Didac Queralt has written an insightful book with a provocative and pessimistic conclusion: that external debt prevented capital-importing countries from building fiscal capacity in the “era of international finance,” the century that preceded WWI. A political scientist by training, Queralt shows impressive skills in historical research when constructing a monumental database out of archival material. He uses this new data to conduct well-thought-out quantitative exercises. The book also includes intriguing but less thoroughly researched case studies to illustrate that foreign capital had side effects in the “global south” of the past.

The book is divided into two parts, the first of which addresses a historical paradox: why did borrowing costs fall internationally at the turn of the twentieth century even though several countries suspended payments on their debt? Queralt argues that “extreme conditionalities” fostered capital exports in the turbulent credit market of that period. Lending contracts contained clauses that allowed creditors to take over borrowing countries’ assets, such as state monopolies, especially after defaults. The literature had dismissed these conditions as being hard to enforce. Yet the author describes how members of London’s “gentlemanly capitalism” perfected the art of using Britain’s diplomatic influence and military might to protect their contractual rights internationally. Thus, financial imperialism explains why indebted governments—especially those in financial distress—handed over their wealth to fortunate bondholders, who had good reasons to continue lending to bad borrowers.

The second part of the book is on state building. It assesses why governments failed to build fiscal capacity in the nineteenth century, a period marked by wars around the world. Queralt proposes that Charles Tilly’s “bellicist hypothesis”—that “war made the state and the state made war” (Coercion, Capital, and European States. Cambridge: Basil Blackwell, 1990)—worked in early modern Europe because there was no international credit market then. Matters were different in the age of international finance. External debt enabled autocrats to fight wars without having to negotiate high taxes with the legislature. An “easy money curse” followed: governments that borrowed not to tax had to agree with extreme conditionalities that transferred assets to foreign creditors, leaving the state short of funds to honor its debts.

While the first half of the book is on financial imperialism, Queralt introduces a domestic political economy twist in the second part. Autocrats could choose between taxing—in which case they needed to accept a system of limited government—or borrowing abroad. A few leaders did the former despite the wrong incentives coming from the world financial market and its abundant credit supply. However, most dictators followed the easy but unfortunate path of issuing external debt to maintain their authoritarian regimes.

Queralt bases his conclusions on quantitative exercises that are among the book’s major strengths. The regressions make the case that wars increased taxation when belligerent countries did not have access to foreign credit. This result is persistent over time and passes tests designed to address issues related to the compression of history. The methodology includes an ingenious way around endogeneity: the sample is restricted to countries that were already waging wars when international crises caused sudden stops in the global credit supply.

However convincing, the methodology’s emphasis on war involves historical limitations that may come as a surprise to economic historians of emerging nations. Queralt overlooks the developmental effects that sprung from foreign debt. Yet external credit did finance railways that had a positive impact on social savings, such as in the Latin American cases that the book cites. Railways were also important for the building of centralized states. National governments used new lines’ routes as a tool to negotiate the centralization of power with local elites. Once built, railways helped the army to maintain internal order by swiftly deploying troops to the countryside. Hence, at odds with Queralt’s conclusions, one may argue that developmental foreign credit made economies richer and states stronger.

The comparative case studies highlight a nuance in the book’s main argument: size matters. Governments in relatively densely populated countries were more likely to reach compromises with the elite to tax and borrow domestically. Without access to the London market, the Chilean government taxed income to finance the War of the Pacific. Japan is the book’s most virtuous case because it borrowed both domestically and abroad. In contrast, the territorially larger Argentina overborrowed in London and remained fiscally weak.

Nevertheless, these comparative cases lack the rigor with which Queralt analyses data. For instance, Argentina can hardly be Japan’s “shadow case,” since these countries differ in virtually everything, not only with respect to population density. The case studies miss important details and propose inappropriate generalizations. The passage on Chile entirely omits Rothschilds, the world’s premier bank, whose select hall of clients happened to include the Chilean government. Moreover, Japan’s domestic debt was far from an exception; Brazil and Russia—to quote two gigantic countries—also had large home markets for public bonds. Finally, the chapter on case studies compresses history when suggesting the causality between fiscal capacity in the past and wealth today. Japan and Chile were poorer than Argentina until the 1960s and 1990s, respectively. These countries would not have been such convenient cases had the book been written decades ago.

The case studies are likely to dismay historians wary of big cross-country theories. The book may also alienate economists for whom foreign finance plays a role in smoothing consumption and promoting development. Nevertheless, Queralt’s work has the merit of addressing important questions with brilliant quantitative research. What is more, by testing a state model with primary data, Queralt builds a solid bridge between political science and economic history.