July/August 1995 | Volume 46, Issue 4
Why Americans should mourn the death of a British financial institution
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.
Barings had to overcome numerous difficulties to fulfill the contradictory instructions and often risked loss by acting on its own rather than waiting for further instructions from Washington. But when the job was done, Rufus King, the American minister in London, wrote Francis Baring congratulating him “on the liberal and skilfull manner in which you have assisted Col. Humphreys in a very critical operation. I have written to the Secretary of the Treasury … of my conviction that the United States will entertain a proper sense of your Services in this Business.”
At the same time, Barings was also securing muskets and cannon for the United States, to help in the developing “Quasi War” with France. In all it delivered nearly 10,000 muskets and 330 cannon, advancing £45,000—no small sum at the end of the eighteenth century—for the purpose. But it was in securing Louisiana for the United States that Barings was nearly indispensable to American interests. At heart Louisiana was a geopolitical as well as a domestic political problem for Thomas Jefferson’s administration, which came to power in 1801. The trans-Appalachian West was growing by leaps and bounds by the turn of the nineteenth century, and much of Jefferson’s political support came from there. But the settlers, blocked by the mountains, were dependent on the Mississippi River and its tributaries to reach Eastern and world markets.
The Mississippi then formed the country’s western border, but New Orleans and the river’s mouth were in the hands of the Spanish. Fortunately Spain was now a Great Power in name only, quite unable to threaten American interests seriously. It allowed the United States to maintain a depot in New Orleans where cargoes could be transshipped without paying Spanish customs duties.
The ever more ambitious Napoleon Bonaparte, however, forced Spain to cede Louisiana to France in the secret Treaty of San Ildefonso in 1800. News of this cession soon leaked out, of course, and Jefferson was appalled by the idea of a French army on his back doorstep. The British lion, purring smoothly, offered to conquer Louisiana for the United States and turn it over when peace with France was achieved. But Jefferson, needless to say, didn’t want a British army any more than he wanted a French one. He moved to buy the east bank of the Mississippi all the way to the Gulf of Mexico, sending James Monroe to help the American minister to France, Robert Livingston. negotiate.
Napoleon quickly realized that Louisiana couldn’t be defended against a British attack, and desperate for money as always, he offered to sell the whole territory. No one knew the precise boundaries at the time. Still, at an asking price of $15 million, no one doubted that it was a fantastic bargain. But as former New York Mayor David Dinkins once said, “If they’re selling elephants two for a quarter, that’s a great bargain, but only if you have a quarter and need two elephants.”
The Federalists thought that the answer to both conditions was no. “We are to give money of which we have too little for land of which we already have too much,” the Columbian Centinel , of Boston, complained. And certainly the money, while trivial on a per-acre basis, was huge on an absolute one. Today the U.S. government spends $15 million every five minutes around the clock. But in 1803 the total expenditures for the year were half that, $7,852,000.
Again, the United States needed a banker, one with vast resources. And it had one. Alexander Baring was with Monroe and Livingston throughout the negotiations with the French government and was largely responsible, at least according to his father, for getting the price as low as it was. Even for Barings it was a very large commitment of capital. “We all tremble about the magnitude of the American account,” Francis Baring confessed, and he limited Barings’s part in the deal to 60 percent. Henry Hope and company, another major merchant bank, took the other 40 percent.
In the final deal, Napoleon trusted Barings’s paper over that of the United States. He sold Louisiana to Baring Brothers and Hope for 52 million francs, 6 million payable in the first month and 2 million a month thereafter. Barings in turn turned title over to the United States in exchange for $11,250,000 in 6 percent bonds (the other $3,750,000 was covered by private American claims against France). No wonder that a few years later the French prime minister ruefully acknowledged, “There are six great powers Jn Europe: England, France, Prussia, Austria, Russia and Baring Brothers.”
Now, suddenly, Barings is gone. The history of capitalism has lost a living example, and the United States has lost an old friend.