In search of higher returns elsewhere, European investors in the 19th century increasingly coveted the bonds of South American borrowers. In Argentina, foreign money helped finance national improvements and government deficits. Arranging much of this financing was one of the oldest London merchant banks, Barings Brothers & Co. When the boom years ended and the government of Argentina defaulted on its debts in 1890, the bank was put in a grave position, with millions of pounds in unsold bonds still on its balance sheet. In the end, Barings was rescued by a consortium of banks led by the Bank of England but this rescue did little for Argentina which continued its descent into a deep recession.
Baring Brothers & Co. issued bonds for many clients, including sovereign governments. The firm was founded in 1762 and, by the end of the 19th century, it was among the largest investment banks in the world. Barings Bank, as the firm was also known, had equity capital of £3 million supporting assets of £24 million in 1890; making the firm a close rival to the Rothschild banking operation in London. Unlike its smaller public bank counterparts, and like the Rothschild firm, Barings was privately held, meaning the bank did not need to disclose any financial information. Its business partners relied on the firm’s long history for assurance of its strength.
Barings was quite active in the Americas and underwrote Argentine debt issues in London. For this client, the bank initially acted only as an agent, doing little more than selling Argentine bonds on a ‘best efforts’ basis. As the 1880s went on, the bank increasingly made firm commitments to hold the bonds itself and selling them as and when they could, giving the Argentine government greater assurance that its bonds would be placed with someone. Barings financed its bond holdings until they could be sold by issuing bankers acceptances and taking deposits from savers and investors.
There was a great deal of European interest in South American bonds through much of the 1800s. Argentina provided perhaps the most alluring investment opportunities. The country was in the midst of an economic boom in the 1880s. It saw growing foreign trade and capital inflows from Europe. Much of this investment financed railway construction and other infrastructure projects. It was during this era of investor enthusiasm that Buenos Aires was rebuilt into the ‘Paris of South America’.
While investor interest in the country was strongest, so too was the appetite of local borrowers, including the government, for overseas financing. Argentine borrowing from Britain in particular grew during the boom. In the case of the state, public budget deficits swelled and Argentina became the fifth largest sovereign borrower in the world. Argentine banks also benefited from the boom years; they added deposits and their asset values rose. Feeling confident, banks also borrowed from abroad in order to extend more credit locally.
Beneath the euphoria were vulnerabilities. These were most noticeable in the largest Argentine banks closely associated with the state, such as the Banco Nacional and the Banco de la Provincia de Buenos Aires. Through the economic expansion, these banks maintained a low ratio of cash on hand to deposits. Government borrowing may have encouraged this; the low liquidity of the banks was at least partially caused by the practice of frequently making short- and medium-term advances to the Argentine government. The largest banks were also accused of counting on a government bailout if needed, encouraging them to invest in less liquid assets while holding less cash.
All this borrowed money and local lending caused inflation to average 17% from 1884 to 1890, matching the growth in paper currency in circulation. At the time, Argentina had a paper currency unlinked to either gold or silver and the paper money traded at a large discount to gold of the same face value. Inflation put pressure on Argentine currency and, if left unchecked, this would make it harder to meet payments on foreign loans. To mitigate this, the government resorted to using gold meant to back banknotes to support its exchange rate instead. In December 1889, with the economic expansion now largely a thing of the past, gold reserves had dwindled to the point where this type of currency intervention was no longer possible.
Panic of 1890
By 1890, perhaps sensing these vulnerabilities or perhaps wary of the inflation underway, the Argentine public was increasingly demanding to hold their money in form of precious metals rather than in bank deposits. This posed a significant monetary problem because withdrawals from banks curtailed growth in the money supply and the availability of credit by limiting the deposit growth of banks.
The first quarter of 1890 essentially saw a bank run nearly deplete the liquid reserves of the largest banks. The government intervened to support the banks by printing money but this led to a further depreciation of local currency and higher foreign borrowing costs. Not only were investors now perceiving greater risks but since Argentina’s foreign borrowing was denominated in sterling or gold, the actual volume of this debt in terms of local currency grew.
The government was now in a rather perilous position after its years of excessive borrowing. It was essentially forced to choose between supporting local banks by printing more money and even going so far as defaulting on foreign debt issues or honor the latter at the expense of the local banks’ survival. The government opted for the former. The country suspended debt service payments in July 1890, amounting to a default on £48 million of sovereign debt. Political disturbances, including popular revolts and an attempted insurrection, add to the unease. Despite this, the local banks did see a slight recovery, as was hoped for, with private deposits growing again by the end of 1890.
Bank of England
Nonetheless, the financial crisis underway in Argentina was exported to London through Barings Bank. The firm held over £4.6 million in unsold, and now unsellable, Argentine debt, an amount exceeding the bank’s equity capital. The storied bank could have failed if the situation in Argentina triggered withdrawals or cut the bank off from further credit. Barings notified the Bank of England of its troubles in November that year.
The failure of Barings could have triggered an unorderly liquidation, affecting prices for securities, including those that had no connection to Argentina. Also, since bankers knew little of each other’s assets, it could freeze interbank lending entirely since it could be difficult to tell who was solvent and who was not. Further, it was not as though other banks, like Barings’ own syndicate partners in the Argentine issues, didn’t have their own volume of unsold securities bogging them down and posing a liquidity problem, if not threatening their solvency.
The Governor of the Bank of England at the time was William Lidderdale. He was on a ski vacation in Scotland when a telegraph notification of the events in London sent him back to the capital. The Governor was initially hesitant to make public the extent of Barings’ difficulties and was wary of any panic that might put strain on the Bank of England’s own gold reserves, which were then uncomfortably low. In the end, the central bank created a rescue fund into which the Bank of England and other British financial institutions contributed. Further, the central banks of France and Russia swapped gold in exchange for British government bills. These measures gave the Bank the confidence to act and a £7.5 million loan was made to rescue Barings.
“The past month will long be remembered in the City. The downfall of Messrs Baring Brothers, perhaps the greatest firm of merchant bankers in the world, would alone have sufficed to keep it in remembrance: but it will be even more distinguished by fact that a crisis of the gravest character has been averted by the action of the Bank of England, aided by the Joint-stock and other banks”Investors Monthly Manual, November 29, 1890, p. 563.
Of course, while the intervention of the Bank of England may have limited the financial consequences of the Argentine panic in London, it did not provide any particular assistance to the Argentines themselves. With their old bankers clearly in distress, the Argentine state secured a new loan from the Rothschilds in January 1891, but this was conditional on reversing its earlier monetary stimulus intended to support local banks. So, in a peculiar way, the bailout of the country actually helped precipitate a new bank run in early 1891. This time, the government could no longer provide support, per the terms of its latest loan. One of the country’s leading banks rescued the last time around, the Banco de la Provincia de Buenos Aires, failed in 1891.
The sudden reduction in the growth of currency in circulation and a contraction in the ratio of the total money supply, including bank deposits, to currency caused a reduction in the availability of money and credit. These contractions prolonged the economic crisis and Argentine real GDP fell by 11% between 1890 and 1891. So, the rescue of Barings Bank and the new loan to the Argentine state meant the crisis would be less contagious than it may otherwise have been but it did not truly resolve the crisis. Indeed, the prices of peripheral market bonds fell elsewhere nonetheless and the boom years were now clearly over.
The Barings Crisis, as the Panic of 1890 was also known, ended up having severe international consequences. However, these were minimized by the actions taken to save Barings Brothers & Co. from bankruptcy. The panic looks surprisingly modern in some respects, especially given its international nature and the organization of a bailout, but the events are also clearly of a time gone by. Barings, one of the largest banks in the world, was put in such a perilous position without almost anyone outside the firm knowing. Even a bank so large was still left unregulated and, since it was privately held, was virtually completely unmonitored as well. Nevertheless, the events demonstrate that the quick work of the Bank of England and others was able to make up for at least part of their earlier ignorance.
More from the Tontine Coffee-House
Read about an earlier boom in South American bonds traded in Europe as well as the actions of the Bank of England during an earlier crisis, the Panic of 1866. Also, consider subscribing to this blog’s newsletter here.
1. Mikkelsen, Anders L. “Dealing with Risk: Underwriting Sovereign Bond Issues in London 1870-1914.” Eabh Papers, No. 14-06, The European Association for Banking and Financial History (EABH), Frankfurt a. M., June 2014.
2. Mitchener, Kris James, and Marc D. Weidenmier. “The Baring Crisis and the Great Latin American Meltdown of the 1890s.” The Journal of Economic History, vol. 68, no. 2, June 2008, pp. 462–500.
3. Paolera, Gerardo Della, and Alan Taylor. “A Monetary and Financial Wreck: The Baring Crisis, 1890-91.” Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935, Jan. 2001, pp. 67–79.
4. White, Eugene N. “Censored Success: How to Prevent a Banking Panic, the Barings Crisis of 1890 Revisited.” Jan. 2018.