American Military Interests and Economic Confidence in Spain Under Franco Dictatorship - Oscar Calvo-Gonzalez

Economic History Association
American Military Interests and Economic Confidence in Spain under the Franco
Dictatorship
Author(s): Oscar Calvo-Gonzalez
Source: The Journal of Economic History, Vol. 67, No. 3 (Sep., 2007), pp. 740-767
Published by: Cambridge University Press on behalf of the Economic History Association
Stable URL: http://www.jstor.org/stable/4501186
Accessed: 02-08-2017 20:44 UTC
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms
Cambridge University Press, Economic History Association are collaborating with JSTOR
to digitize, preserve and extend access to The Journal of Economic History
This content downloaded from 147.96.1.236 on Wed, 02 Aug 2017 20:44:20 UTC
All use subject to http://about.jstor.org/terms
American Military Interests and
Economic Confidence in Spain under the
Franco Dictatorship
OSCAR CALVO-GONZALEZ
The security of property rights is fragile under dictatorships. This is particularly

so if economic agents are uncertain as to whether the regime will last. As a re-
sult, private investment is withheld and economic performance is poor. Spain
was in such a situation after World War II. However, as the Cold War intensi-
fied the United States became interested in Spain as a military ally, thereby help-
ing to consolidate Franco's regime. This led to an increase in economic confi-
dence and helps to explain why economic growth resumed in Spain ahead of
significant changes in its autarkic economic policies.
D ictatorships havepowerparticular
A ruler with absolute may promise notdifficulties
to expropriate his in securing property rights.
subjects' property, but such promises are unenforceable and, hence, not
credible. The subjects in an autocracy face a risk that their capital will be
confiscated, their loans repudiated, or their currency debased. Faced with
those risks, private individuals reduce the amount of investment and in-
stead hoard liquid assets and engage in capital flight.' The root of the prob-
lem is that the autocratic ruler has too much power. Institutions that con-
strain those with coercive power will influence private individuals'
willingness to invest and take part in the market.2 Lack of such "coercion-
constraining" institutions can be a major obstacle to economic growth.
The challenge is even greater for dictators whose hold on power may
be insecure. A ruler who expects to remain in power will be able to bene-
fit from future riches and hence will have an incentive to promote eco-
nomic growth. A "roving bandit," however, has an incentive only to ex-
propriate. But insecurity affects more than just the incentives of the ruler.
The Journal of Economic History, Vol. 67, No. 3 (September 2007). C The Economic
History Association. All rights reserved. ISSN 0022-0507.
Oscar Calvo-Gonzalez is Principal Economist, European Central Bank, Kaiserstrasse 29,
Frankfurt am Main 60311, Germany. E-mail: o.calvo-gonzalez-alumni@lse.ac.uk.
The author would like to thank Christina Beharry, Albert Carreras, Nick Crafts, Michael Fi-
dora, Fernando Guirao, Philip Hoffman, Arnaud Mehl, Leandro Prados de la Escosura, Albrecht
Ritschl, Julio Tasc6n, Cristina Vespro, and the anonymous referees of this JOURNAL for com-
ments, assistance, and encouragement. Research on which this article is based was largely con-
ducted prior to the author joining the staff of the European Central Bank and was made possible
thanks to financial support from the London School of Economics and the University of London
Irwin Studentship. Any views expressed in this article are those of the author and should not be
attributed to any of the above-mentioned institutions.
SNorth and Weingast, "Constitutions"; and Olson, Power.
2 Greif, "Commitment."
740
Economic Confidence in Spain 741
Even if a dictator expects to remain in power, the population may

doubt that he will be able to do so. In such circumstances, economic
agents may fear that any commitments may not be enforced by a suc-
cessor political regime. The perceived instability of the dictatorship
therefore undermines further its ability to make credible commitments.
An increase in the political security of a dictatorial regime will reinforce
the perceived security of property rights and thus raise economic
agents' expectations and affect their economic behavior.
This article explores how the support of the U.S. administration to the
Spanish dictator Francisco Franco may have had such an effect on improv-
ing economic confidence within Spain by helping to secure Franco in
power. As we will see in more detail, the international standing of the
Franco regime saw a significant turnaround from being ostracized at the
end of World War II to emerging as a military partner of the United States
in the mid-1950s. As press reports put it, the Franco regime had swiftly
turned from "U.N. outcast to U.S. partner."3 The end of Franco's isolation
was widely regarded as enhancing his regime's long-term prospects. The
New York Times, critical of the American rapprochement to Franco's
Spain, contended that the American support "will be helping to perpetuate
Franco in power."4 This assessment, which stresses how the American
support to Spain meant the "definitive consolidation" of Franco's regime,
is a common feature in the political historiography of Spain.5 What did this
definitive consolidation mean for the Spanish economy?
In answer to this question the literature has suggested that American
support to Franco may have improved business sentiment and economic
confidence inside Spain.6 However, only limited evidence has been pre-
sented in support of that view. The contribution of this article is to provide
such evidence. Specifically, we look at financial markets, because the al-
leged change in expectations should be reflected in the pricing of assets.
A related, but separate, issue may also occur to some readers: whether
the increased political stability affected the incentives facing the Franco
regime. Increased political stability may have increased the willingness of
the regime to experiment with economic policies geared towards long-run
growth. In particular, it may have made the regime accept the short-term
costs associated with stabilization measures such as those adopted in Spain
in 1959. This article does not address that question.
Here the argument is that greater political stability resulted in im-
proved confidence among economic agents, even in the absence of sub-
3 World Today, December 1953.

4 New York Times, 30 August 1953.
5 Fusi, Franco, p. 146. See also Preston, Franco, p. 624.
6 Calvo Gonzalez, "Bienvenido, Mister Marshall."
742 Calvo-Gonzalez
stantial institutional reform or econom

is consistent with the growing literatu
litical events.7 It should be stressed tha
cal stability alone is sufficient to supp
mid-1950s, for example, growth in Spa
autarkic economic policies and the inst
presented, therefore, does not take aim
constrain the executive are conducive t
tain types of political institutions lead
Nevertheless, it reminds us that econo
pend on the characteristics of the curr
institutions but will also be influenced
prospects of survival of those institut
combined with low uncertainty will le
than a combination of "bad" institutio
However, which of the other two poss
tions with high political uncertainty an
tainty) will lead to better economic ou
whose answer is likely to differ from c
THE AMERICAN RAPPROCHEMENT TO FRANCO'S SPAIN
Following the end of World War II, the Franco regime was ostra
and barred from the United Nations by a resolution that also re
mended that U.N. member states recall their ambassadors from Madrid.
At the time, the American policy was to isolate the regime and hope for
its peaceful downfall. Growing Cold War tensions, however, prompted
a revision of American policy. American military planners saw in the
Iberian Peninsula an excellent location for naval and air bases. Planes
based in Spain could reach their targets inside the Soviet Union yet still
remain a safe distance away from the main theater of operations in
Western Europe, which was expected to fall under enemy control
should the Soviet Union launch a ground attack.9 These strategic advan-
tages led to a progressive modification of American policy.
7 Sussman and Yafeh, "Institutions," show how Japanese bond prices during the Meiji era did
not respond to constitutional changes as much as they did to geopolitical events, while in "Insti-
tutional Reform" they argue that wars and instability contributed to keeping borrowing costs
high and volatile for Britain even long after the Glorious Revolution. Mitchener and Weiden-
mier, "Empire," show that the American threat to intervene in Central American countries in ar-
rears resulted in an increase in stability and a dramatic rise in bond prices.
8 Acemoglu et al., "Institutions."
9 Joint Strategic Survey Committee, 29 April 1947, Foreign Relations of the United States
[hereafter FRUS], 1947, 1, p. 747. See also Fernsworth, "Spain."
The overall objective of American policy toward Spain was first to

change. In January 1948 President Harry Truman endorsed the National
Security Council "Report on U.S. Policy toward Spain," which called
for a normalization of relations. It should be emphasized, however, that
the change in policy was initially limited and had potentially ambiguous
effects for the Franco regime. In fact, following the reappraisal of the
strategic importance of Spain, the American administration toyed with
the idea of sponsoring an uprising against Franco and even consulted
with the British on whether they would cooperate in such an opera-
tion.10 Because the ostracized Franco was considered an obstacle to se-
curing American interests, the United States therefore had a motive for
seeking his ouster. The American administration entertained this policy
option but eventually concluded that it was highly uncertain what type
of regime would succeed Franco. American policy then moved towards
establishing closer ties with the Franco regime. By mid-1949 the State
Department no longer opposed Spain's loan applications to the Export-
Import Bank as a matter of principle, though no such loans would in
fact be granted for more than a year."
The outbreak of the Korean War in June 1950 strengthened the posi-
tion of those within the U.S. administration who sought to reach a deal
with Spain in order to set up military bases. As a result, and despite con-
tinuing hostility to the Franco regime within the U.S. administration,
policy toward Spain was about to turn decisively.12 In August 1950 the
U.S. Congress voted to allow Spain to receive concessional loans from
the U.S. Export-Import Bank and, for the first time, the U.S. administra-
tion decided to go ahead with providing financial assistance to the
Franco regime. In November 1950 the United States supported a U.N.
General Assembly vote in favor of nullifying the 1946 resolution ex-
cluding Spain. By January 1951 Secretary of State Dean Acheson con-
ceded internally that "the potential military value of Spain's geographi-
cal position grows steadily in direct proportion to the deterioration of
the international situation," and the U.S. Joint Chiefs of Staff urged that
steps should be "immediately initiated by the United States to make
Spain one of our military allies."'3 By mid-July 1951 the American
military had already been granted permission to send a senior figure for
o10 Liedtke, "International Relations," p. 40.

" Acheson to Embassy in Spain, Washington, 13 April 1949, FRUS, 1949, 4, p. 735.
12 Truman himself stated at a press conference on 30 March 1950 that "there isn't any differ-
ence between the totalitarian Russian government and the Hitler government and the Franco
government in Spain," in Merrill, Documentary History, vol. 25, p. 45.
13 Draft report by Acheson to the National Security Council, Washington, 15 January 1951,
FRUS, 1951, 4, p. 773, and Study by the Joint Chiefs of Staff, Washington, 15 January 1951,
FRUS, 1951, 1, p. 66.
744 Calvo-Gonzalez
exploratory talks with Franco on the p

bases in Spain. The U.S. Department o
18 July 1951 under the heading "U.S. B
Role in European Defense," and the f
that the United States was seeking some
Franco and his American interlocutor
ment in principle on the need for close
However, details about military bases o
were left for later negotiations, which
to be completed. For our purposes, it is
negotiations were lengthy, they never
point. In fact there were repeated rum
close to a successful conclusion. In J
American press reported that U.S. offi
be concluded soon.14 In the end, three
economic assistance, and mutual defe
public ceremony in Madrid on 26 Septe
as the agreements came to be known,
vide an unspecified amount of aid in retu
military bases in Spain.
THE CREDIBILITY HYPOTHESIS
Why did the American rapprochement help to secure Franco in

The short answer is because the United States became a stakeholder in
the political and economic stability of Spain. In other words, it was now
in the American interest to "guarantee [the] internal stability in Spain so
that the use of our bases is not jeopardized by civil disorders."'5 Cru-
cially, this was a commitment that was well understood by contempora-
neous observers. The magazine The Economist, commented some half a
year after the signing of the 1953 agreements that "[n]ow that the Ameri-
cans have an interest in the country, it is reasonable to assume that they
will help it get out of the most serious economic difficulties."16
But could not have the American support been withdrawn as quickly
as it was granted? In answering this question it is crucial to bear in mind
that the American rapprochement to Franco was a result of a re-
14 New York Times, 16 January 1952. The delay was partly due to Spain's demands-
eventually granted-that sensitive issues about the U.S. right to use the bases be dealt with in
secret notes, so as to maintain the public appearance that the bases were under full Spanish sov-
ereignty.
15 Memorandum of the 248th meeting of the National Security Council, Washington, 12 May
1955, in FRUS, 1955-1957, vol. 27, p. 539.
16 The Economist, 17 April 1954.
assessment of the geo-strategic value of Spain within the context of the

Cold War. Moreover, the Pact of Madrid meant a military alliance in
everything but name. As Harold Stassen, Director of the Mutual Secu-
rity Agency, conceded in his July 1954 testimony before the Senate,
"you cannot defend the U.S. air bases without defending Spain.""7 Once
the United States had made a substantial investment in time and money
in securing base rights in Spain its commitment would not be easily re-
versed. The U.S. administration also had to compromise its previous
position, alienating domestic groups such as trade unions and foreign
governments opposed to any dealings with Franco. In this regard, sub-
stantial political capital was already invested when, in July 1951, Tru-
man publicly announced the aim to reach a security deal with Franco.
It was as if the Franco regime was insured by the United States against
possible political and social instability. When Senator J. William Ful-
bright, Chair of the Senate Foreign Relations Committee, traveled to the
American bases in Spain he was appalled to discover that the scenario for
the annual joint American-Spanish military maneuvers was "a domestic
insurrection in which the American military intervened to save the Span-
ish government."18 Although Fulbright's observations refer to the 1960s
they help to illustrate the extent of the American commitment.
The argument that economic confidence improved in Spain as a result
of the American support was perhaps most clearly put forward by con-
temporaneous analysts. A Bank of England staffer who traveled to
Spain in early 1954 to gather information on the Spanish economy sug-
gested that
... one important factor underlying the confidence in the future is the psycho-
logical reaction to the U.S. agreement. I say "psychological" because it is the
potential effects of the Agreement which has made the impact rather than the as-
sistance itself (for this, although welcome, is a mere "drop in the ocean" in the
light of Spain's requirements), i.e., the very fact that an agreement of any sort
has been concluded with the U.S. as representing an end to Spain's isolation and
an indication of [the] U.S. Government confidence in the future stability of the
country. 19
Exploring this argument is important, for so far the literature has

failed to explain the rapid economic growth observed during the 1950s
in Spain. Whereas real per capita income in Spain in 1949 was barely 4
percent above its 1940 level, it had jumped to 53 percent above its 1940
level by 1958. In fact, tests of structural breaks in the time series of
17 As quoted in Duri, U.S. Policy, p. 344.

18 Woods, Fulbright, p. 511.
19 "Spain," report by G. J. MacGilivray, 21 May 1954. Bank of England Archive, File
OV61/5.
746 Calvo-Gonzalez
Spanish real GDP suggest an upward

economic performance of Spain dur
vorably with that of other Western E
example, from 1950 to 1958 Spain's
with that of the Western European cor
and, especially, Ireland fell behind.21
Spain also stands out during the 1950s
1950 as a base, the Spanish investme
percent by 1956. In comparison, the
Greece remained stable during that per
One hypothesis that has been advanced
of economic growth is that property righ
in the 1950s through deregulation and
thus contributed to capital accumulation
argument hinges on actual change in ec
ing the decade, and subsequent researc
level and discretionary nature of state
1957.24 Economic policies did change f
overhauled his cabinet and a new gove
devalued the peseta, and put some limit
reform process culminated in July 1959
Stabilization Plan backed by the Intern
Organization for European Economic
economic growth took place before th
institutions were still burdensome. As
scholars "should be looking for those
evidence rather than limiting themsel
the mass of obstructionist measures then
20 Prados de la Escosura, Progreso, p. 146 and app

21 Spain's real per capita GDP as a percentage of t
Denmark, United Kingdom) remained around 42-4
as the Stabilization Plan led to a recession). Irelan
percent in 1958, while Portugal's decreased from ar
achieved some catching up during the 1950s. Calcu
greso; and Maddison, World Economy.
22 Mitchell, International Historical Statistics.
23 Gonzilez, "Autarquia."
24 G6mez-Mendoza and San Romin, "Competition
lacidn industrial, on industrial policies; and Martine
censes.
25 The Stabilization Plan aimed to address the recurrent balance of paymen

valuing the peseta and adopting tight fiscal and monetary policies. But th
also implied a substantial opening up of the Spanish economy to foreign
vestment as well as getting rid off many internal licensing and restrictive sta
26 Guirao, Spain, pp. 203-05.
The argument I advance here can help to explain this puzzle because
it does not rest on substantial change in economic policies, which did
not occur until 1959. Rather, my claim is that property rights were per-
ceived to be more secure because of America's geo-strategic interest in
Spain and in Spain's stability; in other words, my hypothesis is that the
change in America's foreign policy strengthened Franco's position and
thereby reinforced the credibility of Spanish property rights.
Gathering evidence to test this argument is, unfortunately, a challeng-
ing task. Contemporary commentators often referred to the broader sig-
nificance of the Pact of Madrid for the Spanish economy. For example,
the fortnightly Economia suggested that the "amounts [of aid Spain is to
receive] is not in our view the most important, but the influence that it
could have on the normal development of our economy."27 And other
observers often suggested that the American support to the Franco re-
gime may have led to an improvement in economic confidence. For ex-
ample, shortly after the 1953 agreements were concluded a local bank
manager claimed that "business and banking circles are enthusiastic
[and] already confidence in the future has picked up, the peseta is
strengthening, and everything points to continued improvement."28
Such optimism contrasts with the situation in the late 1940s and early
1950s, which is sometimes described by diplomatic sources as one in
which the "business world of Spain has no confidence."29 Still, although
such evidence is suggestive, it may well be biased or unrepresentative.
To find out, we will look at the impact these political events had on
Spanish capital markets.
ASSET PRICE RESPONSE
Because improved expectations affect the pricing of assets, f

markets are an obvious place to look for evidence that American
policy bolstered the Spanish regime and thereby reinforced the
ity of Spanish property rights. To ensure that asset prices refle
agent's expectations, we will focus on markets free of direct i
tion from the Spanish government. The first asset we examin
Spanish peseta. Although the official exchange rate of the p
27 Economia, 30 September 1953.

28 Memorandum of conversation between Robert Wilson, U.S. Consul in Seville
desto Cafial, branch manager of the Banco de Vizcaya, Seville, 30 September
Madrid Embassy, Classified General Records, 1953-1963, Foreign Service Post Fil
Archives at College Park.
29 Paul Culbertson, American charge in Spain, to Acheson. Madrid, 20 June 19
1950, vol. 3, pp. 1564-65. The apathy of investors is also noted in Clinton Pelham
and Commercial Conditions, p. 4.
748 Calvo-Gonzalez
80
Exchange rate in New York
70 ..Exchange rate in Tangiers
SOfficial exchange rate for

S60 ~ transfers a
50
40
30
20
10i --- I . .
1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975
80T
60 +
40
20
PL -20
-40
-60-
-80+i Deviation of the exchange rate in Tangiers from the exchange rate that satisfies the purchasing parity
condition between the US and Spain
0 Deviation of the exchange rate in New York from the exchange rate that satisfies purchasing parity
O Deviation of the official exchange rate (transfers) from the exchange rate that satisfies purchasing parity
FIGURE 1
SPANISH PESETA-U.S. DOLLAR EXCHANGE RATE
Note: The exchange rates refer to annual averages.

Sources: Aixalk, Peseta; and Pick, Black Market Yearbook (various years); and Ma
sector exterior," for the official exchange rate for transfers from 1941 to 1958.
fixed, it traded freely in a number of international markets. A

these markets the most liquid was that of the North African
Tangiers. The exchange rate in Tangiers was widely cited, even
official circles, when discussing economic conditions and policie
ure 1 provides the available data on the exchange rate as it tr
Tangiers and in New York, as well as the official exchange r
transfers.30 The bottom part of Figure 1 shows the deviation
Tangiers rate from the exchange rate that would be obtained if t
chasing power parity condition would hold.31 This deviation
30 In 1949 a multiple exchange rate system was introduced, through which a subs
valuation was engineered. This led to large differences in the exchange rate applied to
types of flows. For example, in 1950 the exchange rate applied to sales of pesetas linke
in goods was 21.81 while transfers were applied the highest rate of 31.14. The latte
akin to the type of transactions for which the unofficial markets may provide an alt
the official market and it is therefore the one shown in Figure 1.
31 Calculated as follows: (exchange rate in Tangiers - PPP exchange rate) / PPP e
rate. For example, in 1950 the exchange rate that would have satisfied the PPP con
32.1 pesetas per U.S. dollar while the peseta was traded at 52.5 per U.S. dollar in Tan
some information about the risk premium placed on the Spanish peseta.
In the aftermath of World War II this measure of risk increased substan-
tially, peaking in 1950, and thereafter came down and stayed at rela-
tively low levels from 1953 onwards. While broadly supportive of the
argument put forward here, when interpreting the evolution of this
spread we should however bear in mind that the official rate was also
changed at various times, such as in December 1948 when a system of
multiple exchange rates was introduced and the peseta was de facto de-
valued. In fact, the official exchange rate applied to transfers was very
close to the exchange rate that satisfied the purchasing power parity
condition in 1949-1950. Yet, in the unofficial market those changes did
not lead either to a closing of the discount at which the peseta traded in
the free markets nor to a reduction in volatility.
To explore the hypothesis I focus on the volatility of the exchange
rate, as uncertainty about the security of property rights is likely to in-
crease the volatility of exchange rates. The reason is that insecure prop-
erty rights make the process of price formation inherently difficult.
Much arriving news may convey information about the security of
property rights, but some of this information will be difficult to inter-
pret, and, in addition, there may be unfounded rumors. The potential for
information asymmetries is also high, as market participants may be-
lieve that some players will benefit from inside information. In contrast,
if property rights are credibly secured, market participants would no
longer need to focus on interpreting the information about the security
of property rights. They would still need to factor in the impact of mac-
roeconomic fundamentals, but the security of property rights would be
settled. As a result, exchange rate volatility would be reduced.
Following the standard finance literature we will examine the "condi-
tional variance" derived from a generalized autoregressive conditional
heteroskedasticity (GARCH) model of exchange rate changes (or re-
turns).32 In GARCH models the variance of the returns is not assumed
to be constant but rather is allowed to change over time, or to be "condi-
tional" on its past values. This allows these models to fit the well-
known fact of "volatility clustering," common in most financial data
given that some time periods are riskier than others and therefore the
expected value of the magnitude of error terms is greater at some times
per U.S. dollar in New York, and the official exchange rate (for transfers) was 30.75 pesetas per
U.S. dollar. Therefore, the exchange rate in the free markets was around 60 percent higher than
the PPP exchange rate (indicating an undervaluation of the peseta in unofficial markets). In con-
trast, the official exchange rate was around 5 percent lower than the PPP exchange rate (indicat-
ing an overvaluation of the official exchange rate).
32 See Engle, "GARCH 101," for an introduction to GARCH models as well as references to
common applications in the finance literature.
750 Calvo-Gonzalez
than at others. In particular, exchange

ized by a GARCH (1,1) process, which
change rate volatility.33 Formally, th
two equations. The first is a so-called m
r, - ~= + 2 ril +E, (1)

where rt represents the difference of log exchange rates, and the error
term, et, conditional on past values of the error (et-1, et-2 ...), is distrib-
uted as N(O, Ut). (Here ct is the variance of returns in period t.) The sec-
ond equation is a so-called variance equation
t = ao + e 1 1 t-1 (2)
Therefore, the GARCH (1,1) model asserts that the best predictor
the variance in this period (rt) is a weighted average of the long-run a
age variance (ao), the new information in the most recent period as c
tured by the most recent squared residual (et-12), and the variance
dicted for the most recent period (at-1). The conditional variance can
be interpreted as the expected amplitude of exchange rate movements
given point in time. Changes in the conditional variance may be cau
by a number of factors. For example, macroeconomic news-i.e., una
ticipated by the market--would imply larger errors in the mean equa
and would hence affect the estimate of the conditional variance. Assum-
ing agents do not improve their forecasting abilities, such unanticipated
economic news is likely to remain fairly random as would be its impact
on the conditional variance. In contrast, a reduction in the perception of
risk would be associated with a reduction in the conditional variance. In
particular, a reduction in political uncertainty would be associated with a
lower conditional variance. I, therefore, apply the GARCH (1,1) model
on the monthly exchange rates of the peseta in New York and obtain its
conditional variance, as shown in Figure 2.34
The results suggest that volatility, and hence uncertainty, was high dur-
ing the late 1940s. Moreover, the spikes in the late 1940s are in line with
the view that political uncertainty would be associated with frequent price
changes. Following this period of high and changing risk there was a
steady decline and, after 1953, relatively low and stable levels.
33 Bollerslev et al., "ARCH Modeling."

34 We use New York price data as they cover a longer span at a higher frequency than the
Tangiers market data. The two move closely together, with a correlation coefficient of 0.994
from January 1953 to June 1959, the period for which we have monthly data for both markets.
0.007
0.006
0.005
0.004
0.003
0.002
0.001
0.000
Jan-46 Jan-48 Jan-50 Jan-52 Jan-54 Jan-56 Jan-58 Jan-60 Jan-62 Jan-64 Jan-66 Jan-68 Jan-70 Jan-72 Jan-74
FIGURE 2
CONDITIONAL VARIANCE OF THE PESETA-U.S. DOLLAR EXCHANGE RATE IN
NEW YORK
Source: See the text.
To cross-check these results I also looked at an alternative measure of

confidence. I derive my second proxy for uncertainty from the price of
gold in the unofficial market in Madrid. It is likely that the demand for
gold, which was legal to own but illegal to trade, was affected by the
perception among Spanish economic agents of the risk involved in al-
ternative investments in Spain. Although I have no information on turn-
over, available commentary suggests that the market seemed to be rela-
tivelyliquid and prices reflected and sometimes anticipated economic
policy changes.35 To control for fluctuations, in the price of gold driven
by changes in the international market for gold, my proxy is the spread
between the price in Madrid and in Zurich (see Figure 3).
The overall .picture closely resembles the one for the conditional
variance of the exchange rate. The price in Madrid was always higher
than in Zurich, for two likely reasons: there was probably more de-
mand in Spain for gold as a hedge against insecurity, and a higher
price also rewarded the risk borne by the people who carried out the il-
legal trades in Madrid. But spreads were much higher, and much more
volatile, in the late 1940s than thereafter. From mid-1950 onwards
there was a substantial decline in the gold premium in Madrid.
Changes in the permissiveness of the authorities towards this unoffi-
cial market would affect this risk premium, but I have no evidence of
any such changes throughout the period. I will therefore interpret this
decreasing premium-tentatively-as the manifestation of greater security
35 Pick (Currency Yearbook 1963, p. 562) suggests that "[i]n 1956 gold smuggling into Spain
increased substantially and in the first quarter of 1957 'imports,' aided by high officials, soared
to about $500,000 a month, as the crowd 'in the know' of the coming devaluation coldly com-
mercialized this knowledge."
752 Calvo-Gonzalez
40
30
20
10
Jan-47 Jan-48 Jan-49 Jan-50 Jan-51 Jan-52 Jan-53 Jan-54 Jan-55 Jan-56 Jan-57 Jan-58 Jan-59 Jan-60 Jan-61 Jan-62 Jan-63
FIGURE 3
SPREAD BETWEEN THE U.S. DOLLAR PRICE OF GOLD IN MADRID'S UNOFFICIAL
MARKET AND THE U.S. DOLLAR PRICE OF GOLD IN ZURICH
Source: Pick, Black Market Yearbook (various years).
for other investments and a resulting lower demand for gold as a saf
haven. Although the data presented may be suggestive, I now turn to
further statistical analysis of the time series properties of these proxi
for economic confidence.
Did the American Rapprochement to Franco Mark a Turning Point?
To explore whether the American rapprochement marks a "turning

point" in economic confidence, I analyze breaks in the two proxies of
economic confidence: the conditional variance constructed from the ex-
change rate in the New York market and the premium for gold in the
Madrid unofficial market. My strategy is to apply a common four step
methodology to search for turning points in time series; roughly speak-
ing, the methodology will help determine whether there were "breaks"
in the measure of confidence-that is, changes in its mean that were
long lasting and not simply a blip or a random variation in confidence.36
The first step consists of estimating a regression equation over a win-
dow starting from the first observation in the time series. The time-span
for the window inevitably involves some arbitrary choice. After some
experimentation, and given the long-term nature of our argument, I set-
tled for 60 month windows so that I detect only turning points that are
relatively long lived.37 As for the regression equation, I use an autore-
gressive specification of order one because both of the variables of in-
36 See Frey and Kucher, "History"; and Willard, Guinnane, and Rosen, "Turning Points."
37 Results were qualitatively unchanged using 48 month and 72 month windows.
terest, the conditional variance and the gold premium, are such that I
cannot reject the unit root hypothesis. Within each of the rolling win-
dows I estimate two sets of regressions. The first one is the simple auto-
regressive equation and the second one is the equation expanded to in-
clude a dummy variable, as shown in equations 3 and 4 for the
conditional variance
a, = 0 + 7, a,_, + E, (3)
a, = : + y, at- + y2 D, + t, (4
where D1 equals one from the mid-point of the window onw
zero otherwise. To check for changes in the constant we compu
test based on comparing the sum of the standard errors from t
tions with and without the dummy variable (equations 3 and 4
conditional variance, and similar equations for the gold price pr
The second step consists of estimating the regression again for
dow starting one month after the beginning of our data and repeati
procedure until I cover the entire time period. The results fro
first and second steps for both the conditional variance of the e
rate and for the gold price premium are shown in Figures 4 and
The third step of the methodology implies selecting 60 month
around the dates of the peaks in the series of F-statistics. Whe
first and second steps allow me to identify the windows in which
points are most likely, the fourth step is designed to test withi
the windows for structural breaks. To do so, I estimate within e
dow a random walk augmented by a dummy variable as follows
t --= + y, ,t-1 + y, D,, + Et (

where s = 6, ..., 72 and D,t equals one if date t is on or afte
and zero otherwise. The estimated coefficient on the dummy v
(ys) measures a change in the mean occurring on date s. I c
standard F-statistic to test whether the coefficient on the dumm
ferent from zero, and the date with the highest F-statistic
when the most important mean shift occurs within the window
ignated as a turning point.38 The results from this exercise are
38 As in Frey and Kucher, "History," we added six observations to the beginning

end of the windows to allow for the sequential break test to detect turning points to
beginning and the end of the windows. We also generated critical values for the F
10,000 Monte Carlo simulations of random walk equations where the intercept, coeff
standard errors are those of random walk equations estimated for each of the two tim
ing examined.
754 Calvo-Gonzalez
40
30
20
10
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75
FIGURE 4
F-TESTS FOR STRUCTURAL BREAKS IN THE CONDITIONAL VARIANCE OF THE
SPANISH PESETA-U.S. DOLLAR EXCHANGE RATE
40
30
20
10
FIGURE 5
F-TESTS FOR STRUCTURAL BREAKS IN THE SPREAD BETWEEN GOLD PRICE IN
MADRID'S UNOFFICIAL MARKET AND ZURICH
Table 1, which also reflects some of the key political events affect
the American rapprochement to Franco's Spain as well as m
changes in Spanish economic policy.
If the true data generating process of the exchange rate embodies
turning points identified in Table 1, the GARCH model should b
estimated to reflect these turning points.39 One way to do so is to
clude dummy variables in the variance equation to allow for differ
intercepts after each turning point. The dummy variables assoc
39 I owe this point to an anonymous referee of this JOURNAL.
TABLE 1
TURNING POINTS IN PROXIES FOR ECONOMIC CONFIDENCE
Turning Points in the Turning Points in the

Conditional Variance Gold Price Spread
of the Peseta Major Events Regarding American Between Madrid's
Exchange Rate in Rapprochement to Spain or Spanish Economic Unofficial Market and
New York Policy-Making Zurich
May 1950
June 1950: start of Korean war
August 1950: First U.S. assistance to Spain in
the form of a loan by the Export-Import
Bank
October 1950
November 1950: Repeal of United Nations
Resolution barring Spain from membership
Expectations of conclusion of agreements with December 1952
February 1953 United States (signed in September 1953)
August 1956 Expectations of upcoming devaluation (official
exchange rate unified and devalued to 42
pesetas per US dollar in April 1957)
Reshuffle of cabinet in February 1957, new
ministers for Commerce and Finance
appointed December 1956
Stabilization Plan being discussed (launch
July 1959, including devaluation of the
April 1959 official exchange rate to 60 pesetas)
March1962
November 1967: Devaluation of official
November 1967 exchange rate to 70 pesetas per U.S. dollar
with the turning points in February 1953, August 1956, April 1959, Au-
gust 1962, and November 1967 all prove to be highly significant. When
I include the dummy variable for October 1950, however, the autore-
gressive term in the variance equation fails to be significant, indicating
that the exchange rate can no longer be accurately characterized in a
GARCH(1,1) form. 40 These results raise doubts about the turning point
in late 1950, but they confirm five clearly distinct periods in exchange
rate uncertainty, of which the period up to February 1953 shows the
highest conditional variance (Figure 6).
While the results from the conditional variance of the exchange rate
suggest that there may have been no turning point in 1950, the analysis
of the gold premium does suggest a likely turning point in May of that
year, broadly corresponding with the sharp deterioration in the Cold
War situation (with the outbreak of the Korean war in June) and with
40 This is not that surprising given that the turning point associated with October 1950 had the
lowest F-statistic of all identified turning points (see Figure 4).
756 Calvo-Gonzalez
0.007
0.006
0.005
0.004
0.003
0.002
0.001
0.000
FIGURE 6
CONDITIONAL VARIANCE OF THE PESETA-U.S. DOLLAR EXCHANGE RATE IN
NEW YORK
Note: Dummy variables for turning points were included in the variance equation of the
GARCH model.
the first official assistance from the U.S. administration to Franco's

Spain in August. Significantly, the analysis of both the exchange rate
and the gold price suggest a turning point in either December 1952 or
February 1953. By late 1952 it was widely expected that the negotia-
tions would be satisfactorily concluded.41 With the benefit of the archi-
val record we also know that insiders privy to the negotiations were ex-
pecting a successful conclusion in early 1953. In December 1952, the
head of the American team negotiating the economic agreements wrote
back to the Mutual Security Agency stating that the "target date for
signing of bilateral agreements and thus activation of mission is January
15 [1953]" which was considered to be the "most realistic estimate by
all concerned with [the] negotiations here."42
Later turning points uncovered by this method broadly correspond
with economic policy changes in Spain, particularly with regard to the
exchange rate (which is devalued in 1957, 1959, and 1967). This is to
be expected, as uncertainty would have increased when economic pol-
icy took a new turn. The results are thus a reminder that we are not only
measuring the security of property rights but the effects of economic
policies as well. We should therefore consider whether there are any
other possible explanations for the earlier turning point observed in
41 The Fortnightly Review of Business and Economic Conditions of the Bank of London and
South America noted on 24 January 1953 the "possibility of the early signature of the Mutual
Aid agreement," vol. 18, no. 426, p. 66.
42 George Train to MSA, Madrid, 10 December 1952, in Director of Administration, Admin-
istrative Services Division, Geographic Files 1948-53, Records of Foreign Assistance Agencies
(RG469), entry 236, box 286, National Archives at College Park.
TABLE 2
EVOLUTION OF KEY MACROECONOMIC POLICY VARIABLES IN SPAIN, 1940-1959
1940 1941 1942 1943 1944 1945 1946 1947 1948 1949
Base money n.a. n.a. 18.2 7.2 8.1 4.9 20.0 11.9 5.1 7.4
growth (%)
Fiscal balance -3.8 -4.7 -2.8 -8.2 -8.6 -7.6 -4.4 -2.7 -1.9 -1.0
(as % of GDP)
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959
Base money 8.7 16.0 5.8 6.3 13.4 6.4 16.6 20.5 9.0 8.6
growth (%)
Fiscal balance -0.9 -0.6 0.5 0.4 0.3 0.3 -0.4 0.7 -0.2 -1.3
(as % of GDP)
Source: Carreras and Tafunell, Estadisticas Hist6ricas de Espahia.
1952-1953, which we associated with the rapprochement between

United States and Spain.
Alternative Explanations?
One obvious alternative explanation for the turning point in late

1952-early 1953 would be a change in economic policy. Let us there-
fore examine monetary, fiscal, exchange, rate, and trade policies during
the 1940s and 1950s. Monetary and fiscal policies are summarized in
Table 2. In an economy where many official prices were controlled and
where the interest rate was not a significant lever of monetary policy,
the evolution of the supply of money is a key indicator of the policy
stance. We observe that base money growth remained rather volatile
throughout the period, with occasional peaks but without a clear trend
or turning point.
With regard to exchange rate policy, we already noted when intro-
ducing Figure 1 that the official exchange rate does not seem to ex-
plain the behavior of the unofficial exchange rate or its volatility. As
for fiscal policy, the early 1950s did witness a change in the fiscal bal-
ance from deficit to surplus. However, the deficits were already rather
small (1 percent of GDP) as early as 1949, and on the whole fiscal pol-
icy does not seem to be particularly active throughout the period, ex-
cept during the years 1943-1946. Thus, it does not seem likely that
such small changes in fiscal policy would be the main factor behind
the sharp swings in asset price volatility. Finally, trade policy re-
mained focused on an import substitution industrialization strategy,
which protected domestic production with high tariffs and subjected
imports to licensing.
758 Calvo-Gonzalez
What about other possible political

rapprochement with Spain; could they
One possible candidate is the labor unr
ever, neither the unofficial exchange r
ticeably around the time of the strik
though open dissent of this sort was
Franco regime, the strikes were short
rious threat to the regime.
Overall, these alternatives seem unlikel
late 1952-early 1953, a failing that len
about American policy. But it would h
such as a "natural experiment" in which
can rapprochement to Spain reached fin
experiment and financial markets reacte
then we could be much more confident
An Event Study of the Pact of Madrid
History in fact makes possible such an

study to examine how the signature
ments on 26 September 1953 affected
help reveal whether the shift in econom
to the American rapprochement to Spai
The 1953 signature of the Spanish-Am
the Pact of Madrid culminated the pro
and Spain become security partners. Th
is the key for the natural experiment
characteristics that make it a good cand
First of all, there were rumors in the
agreements (the Spanish business ma
two weeks before the agreements were
discounting the event), but the well-pu
ficial event of 26 September 1953 sti
The rumors do mean that part of the r
have occurred before the official relea
ment against finding a significant asset
agreements. If we do find a significan
more confident of the results.
43 AS Neal ("Shocking View," p. 326) put it, well-

"most sensitive seismographs" available to the econo
44 Following the signature of the agreements Franc
"at last I have won the Spanish [Civil] War," as quo
Second, the signature of the agreements occurred on a Saturday, so

that we know that the news could only be reflected in asset prices when
markets re-opened after the weekend. Fortunately, the signature of the
Pact of Madrid provides us with an event that can be precisely dated,
unlike the granting of the first American loan to Spain in August 1950
which had to be voted in both chambers of Congress and subsequently
endorsed by the executive.45 Third-and this is crucial-the signature
of the agreements did not coincide with any other major news in Spain.
Other events we might study did not have this characteristic. Consider,
for example, the first time (17 July 1951) a senior American official met
with Franco. As we know, the official's visit was followed by a State
Department announcement that the United States would seek a security
deal with Spain. But unfortunately this event cannot be used for an
event study because Franco reshuffled his cabinet on the following day.
An event study of the news on 17-18 July 1951 could not disentangle
the reactions to these two almost simultaneous events.
We thus have an ideal event that signals the United States' rap-
prochement with Spain. What market should be used to examine its im-
pact? Because we need high-frequency data, we chose the Madrid Stock
Exchange with its daily prices for stocks trades.46 Because the Madrid
stock market was open from Tuesday through Friday at the time, the
news would be reflected in market prices on Tuesday 29 September
1953 (the "event date"). Following the standard literature, we will take
the 120 trading days immediately prior to the event date as our estima-
tion period. Daily data on stock prices and on dividends paid were col-
lected from the official daily listings of the Madrid Stock Exchange for
more than 40 stocks and combined to form a broad index. Monthly val-
ues of this index from 1940 to the 1970s are shown in Figure 7.
The purpose of our event study is to compare the actual returns dur-
ing the event period with the returns that one would have normally ex-
pected to observe. For the estimation of the expected returns we will use
the constant-mean model of returns.47 The task is to determine whether
the difference between the two, the abnormal return, is statistically dif-
ferent from zero. As for our testing strategy, we move away from tests
such as the t-statistic because the stock returns in our sample are clearly
45 In previous occasions the House of Representatives had passed resolutions to grant Spain
official assistance which were subsequently vetoed by the executive.
46 Whereas government debt could provide an alternative market, the calculation of daily
yields is complicated by the lack of a standard benchmark bond.
47 For support for this model, see Campbell, Lo, and MacKinlay, Econometrics, p. 154.
Moreover, our event is expected to affect the market as a whole. Controlling for market-wide
developments, such as by using the market model, would be controlling for the type of reaction
we aim to detect.
760 Calvo-Gonzalez
650
600
550
500
450
400
350
300
250
200
150
100
50 1--------~
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975
FIGURE 7
MADRID STOCK EXCHANGE INDEX
Notes: December 1940 = 100; monthly index calculated assuming reinvestment of divid
and deflated by retail price index.
Source: Bolsa de Madrid, Indices.
not normally distributed. We use instead two nonparametric tests,

rank and sign test, which do not depend on the shape of the distrib
of the returns.48 The first test uses ranks of the abnormal return
tained in the event date in comparison to the abnormal returns du
the estimation period. Formally, the rank test is defined as follows 4
L
N " rank (Ai event )- 1 1
rankri= (1 +i,event
test Mi) 2 (6)
T1 T 1 i rank(i,) )1i
where Ait is the abnormal return of stock i on day t (Ai,event being the ab-
normal return of stock i on the event day), Mi is the number of days on
which a stock traded during the entire estimation period and the event
window (T), and N represents the number of stocks. Statistical inference
is based on the fact that the rank test is asymptotically normally distrib-
uted. An important feature of the rank test is that it is well specified un-
der event-date clustering-as in our case-because cross-sectional de-
pendence is taken into account via the aggregation of the individual
stock returns.50
48 MacKinlay, "Event Studies."

49 Corrado, "Nonparametric Test."
50 Campbell and Wasley, "Measuring Security Price Performance," p. 88.
A second nonparametric test exploits the sign of the abnormal re-

turns. The sign test, Z, assumes that the number of stocks that have posi-
tive abnormal returns on an event date is binomially distributed with
probability p, a parameter that captures the proportion of positive ab-
normal returns during the estimation period, as follows51
P=N
Ni ji- ,-?i (7)
PZ~yZ(Olt~
where pit is equal to one if Ait is positive

number of days stock i traded, and N the nu
lio. Formally the sign test is given by
= w-Np
VNp(1 - p)
where w is the number of stocks displaying positive abnormal returns

on the event date. Statistical inference is based on the result that for
large samples w will be normally distributed with mean Np and variance
Np(1 - p).
The results from applying these tests suggest that there was a positive
and statistically significant increase in stock returns following the signa-
ture of the agreements (see Table 3). The conclusion holds when we ap-
ply the tests to a broad portfolio of 41 stocks or to a narrower portfolio
of 27 stocks that traded on more than 90 percent of days in the estima-
tion period. The natural experiment does suggest that rapprochement
with the United States boosted investor confidence.
Link Between Economic Confidence and Investment
Let us now turn to the last link of the chain running from improved
confidence in the long-term security of the Franco regime to greater
private investment. Exploring this link from improved confidence to in-
vestment may help to explain why private investment resumed in the
1950s, even though business profits were lower than they had been in
the 1940s, when investment had nonetheless remained minimal.52
There is some qualitative evidence in support of the claim that in-
vestment picked up following the American rapprochement to the
51 Cowan, "Nonparametric Event Study Tests."
52 Tafunell, "Beneficios." As directed investment at below-market rates was not a common
practice, this increase in private investment is taken as a sign that investors expected future prof-
itability to increase.
762 Calvo-Gonzalez
TABLE 3
EVENT-STUDY OF STOCK RETURNS ON 29 SEPTEMBER 1953
Average Daily
Return Over
Share of Market 120 Days Abnormal Return
Capitalization Before Event on Event Day Rank Sign Test
(%) (%) (%) Test (Z)
41-stock
Madrid index 65 -0.005 0.569 -2.46** 3.20***
27-stock
Madrid index 55 -0.010 0.575 -2.10** 2.47***
** = statistical significance at the 5 percent level.

*** = statistical significance at the 1 percent level.
Franco regime. A report from a Spanish

1953, and perhaps due to the agreemen
new trend [by the private sector] to bu
tions."53
There is also the possibility of further exploring this issue statisti-
cally. Granger-causality tests clearly indicate that a proxy for economic
confidence, the conditional variance of the exchange rate, affects in-
vestment as measured by the ratio of gross fixed capital formation
(GFCF) to GDP (see Figure 8). With the standard F-test yielding a sta-
tistic of 9.9, we can reject the null hypothesis of no Granger-causality
running from the conditional variance to the investment ratio (see esti-
mated parameters in equation 9, where t-statistics are in parentheses) at
a level of less than 1 percent. In addition, we cannot find any significant
support for Granger causality in the reverse direction, from investment
to the conditional variance: the F-test gives a statistic of only 0.78,
equivalent to a probability of 39 percent for the null hypothesis (equa-
tion 10, with t-statistics in parentheses)
GFCF 0.08 + 0.67 GFCF

(3.91) (7.26) GDP - (9)
11.77 (conditional variance),_

(-3.15)
53 Banco Urquijo, Economia, p. 30.
GFCF GFCF
- 0.001- 0.004 GF
(1.05) (-0.88)
GDP DP
(1.05)(-0.88
(10)
0.64 (conditional variance),1

(3.64)
Although Granger-causality measures precedence and information con-

tent and does not necessarily indicate causality in a strict sense, the re-
sults are nevertheless suggestive.
We can also explore the long-term relationship between the condi-
tional variance of the exchange rate and the investment ratio in some
further detail. Because both variables appear to contain a unit root, as
suggested by the augmented Dickey-Fuller and the Phillips-Perron unit
root tests, we search for a cointegrating equation linking the long-run
dynamics of the two time series using the standard Johansen procedure.
Both the trace and maximum eigenvalue standard tests indicate the exis-
tence of one cointegrating equation at the 1 percent confidence level.54
The estimated cointegrating parameters are such that in the long run the
investment ratio is equal to -17.97 times the conditional variance. This
would suggest that a reduction in the conditional variance from its aver-
age value prior to February 1953-the first turning point identified-to
the average value from March 1953 to August 1956-the second turn-
ing point-would be associated with a long-run increase in the invest-
ment ratio of 4 percentage points of GDP.
The preceding estimates regarding the importance of a reduction in
uncertainty for investment should be interpreted with care, not least be-
cause the proxy variable used to capture the reduction in uncertainty is
necessarily an imperfect one. In addition, the investment ratio used here
comprises both public and private investment whereas my argument fo-
cuses on the latter. The estimate shows, however, that a reduction in un-
certainty stemming from an improvement in the security of property
rights can have a nontrivial effect on investment. This is unsurprising
given the large body of literature that stresses the impact of insecure
property rights and uncertainty in general on investment, especially if it
involves large sunk costs that cannot be recouped once incurred.'" As a
54 We use two lags and a quadratic deterministic trend in the data (in line with the exponen-
tially declining pattern of the conditional variance), as suggested by both the Akaike and
Schwarz information criteria.
55 Pindyck, "Irreversibility."
764 Calvo-Gonzalez
0 Gross fixed capital formation as a percent of GDP (inverted scale, left axis) 0.0045
SConditional variance of the peseta-US dollar exchange rate in New York (right axis) 0.00
0.0035
10 0.0030
i 0.0025
15
0.0020
20 --0.0015
0.0010
25
0.0005
30 0.0000
1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974
FIGURE 8
CORRELATION BETWEEN THE CONDITIONAL VARIANCE OF THE PESETA-U.S.
DOLLAR EXCHANGE RATE AND THE INVESTMENT RATIO (GROSS FIXED
CAPITAL FORMATION TO GDP)
Note: Monthly data for the conditional variance of the exchange rate have been averaged to give
annual data.
Sources: Data on the gross fixed capital formation and GDP are taken from Prados de la Esco-
sura, Progreso. Conditional variance as derived from the GARCH(1,1) model in Figure 2.
survey of the literature put it, the result that the security of property
rights matters for economic growth has withstood an unusually large
amount of scrutiny.56
CONCLUSION
This article demonstrates the importance of political events f

pectations and economic performance in Franco's Spain. The
regime was not only a dictatorship, but one which in the after
World War II faced an unclear future. As a dictatorship with an
tain future, property rights were in doubt. As a result, private inve
slackened and the economy stagnated.
The worsening of the Cold War altered the situation substa
Spain's location made it very appealing as a site for American a
and the United States therefore sought a deal with Franco that w
low American military bases on Spanish soil. It has long been
nized that this political event marked a crucial turning point in
litical history of Spain. Although the Franco regime migh
survived without U.S. support, the American endorsement help
force Franco's regime.
56 Keefer, "Review," p. 27.
The American rapprochement also proved to be a turning point for

the Spanish economy. By turning the United States into a stakeholder in
the political stability of Spain, the American military interest in Spain
had the unintended consequence of stimulating economic activity. Be-
cause Franco's regime now seemed to have enhanced long-term viabil-
ity, economic confidence improved and private investment resumed.
Economic growth was still constrained by the policies and institutions
of the Franco regime, but uncertainties about the regime's viability di-
minished. Asset prices confirm that economic confidence improved, and
the shift in asset prices can be traced back to the American rapproche-
ment to Spain and then linked to higher investment. That helps to ex-
plain why economic growth resumed in Spain in the 1950s despite the
fact that most of the distortions stemming from the autarkic economic
policies introduced in the 1940s still remained in place.
REFERENCES
Acemoglu, Daron, Simon Johnson, and James A. Robinson. "Institutions as a Fu

mental Cause of Long-Run Growth." In Handbook of Economic Growth, edit
by Philippe Aghion and Steven N. Durlauf, 385-471. Amsterdam: Else
2005.
Aixala, Jose. La peseta y los precios. Zaragoza: Prensas Universitarias de Zaragoza,
1999.
Archivo del Ministerio espafiol de Asuntos Exteriores [Archive of the Spanish Minis-
try of Foreign Affairs]. Serie Renovada.
Banco de Espafia. Informe sobre la evolucidn de la economia espahola en 1958. Ma-
drid: 1959.
Banco Urquijo. La economia espahola, 1952-53. Madrid: Servicio de Estudios del

Banco Urquijo, 1954.
Bank of England Archive. File OV61/5.
Bollerslev, Tim, Ray Y. Chou, and Kenneth F. Kroner, "ARCH Modeling in Finance:
A Review of the Theory and Empirical Evidence." Journal of Econometrics 52,
no. 1 (1992): 5-59.
Bolsa de Madrid. Indices de cotizacidn de acciones de la Bolsa de Madrid, 1941-
1987. Madrid: Bolsa de Valores de Madrid, Servicio de Estudios, 1988.
Calvo Gonzalez, Oscar. "iBienvenido, Mister Marshall! La ayuda econ6mica ameri-
cana y la economia espafiola en la d6cada de 1950." Revista de Historia
Econ6mica 19 (2001): 253-75.
Campbell, Cynthia J., and Charles E. Wasley. "Measuring Security Price Performance
Using Daily NASDAQ Returns." Journal of Financial Economics 33, no. 1
(1993): 73-92.
Campbell, John Y., Andrew W. Lo, and A. Craig MacKinlay. The Econometrics of
Financial Markets. Princeton, NJ: Princeton University Press, 1997.
Carreras, Albert, and Xavier Tafunell (coord.). Estadisticas Histdricas de Espaia,
siglos XIXy XX. Fundaci6n BBVA, 2006.
Clinton Pelham, G. Economic and Commercial Conditions in Spain, May 1951. Lon-
don: HMSO Overseas Economic Surveys, 1952.
766 Calvo-Gonzalez
Corrado, Charles J. "A Nonparametric Test for

in Event Studies." Journal of Financial Econo
Cowan, Arnold R. "Nonparametric Event Stu
nance and Accounting 2 (1992): 353-71.
Department of State. Foreign Relations of the
several years.
Durd, Juan. U.S. Policy Toward Dictatorship an
Test Case in Policy Formation. Sevilla: Array
Economia. Madrid.
Economist, The. London.
Engle, Robert. "GARCH 101: The Use of ARCH/GARCH Models in Applied
Econometrics." Journal of Economic Perspectives 15, no. 4 (2001): 157-68.
Fernsworth, Lawrence. "Spain in Western Defense." Foreign Affairs, July (1953):
648-62.
Frey, Bruno S., and Marcel Kucher. "History as Reflected in Capital Markets: The
Case of World War II." This JOURNAL 60, no. 2 (2000): 468-96.
Fusi, Juan Pablo. Franco: Autoritarismo y poder personal. Madrid: Taurus, 1995
[1985].
G6mez-Mendoza, Antonio, and Elena San Roman. "Competition Between Private and
Public Enterprise in Spain, 1939-1959: an Alternative View." Business and Eco-
nomic History 26, no.2 (1997): 696-708.
Gonzilez, Manuel-Jestis. "La autarquia econ6mica bajo el regimen del General
Franco: una visi6n desde la teoria de los derechos de propiedad." Informacidn
Comercial Espahola, nos. 676-77 (1989/1990): 19-31.
Greif, Avner. "Commitment, Coercion, and Markets: The Nature and Dynamics of In-
stitutions Supporting Exchange." In Handbook of New Institutional Economics,
edited by C. Menard and M. M. Shirley, 727-86. Dordrecht: Springer, 2005.
Guirao, Fernando. Spain and the Reconstruction of Western Europe, 1945-57. New
York: St. Martin's Press, 1998.
Keefer, Philip. "A Review of the Political Economy of Governance: From Property
Rights to Voice." World Bank Policy Research Working Paper no. 3315, May
2004.
Liedtke, Boris N. "International Relations Between the U.S. and Spain: economics,
Ideology and Compromise." London School of Economics: Ph.D. dissertation,
1996.
. Embracing A Dictatorship. New York: St. Martin's Press, 1998.
MacKinlay, A. Craig. "Event Studies in Economics and Finance." Journal of Eco-
nomic Literature 35 (1997): 13-39.
Maddison, Angus. The World Economy: A Millennial Perspective. Paris: OECD,
2001.
Martinez, Elena. "Sector exterior y crecimiento en la Espafia autarquica." Revista de
Historia Econ6mica 19 (2001): 240-45.
. "El sector exterior durante la autarquia: Una reconstrucci6n de las balanzas de
pagos de Espafia (1940-1958)." Banco de Espafia, Estudios de Historia
Econdmica no. 23, 2003.
Merrill, Dennis, ed. Documentary History of the Truman Presidency, vol. 25. Be-
thesda, MD: University Publications of America, 1995.
Mitchell, Brian R. International Historical Statistics: Europe, 1750-1988. New York:
Stockton Press, 1992.
Mitchener, Kris, and Marc Weidenmier. "Empire, Public Goods, and the Roosevelt
Corollary." This JOURNAL 65, no. 3 (2005): 658-92.
National Archives at College Park, Maryland.
Neal, Larry. "A Shocking View of Economic History." This JOURNAL 60, no. 2
(2000): 317-34.
New York Times, The, several issues.
North, Douglass C., and Barry Weingast. "Constitutions and Commitment: The Evolu-
tion of Institutions Governing Public Choice in Seventeenth-Century England,"
This JOURNAL 49, no. 4 (1989): 803-32.
Olson, Mancur. Power and Prosperity: Outgrowing Communist and Capitalist Dicta-
torships. New York: Basic Books, 2000.
Pick, Franz. Black Market Yearbook [renamed Pick's Currency Yearbook from 1963
onwards]. New York: Pick's Publishing Corporation, several years.
Pindyck, Robert S. "Irreversibility, Uncertainty, and Investment." Journal of Eco-
nomic Literature 26, no. 3 (1991): 1110-48.
Pires Jim6nez, Luis E. Regulacidn industrial y atraso econdmico en la dictadura de
Franco. Madrid: Universidad Rey Juan Carlos, 2003.
Prados de la Escosura, Leandro. Elprogreso econ6mico de Espania (1850-2000). Ma-
drid: Fundaci6n BBVA, 2003.
Preston, Paul. Franco: A Biography. New York: Basic Books, 1994.
San Roman, Elena. Ejercito e Industria: el nacimiento del INI. Barcelona: Critica,
1999.
Sussman, Nathan, and Yishay Yafeh. "Institutions, Reforms, and Country Risk: Les-
sons from Japanese Government Debt in the Meiji Era." This JOURNAL 60, no. 2
(2000): 442-67.
. "Institutional Reforms, Financial Development, and Sovereign Debt: Britain,
1690-1790." This JOURNAL 66, no. 4 (2006): 906-35.
Tafunell, Xavier. "Los beneficios empresariales en Espafia, 1880-1981. Estimaci6n de
un indice anual del excedente de la gran empresa." Revista de Historia
Econ6mica 16 (1998): 707-46.
Vifias, Angel. Los pactos secretos de Franco con Estados Unidos: Bases, ayuda
econ6mica, recortes de soberania. Barcelona: Grijalbo, 1981.
Whitaker, Arthur P. Spain and the Defense of the West: Ally and Liability. New York:
Harper for the Council on Foreign Relations, 1961.
Willard, Kristen L., Timothy W. Guinnane, and Harvey S. Rosen. "Turning Points in
the Civil War: View from the Greenback Market." American Economic Review
86, no. 4 (1996): 1001-18.
Woods, Randall B. Fulbright: A Biography. Cambridge: Cambridge University Press,
1995.
World Today. December 1953.

American Military Interests and Economic Confidence in Spain Under Franco Dictatorship - Oscar Calvo-Gonzalez

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

American Military Interests and Economic Confidence in Spain Under Franco Dictatorship - Oscar Calvo-Gonzalez

Hochgeladen von

Copyright:

Verfügbare Formate

Economic History Association

The security of property rights is fragile under dictatorships. This is particularly

Even if a dictator expects to remain in power, the population may

3 World Today, December 1953.

stantial institutional reform or econom

THE AMERICAN RAPPROCHEMENT TO FRANCO'S SPAIN

The overall objective of American policy toward Spain was first to

o10 Liedtke, "International Relations," p. 40.

exploratory talks with Franco on the p

THE CREDIBILITY HYPOTHESIS

Why did the American rapprochement help to secure Franco in

assessment of the geo-strategic value of Spain within the context of the

Exploring this argument is important, for so far the literature has

17 As quoted in Duri, U.S. Policy, p. 344.

Spanish real GDP suggest an upward

20 Prados de la Escosura, Progreso, p. 146 and app

25 The Stabilization Plan aimed to address the recurrent balance of paymen

ASSET PRICE RESPONSE

Because improved expectations affect the pricing of assets, f

27 Economia, 30 September 1953.

70 ..Exchange rate in Tangiers

SOfficial exchange rate for

Note: The exchange rates refer to annual averages.

fixed, it traded freely in a number of international markets. A

than at others. In particular, exchange

r, - ~= + 2 ril +E, (1)

33 Bollerslev et al., "ARCH Modeling."

Source: See the text.

To cross-check these results I also looked at an alternative measure of

Source: Pick, Black Market Yearbook (various years).

Did the American Rapprochement to Franco Mark a Turning Point?

To explore whether the American rapprochement marks a "turning

t --= + y, ,t-1 + y, D,, + Et (

38 As in Frey and Kucher, "History," we added six observations to the beginning

Source: See the text.

Source: See the text.

39 I owe this point to an anonymous referee of this JOURNAL.

Turning Points in the Turning Points in the

the first official assistance from the U.S. administration to Franco's

Source: Carreras and Tafunell, Estadisticas Hist6ricas de Espahia.

1952-1953, which we associated with the rapprochement between

One obvious alternative explanation for the turning point in late

What about other possible political

An Event Study of the Pact of Madrid

History in fact makes possible such an

43 AS Neal ("Shocking View," p. 326) put it, well-

Second, the signature of the agreements occurred on a Saturday, so

not normally distributed. We use instead two nonparametric tests,

48 MacKinlay, "Event Studies."

A second nonparametric test exploits the sign of the abnormal re-

where pit is equal to one if Ait is positive

where w is the number of stocks displaying positive abnormal returns

Link Between Economic Confidence and Investment

** = statistical significance at the 5 percent level.

Franco regime. A report from a Spanish

GFCF 0.08 + 0.67 GFCF

11.77 (conditional variance),_

53 Banco Urquijo, Economia, p. 30.

0.64 (conditional variance),1

Although Granger-causality measures precedence and information con-

This article demonstrates the importance of political events f

56 Keefer, "Review," p. 27.

The American rapprochement also proved to be a turning point for

Acemoglu, Daron, Simon Johnson, and James A. Robinson. "Institutions as a Fu