How does sovereign debt emerge and become sustainable? This paper provides
a new answer to this unsolved puzzle. Focusing on the early 19th century, we
argue that intermediaries’ market power served to overcome information
asymmetries and sustained the development of sovereign debt. Relying on
insights from corporate finance, we argue that capitalists turned to
intermediaries’ reputations to guide their investment strategies. The outcome
was a two-tier global bond market, which was sustained by hierarchical
relations among intermediaries. This novel theoretical perspective is backed by
new archival evidence and empirical data that have never been gathered so far