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Boer Bonds and the Doctrine of War Debts

posted by Mitu Gulati

Concentrating on just about anything during these days of the coronavirus, let alone academic writing, has been a trifle difficult.  A splendid new paper on Boer Bonds by Kim Oosterlinck and Marie Van Gansbeke (here) did, however, get me focused (for a bit).  And that’s in part because their paper has potentially turned upside down what I thought was an established part of customary international law.  That is, the law of “War Debts.”

The international law of state succession, standard treatises will tell you, is strict.  New states (and new governments) inherit the debt of predecessor states (and governments), regardless or changes in political philosophies.  One of the only exceptions to this strict rule is the doctrine of War Debts.  This doctrine, that I thought was implemented by the British Crown in 1900, in the wake of Boer War, says that debts incurred during hostilities by the losing party do not need to be taken on by the victor.  The refusal of the United States to take responsibility for the debts incurred by the Confederacy during the Civil War is another example.

The historical materials that I looked at in my prior work were lacking in clarity, to put in mildly.  And my sources – old treatises and cases -- were all secondary.  In a paper from over a decade ago, here is what my co authors (Lee Buchheit and Bob Thompson) and I conjectured that the doctrine of War Debts was (full paper is here):

The British Government did not at the time articulate the rationale for this policy. Perhaps it believed the justification to be obvious. Paying the debts of a former adversary is one thing, particularly when victory brings sovereignty over the disputed territory and resources. But paying off the very loans that both delayed and added to the cost of that victory is quite another thing.

Moreover, anyone lending to a belligerent power after hostilities have begun is placing an obvious bet—an all-or-nothing bet—on the outcome of the war. This aspect of the war-debt limitation to the doctrine of state succession is significant because it introduces into the debate the reasonable expectations of the creditor when extending the loan.

Kim Oosterlinck and Marie Van Gansbeke, both financial historians, look beyond the secondary sources to primary sources – the debates among the legal advisers to the British Crown, the archival records of the investment banks, and most importantly, the prices of the Boer bonds issuer prior to and after the hostilities with the British began. The story they conclude with is different from the one than what my co authors and I conjectured a decade ago (being careful historians, they couch their bottom line with caveats about the need for further research).

The focus of their paper is the 1892 Boer bond underwritten by the House of Rothschilds and, specifically, how its prices held up during the war.  That, by itself, is a stunning finding of the paper.  Ordinarily, they explain, one would expect to see the prices of bonds issued by the party in a war that is likely to lose to drop (especially relative to the bonds of the side that is winning). In fact, one can do cool analyses of how the bond prices of the winner and loser of each battle move during a war.  Kim and Marie find that the prices of this 1892 bond stay stable – close to par.  That is, the markets were confident that the bond would be paid regardless of who won.

Now, one conclusion from the foregoing, and the one I immediately drew, was that the foregoing was the result of the doctrine of War Debts.  The market knew about the doctrine, that assured them that the debts incurred prior to the war would be paid, but the ones incurred would not be. (Kim and Marie do not examine the movements in the prices of the bond issued after the commencement of hostilities, but I am assuming that those prices plunged – although I’m very interested in seeing what happened there).

That, however, is not the story that Kim and Marie tell. Drawing from archival material, they find that the British legal experts had considerable disagreement among themselves about what the law of state succession obligated the Crown to do in the wake of the war. Some thought that the Crown was obligated to pay all of the debts and some thought that there was no obligation to pay any. And no one, to my dismay, seems to have perceived a differential in legal obligations between the debt incurred prior to the hostilities and those after.

If that was indeed the case regarding the view of the international law of state succession at the time – that there was no clear law -- that’s interesting in and of itself.  But it is also interesting that, at the time, there was no sense of a differential between debts incurred during and before the hostilities.  That War Debts spin given to what happened came after the fact.

The question then arises: If it was not the legal regime, what then explains why the pre war 1892 bond didn’t drop in price when it looked like the Boers were going to lose?  Kim and Marie answer drawing on the research of two other financial historians, Marc Flandreau and Juan Flores (and co authors -- here, here and here) on how, at the time, bankers such as the Rothschilds would essentially stand as guarantors for the debts in question and, if they could, would try to use their considerable power for persuade governments to preferentially pay the debts that, they, the Rothschilds had underwritten.  And here, the 1892 bond was a Rothschild one, whereas the later debts were not.

The foregoing raises a number of questions that I’m hoping to persuade some of my co authors that we should investigate. 

  • First, can we dig deeper into the archives to figure out what the international law gurus in 1900 said the authorities for their views were? (And did they draw on the position that the United States took regarding the Confederate debt after the Civil War?)
  • Second, was there an evolution in the views of the international law experts, particularly in Britain, between the Boer War, and their submissions in the 1905 West Rand case?
  • Third, what were the pricing patterns for the Boer bonds issued after the commencement of hostilities against the British Crown and how did those patterns match up against those with the 1892 bond? (Did they vary as a function of how the war evolved?)
  • Fourth, what were the views of international law experts about the repudiation of the confederate debts?  (Was there a view that that was a violation of international law?) 
  • Fifth, did the Rothschilds in fact force (persuade?) the British Crown to pay the 1892 using inducements? And, if so, what were those inducements?


At first I thought you were blogging about "beer bonds"--securitizations of pubs' beer sale income. How disappointing to find that Newscastle Brown Ale is not involved.

It is interesting that not paying "war debts" is so widely accepted, whereas not paying "odious debts" has such weak acceptance. To many Haitians living under the Duvaliers, it had to feel as if the security forces were "waging war" on large swaths of the population. I wonder whether the widespread acceptance of not paying "war debts" is based in power, rather than law—if the United States and the British Empire choose not to pay a debt, who is really going to stop them?

Like Chris, I'm surprised that a super power like Britain in the late nineteenth century felt the need to debate the crown's refusal to pay the bonds. Like we saw in the gold clause cases, sometimes the rules of these transactions are governed by the predilections of the institutions that wield power, not by the amorphous concept of "the law". As Cornelius Vanderbilt once said, what do I need the law for, ain't I got the power?

It is a very interesting analysis of a confusing situation! I am surprised by the difference in the impact that an uncertain situation has on bonds negotiated in this 21st century, versus bonds negotiated in 1890. Even if it were clear that the British government would invoke the war debt doctrine, it is still stunning that the value of the bond stayed around par. Nowadays, when a country has rumours of default, prices drop down to 20 cents on the dollar! I don't think it is due to the lack of infomation, because the only fact of a war going on would presume a scenario of high risk. I wonder if it is due to any of the following facts: (i) the world hadn't seen m any defaults yet (?); (ii) there wasn't a lot of liquidity of sovereign bonds in the capital markets; (iii) the markets weren't liquid and investor couldn't easily fly to quality.

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