Polanyi redux: financial market power, conditionality lending and war prevention during the Pax Britannica (1815-1914)

This paper provides new foundations to Polanyi’s famed argument that monopoly power in the global capital market served as an instrument of peace during the <em>Pax Britannica</em> (1815‐1914). Our perspective is novel: We focus on the role of intermediaries and certification. We show that when information and enforcement are imperfect, there is scope for the endogenous emergence of “prestigious” intermediaries who enjoy a monopoly position and control government policy actions. As a result, they can implement peace‐conditionality: condition the distribution of credit upon the adoption of peaceful policies. The reason they have an incentive to do so, we argue, is because prestigious intermediaries are concerned with maintaining an unblemished track record, while wars increase risk of default. This analysis provides a significant extension to, and departure from, recent research that has used the economics of reputation to emphasize the importance of countries’ own behavior for the accumulation of reputational capital.