. There are many states that have a very precarious position in the international legal order because they’re not fully paid-up members of the ‘family of civilized nations’, to use the terminology of the time. So-called ‘civilized’ states like England and France enjoy full sovereign rights. And, one tier down, polities that are considered ‘barbarous’ enjoy fewer rights, and then, another tier down, political communities considered ‘savage’ have their very ‘international personality’ called into question. These different types of political communities had uneven rights within international society. (I wrote a chapter on this forthcoming in the Oxford Handbook of History and International Relations).

If a state doesn’t enjoy full sovereign rights, that has a number of consequences. For example, if you’re lending to a colony that doesn’t enjoy full sovereign rights, there is a possibility that you’re able to sue them in the court of the metropole. But even polities that weren’t colonies—say, China or the Ottoman Empire—were not considered as deserving of all the rights attached to sovereignty. So, parts of their finances could be controlled by foreign powers: institutions like the Imperial Chinese Maritime Customs Service or the Ottoman Public Debt Administration. And, again, if there is an institution of this sort, the risk you’re taking is much less than if you’re lending to a fully sovereign actor. The reason that I’m circumscribing the project to sovereign lending in that narrow sense—that legal sense—is that lending to sovereign states is a specific kind of lending that entails specific kinds of risks that are just not present in other kinds of lending.

Beyond that, another reason I narrowed the focus in this way was that sovereign states now cover the entire Earth. So while we can quibble about what sovereignty means as social scientists, in a legal sense, the international system is almost exclusively populated by sovereign states—and I wanted to understand how lending to such entities functions.

What the book does is reveal a kind of profound transformation in the social composition of sovereign debt markets and a similar shift that happens at the same time in terms of how financiers think about states.

It’s a story of a transition from an Old World of sovereign lending to a newer one. The Old World of sovereign lending basically goes from the early nineteenth century to the interwar period, the 1920–30s. And in that period, sovereign lending is basically dominated by a small coterie of merchant bankers: think Rothschild & Co; Morgans; or Barings—these kinds of merchant banks.

There are a couple of key points about these merchant banks. One is—and it’s often insufficiently recognized—that these were families. And they’re also families that have migrated across Europe and eventually, for some of them, to North America. So they’re naturally, as banks, ‘international’, because they’ve migrated. And because they’re families, there’s one really distinct aspect to what they want, what they seek. And it’s very different from what you think a kind of financial corporation nowadays wants. It’s that these family banks are not just profit-seeking, they’re also status-seeking. They want to rise socially, as an end in itself. And that desire isn’t just transactional, it’s not just, “oh, it’d be nice to have a good reputation, so we make more money, so we attract more clients.” Some of the families are from persecuted religions—they’re Jews, for example—and they’re also recent migrant families, in, let’s say, Britain or France. And so they’re interested in social mobility in a broad sense. Acknowledging these mixed motives enables us to reframe the relationship that these merchant bank families have to governments—it’s one in which they extract two things: profit, but also social status. So there’s more than one thing at stake, more than just money. And, in order to pursue these two goals, what they do is they try to become gentlemen, to acquire what was then called gentility. And in pursuit of gentility, they become friendly with the heads of state, the sovereigns, the ministers of state across the world.

It’s an approach to sovereign lending that really relies on personal acquaintances and the granting of trust. You grant your trust to a set of individuals, and that’s made easy because merchant banks are transnational families; if you’re lending to a state that’s not the one you reside in, you can contact your brother, your cousin—you can do all sorts of things like this. And for the families that are not so international, what they sometimes do, as a kind of alternative strategy, is to inter-marry: they marry another banking family abroad, and then the merchant banks become connected. So, you create your international network through marriage. This way of doing business is dominant until the interwar period—really quite late when you think about it; until the 1920s and 30s.

Meanwhile, toward the end of the nineteenth century, a new set of actors begins to appear. At first, these are joint stock banks, rather than family banks—banks with many shareholders: Deutsche Bank, Crédit Lyonnais, Midland Bank, all these kinds of banks. And the reason they rise at this time is that there’s a set of legal innovations in the 1850s, 60s, and 70s in Europe—Germany, France, England—and the United States. And these legal innovations allow for the easy creation of banks with many shareholders, limited liability, and unlimited capital. Of course, there were joint stock companies before—you know, the Dutch East India Company—but generally they required a kind of exceptional legal act, like a royal charter, to be created. The Crown or the state had to profit in some way from their creation, and so might exceptionally grant the right to create a joint stock company. These new ones do not require that type of exceptional legal act.

These new joint stock banks have two features that are, I think, important. One is: they’re not families—so there’s no particular inclination for status-seeking. To the extent they might seek to enhance their reputation, it’s to do better on the market. And the second interesting point, which is a bit counterintuitive, is that these banks have no transnational networks. Initially, they’re very national banks. They’re created by French bankers or German bankers etc. They are national institutions.

To that extent, you can talk about pre-World War I as a kind of slow process of nationalization of international finance. To the extent that the heads of Deutsche Bank or Crédit Lyonnais are connected to anyone, it is to the political leaders of their own countries.

But when it comes to knowing sovereign state actors abroad, they are flying blind: they lack the personal contacts the family banks had cultivated, and, to start, they have no other means of knowing foreign sovereigns and of assessing whether or not to invest in their sovereign debt.

Their solution is to create new ways to assess sovereign creditworthiness. But how do you do that? What they end up doing is hiring graduates from business schools and schools of government that are also all created at the end of the nineteenth and early twentieth centuries. LSE in England; in Germany there are many so-called Handelshochschulen; in France, you have the Ecole des Hautes Etudes Commerciales de Paris; and the list goes so on. So they hire graduates from these new schools. And one of the distinctive things they have all learned is to think about states using the tools of a relatively new discipline—statistics.

What that means is the description of states by itemizing quantifiable facts, initially. This discipline is created at the end of the eighteenth century, mostly in Germany, but there are similar things going on elsewhere, and it’s created by lawyers in order to understand international relations. They’re interested in measuring and comparing the power of states. And so they developed this discipline concerned with precisely this, ‘Statistik’. As this discipline spreads throughout Europe by means of publications, and then educational institutions, you eventually have all these graduates that are trained in analyzing the world by comparing states with quantifiable data.

It’s these people who produce the first sovereign credit ratings. They start producing these tables with states and data, ranking them in order of creditworthiness. The first ones we know of are from 1898 at the Crédit Lyonnais, but the exercise is later repeated in other institutions. Meanwhile, the merchant bankers are still in charge. Until the twenties and thirties, they’re still the dominant players in sovereign debt markets. But the new statistical approach to sovereign lending starts to spread. And you start to see new actors that get into the business of sovereign lending, like credit rating agencies, like Moody’s, or Standard & Poors. These kinds of companies that are created earlier start rating sovereign states in the interwar period when the United States becomes the world’s banker. Initially, people call them ‘statistical corporations’. The new approach is also taken up at the League of Nations. Like the credit rating agencies, this organization is not engaged in actually lending capital. Rather, it’s tasked with ‘approving’ various loans to Central and Eastern Europe.

And how do they approve those loans? They hire economists who compare states with statistical data, and the League of Nations itself is really involved in standardizing economic statistics in the world.

Still, in the late 1930s, and after World War II, private international finance is pretty much curtailed. Part of the arrangements of Bretton Woods include significant capital controls, which means that private international finance does not play a very large role in the world. States fund themselves in a variety of ways, but borrowing on private international capital markets is not a huge activity—until the end of the 1970s.

By the end of the 1970s, private international finance has returned and overtakes public international finance as a source of funding for states seeking to borrow capital. Banks reopen sovereign rating departments, and rating agencies who had put their activities on hold during the sixties and seventies reopen their departments to rate sovereigns. And so, by the 1980s, what you have is the triumph of the new world of sovereign lending. The Old World has been swept away; these decades of capital controls basically killed off one of the merchant bankers’ main sources of business. And the New World of sovereign lending is now triumphant, a world in which states face purely profit-seeking financial actors that are continually evaluating them with statistical data.

That’s the world we’ve lived in since the 1980s, and that’s the story my book tells.

Cole: What do you see happening in the future?

Bruneau: I think there are two sets of developments that allow us to envisage new possible worlds of sovereign lending beyond the ones I’ve described. And they raise, each of them, different political questions.

The first new development we’ve witnessed in recent years is the rise of huge asset management companies like BlackRock, Vanguard, and State Street, and one of the key features of these huge asset management companies is that they manage their assets passively. They choose not to actively manage the bulk of assets that they own. They don’t make decisions to invest in individual companies. They invest in funds that track specific indexes, like the S&P 500 or the FTSE 100—index funds. That’s mostly for shares; equity. But you can imagine a world in which these large asset management companies become the dominant players in sovereign bond markets.

And then the question is: What would that look like?

Well, you would have sovereign bond indexes—they already exist, but it’s just that these companies aren’t the dominant players in sovereign debt markets—so the whole question would be how do you design the sovereign bond indexes, like which sovereigns are part of the index in which these large asset management companies put funds, and which ones are not? How do these calls get made?

Those decisions would have to be made with quite a long-term view, because you don’t change the composition of an index all the time. I don’t have the answer to the question, but it would certainly change the way in which sovereign debt markets function. And the moment when some states are pulled out of specific indexes would potentially be really disruptive.

In terms of the politics that this world would create, it’s hard to say without further empirical work. There are people like Jan Fichtner and Benjamin Braun—a lot of Germans actually—who are working on these kinds of questions.  

The other possibility, which we’ve glimpsed in the last 15 years, is a world in which the central banks of powerful nations become the dominant players in sovereign debt markets. During the crisis of 2007-08 and its aftermath, and then again during the COVID-19 crisis, central banks became the dominant purchasers of sovereign debt in various countries.

The kind of possibility this raises is a world in which they remain, in the long run, the main purchasers of sovereign bonds. Sometimes people make analogies with the post-World War II period when something similar happened. But the difference now is that the reasons for intervention in sovereign bond markets have changed. Central banks are not doing this to just do the state’s bidding, or only to allow the state to finance itself at good interest rates. They’re doing it in large part to support the shadow banking system, which is pretty unstable and booming at the same time.

But the real question for me, given how I’ve approached sovereign lending in the periods that precede our own, is: What kind of knowledge would central banks use to determine the scope and duration of their interventions in sovereign bond markets? How would they determine that? They’re more independent than they used to be, so what is the type of knowledge they would use to do that?

And that of course raises the question, what kind of politics would this give rise to? That’s a very interesting question.

One of the developments we can already see now is the growing discussion about central bank independence and democratization. It’s increasingly debated, at least within academia, but also a bit beyond. I think there is a further set of two issues when you think about it on a global scale. First, not all central banks have the same capacity to purchase their sovereign’s debt. Some sovereigns are forced to issue debt in a foreign currency, which makes it very difficult for them to rely on their central bank to purchase it.

Second, what would it mean to democratize a central bank, like the Federal Reserve, which is a domestic American institution, but with a huge global footprint in terms of its actions? Can you fully ‘democratize’ a central bank in that type of context? That seems like a particularly insoluble problem to me.

These two ‘futures’—the asset-manager-dominated one and the central-bank-dominated one—will probably never come to exist in such ‘pure’ forms, but they’re still useful to consider, if only as thought experiments.

Zoe Cole is an MA candidate at the New School for Social Research and a Communications Assistant at the Robert L. Heilbroner Center for Capitalism Studies.

Quentin Bruneau is an Assistant Professor in the Department of Politics at the New School for Social Research and Eugene Lang College, and the author of States and the Masters of Capital: Sovereign Lending, Old and New (Columbia University Press, 2022).