We Banked On Them

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It is not often that even the most ardent believer in capitalism mourns the passing of an economic institution, unless, of course, he or she has personally lost money as a result.

After all, the people involved are still around even if the institution is gone. So, too, are the capital assets, if now in other hands. What is actually lost is just such stuff as lawyers make, the corporate or partnership agreement that governed the way the parts made up the whole. To be sure, one of the miracles at the core of capitalism is how the whole always exceeds the sum of those parts.

But the Barings bank is different, and I, for one, mourn its loss. Old capitalist institutions, like old generals, tend to just fade away when they fail to change with the ever-changing economy. But Barings suffered no such protracted disappearance. It had been adapting successfully to changing times since 1762, seven years before James Watt perfected the steam engine that set off the Industrial Revolution. By the time the revolution was far enough advanced to be noticed and the phrase entered the English language, the Barings bank was 86 years old and flourishing as never before. It continued to flourish—with one serious illness in 1890—until this spring, when it suffered something akin to murder, at the age of 232.

Historians, of course, are likely to have a weakness for the venerable for no better reason than that it is venerable. But there is another reason all Americans might mourn Baring Brothers. The firm was a friend of the United States from its earliest days, when most members of the British establishment treated this country as something between a traitor and a banana republic. How big a friend was it? Consider this: Technically we didn’t buy the Louisiana Purchase from Napoleon. We bought it from Baring Brothers.

The Baring family had its origins in Germany. Their involvement in the wool trade brought them to Exeter, in the west of England, in the early eighteenth century. There they prospered mightily, and the family soon evolved into gentry while the family firm evolved into a new kind of business, one that the British now call merchant banking and Americans call investment banking.

Investment banks, very roughly, are wholesale bankers. They do not deal with individuals (unless, of course, the individuals are very, very rich). Rather, in the beginning, they facilitated trade by handling cargoes for foreign merchants on consignment as well as traded on their own account. Soon they were financing this trade by making loans to trading firms to cover the period between when a cargo and the payment was received.

As their loan business expanded, merchant bankers slowly left the actual buying, selling, and handling of commodities behind and concentrated on the finances. Governments and businesses also began using merchant bankers to facilitate borrowing money long-term, using them as agents to sell bonds in the money markets that were springing up in London, Amsterdam, Frankfurt, and elsewhere.

Barings was active in the American market even before the Revolution, when the firm was only a few years old. The Thirteen Colonies had become one of the principal markets for British cloth, and Baring Brothers helped finance this trade as well as participate in it. After the Revolution Robert Morris and State Senator William Bingham, two financially prominent Philadelphians, and others quickly moved to re-establish relations with Barings, which welcomed their overtures, unlike many other British merchants and financial houses. Alexander Baring, the son of the firm’s leading partner, Sir Francis Baring, would marry Bingham’s daughter.

But the possibilities for doing profitable business were limited as long as the new United States was mired in the depression and financial chaos that followed the Revolution. Only in the 179Os, after the Constitution was adopted and Alexander Hamilton put the federal government on a firm footing did Atlantic trade take off.

It was in dealing with the Barbary pirates that Barings did the U.S. government its first real service. The Barbary pirates ran one of history’s largest protection rackets. Their ships regularly attacked commerce in the Mediterranean unless they were suitably paid off. By the mid-1790s Britain, deeply engaged in a war with revolutionary France, simply found it cheaper to pay the pirates off than to divert the naval force needed to attack the well-fortified ports of Tunis, Algiers, and Tripoli. In 1795 the U.S. government came to the same conclusion. The problem was how to pay them off.

Pirates, needless to say, don’t accept IOUs, which was all the United States had to offer right then. To turn paper into something the pirates would accept, the U.S. Treasury needed a banker. Its officials turned to Barings, sending it eight hundred thousand dollars in U.S. bonds. Typical of treasury officials the world over, they instructed the firm both to sell these bonds in London without depressing the market for U.S. securities and to do it with the utmost haste. The proceeds, in silver bullion, were then to be forwarded to David Humphreys, the American minister in Lisbon, who was in charge of bribing the pirates.