the first latin american debt crisis -- 8/29/23
Today's selection -- from The House of Baring in American Trade and Finance by Ralph W. Hidy. In the 1820s, Londoners, including leading bankers at the all-powerful Baring firm, were seized by a mania for investing in the newly independent countries of Latin America:
“Meanwhile, previous experience, new conditions, and a policy of opportunism enabled the Barings to expand greatly their American business between 1815 and 1828. Their activities in financing American trade and in marketing American bonds during the preceding twenty-two years had broadened their list of correspondents and familiarized the members of the firm with the conditions of the expanding American economy, both in the United States and in Latin America. The firm's intimate knowledge of the Far Eastern trade could also be used to advantage in expanding services to American merchants trading east of the Cape of Good Hope.
“Latin America excited the imagination of many British merchants and investors after Waterloo. Expeditions to aid the colonists in their struggle for independence from Spain were often financed by London merchants who mixed sympathy for the underdog with imagined sound business practice and the welfare of the Empire. Loans floated by various Latin American governments were sold by the same merchants in large part to liquidate their previous claims and to provide a financial basis for the new governments. One estimate of total loans marketed in England for the Latin American states between 1822 and 1825 was £21,000,000, or $95,000,000. Even shares of joint-stock companies created to exploit the natural resources of South America, especially the gold mines, met a greedy market. Stimulated by the implications of the Monroe Doctrine, in 1824 and 1825 speculation rose almost to a frenzy, comparable to that culminating in the South Sea Bubble of 1720. When panic struck the City in December, 1825, Latin American ventures were among the first to manifest their appalling weakness and to indicate the credulity of a part of the British investing public.
“Baring Brothers & Company was not immune to the mania of interest in Latin America. As early as 1814 Erich Bollman, an international promoter, had pointed out to the house the profits to be made in exporting quicksilver for use in the gold mines of Latin America. After a joint operation with American firms had fallen through, the Barings purchased on their own account 4,000 quintals of the mercury for £40,000 from the Austrian government and shipped it to Jamaica as a major step toward its ultimate destination.
|A circular letter of credit issued by Baring Brothers in 1892 to US Senator George Hoar for £1000, a sum equivalent to £115,695 in 2021|
“When the revolutions did not succeed so rapidly as hoped, the lot was sold to a North American house for shipment to China. The Barings are also reported to have dispatched Bollman on a successful mission to Bolivar in 1821.
“Not that bills on the London house were unknown in Latin America. They had long been drawn from the British West Indies. The Mexican silver operation from 1805 to 1808 had given rise to many more drafts. Moreover, trade had been authorized under governmental license with both Spanish and Portuguese America during the Napoleonic years.
“After 1815, bills on the Barings increased for account of American merchants and the Federal government. Many more American merchants undertook ventures south of the Rio Grande, and some of them drew on Baring Brothers & Company. State Department representatives were issuing drafts on the London house from Rio de Janeiro at least as early as 1817. These activities led to connections with such Latin American firms as Manning & Marshall of Vera Cruz and Mexico City as well as similar houses further south. Furthermore, bills began to appear against securities from Buenos Aires as early as 1824.
“The House of Baring was publicly associated for the first time with securities from the Latin American area now known as Argentina. As of July 1, 1824, Buenos Ayres, as then spelled, issued a £1,000,000, 6 per cent loan. Taken at 70 by Don Felix Castro and John Parish Robertson, the original purchasers, the bonds were sold by Baring Brothers & Company to English investors at 85. The Buenos Ayres government, after various charges had been deducted, received less than £600,000, and even a part of that money was misappropriated for war with Brazil over La Banda Oriental (Uruguay) in 1825-26. Interest payments ceased with that on July 1, 1827, by which time through a sinking fund the outstanding bonds had been reduced to £977,000.
“Mexico met its interest payments on July 1, 1827, amounting to £221,697, only by an advance of £131,154 from the Barings, who had become the Mexican financial agents in September, 1826. Although the greater part of the advance was repaid by 1830 and no money was lost by the operation, Alexander Baring later remarked that, since the default on interest payments reflected on the character of his house, he would have paid ‘some thousands to blot out the mistake.’
“Probably the most favorable observation that could be made is that Baring Brothers & Company had not succumbed to the prevailing hysteria in London over Latin American undertakings. In February, 1825, the head of the house had spoken in the House of Commons against the joint-stock mania as interfering with ‘legitimate’ government loan-making. He adhered to that policy and involved his firm in a relatively small volume of Latin American business even on government loans. This relative aloofness the Barings shared with the Rothschilds. Even at that, later partners in the House of Baring, especially in 1890, certainly had reason to wish most sincerely that relations with Argentina had never been inaugurated.
“For many years after 1827 the reputation of Latin American governments in London was very low indeed--a powerful deterrent to their borrowing capacity and economic development. In consequence, British capital flowed more to the United States than to regions south of the Rio Grande. Both were sheltered by the Monroe Doctrine, which was enforced by the British fleet, but the excellent credit, expanding economy, and prosperity of the northern neighbor promised greater and more certain dividends to British investors."