Wall Street - The Baring Failure
( Originally Published Early 1900's )
The true story of the cause of that astounding collapse told for the first time. The great Baring boom, and what the scaling down of the interest on British consoles had to do with it. The Duke of Marlborough's hand in it. Sensational acts of the hypnotic gentleman who captivated the Argentine beauty, and through her captured all the Barings' business in the South American republic. Magnificent executive ability displayed by Mr. Lidderdale in the rehabilitation of the firm. Amazing gratitude of the benevolent friend who assisted Lord Revelstoke with five million dollars. The future money center of the world. THERE have been many versions of the Baring failure and its causes, but the true story of the latter is here told for the first time. The means to obtain the money which caused the big Baring boom, first in the securities of Guinness's XX. and afterward in the properties, real and imaginary, of Argentina, originated in the act of Parliament, a few years ago, which scaled down the interest on the British consols from 3 to 23 per cent., and that act of Parliament originated in a casual conversation between the Duke of Marlborough and myself. When the Duke, who married Mrs. Lily Price Hamersley, now Lady Charles Beresford, was in New York, he and I became quite well acquainted, and had frequent conversations on financial questions and other subjects, in all of which I found him an exceedingly brilliant talker, thoroughly informed on all subjects that came up. One evening the conversation was diverted to a comparison of the market value of our government bonds with that of the British 3 per cents., or " consols " as they are called. These securities had been called "consols" by way of abbreviation since the time of the Consolidated Act in 1757, in the reign of George II., by which the debts of the nation, including annuities, were consolidated or brought together into one scheme, an average rate of interest being struck at 3 per cent. This rate had never been changed, and it was therefore natural for the idea to get into the British mind that it was destined to be perpetual. As these "consols," or the British consolidated fund, are kept in account in the Bank of England and virtually form the great bulwark of its deposits, the decrease in the rate of interest was regarded as an injury to the credit of that mighty financial institution, which had been established in 1694 on the first national loan of 11,200,000, to William III. I said, "Your Grace, the English consols in comparison with our government's ought to be reduced to a lower rate of interest, as 3 per cent. for such a high grade security is too high, and the premium at which our bonds are now selling makes the credit of the United States higher than that of Great Britain," for our bonds were then on the basis of 2 per cent. per annum or thereabout. Marlborough appreciated the criticism at once, and remarked that his government ought to stand on an equal footing with that of the United States. He added, " The comparison from your point of view, with which I coincide, has never, I think, been presented to the British Parliament; but I will call the attention of some of my political friends to the subject as soon as I return home." The Duke remembered this resolve; the attention of Parliament was called to the subject, and the result was that the interest on consols was cut down to 23 per cent. by an act of Parliament, with the understanding that there should be a further reduction to 2- per cent. When the fact was announced that the rate of these time honored and most reliable securities had been reduced one quarter of 1 per cent., the surprise and astonishment of their holders in England could hardly have been greater if they had been struck by a cyclone; and if some of them had known that the Duke was at the bottom of it, Blenheim Castle might not have been the best place for him to seek repose and shelter. To the American mind one quarter decline in the interest of any security appears of but small account; but if we take into consideration the result to the steady-going life of the average Englishman, with his income adjusted to a certain mode of living just so as to make both ends meet, we can easily imagine that this decline of one twelfth was sufficient to produce a shock. If it deprived him of only one or two luxuries, it was yet a hard matter; but this cutting off of one twelfth of their income was to plunge many of them irretrievably into debt. Consequently they became desperate, and in the moment of their partial frenzy they determined to part with their holdings and buy into others that would yield more. This was the opportune moment when the Barings resolved to put upon the market the Guinness's Stout Corporation securities. Guinness's XX. was a commodity known and appreciated by everybody in Great Britain and her colonies who had arrived at the years of discretion, and the shares were known to have for their basis one of the best properties in all the British dominions. Consols were, therefore, rapidly changed into cash, and invested in this new and promising security. The Barings took in the money with such rapidity, and the accumulations became so large, that the fiction of Sinbad the Sailor in the Valley of Diamonds might have seemed more true than the reality. While the tide of this wonderful prosperity was still rising and threatening to overwhelm all other multi-millionaires, a young man with a strong resemblance to Adonis in features, and an Apollo Belvedere in form, was roaming through South America eking out a precarious existence by selling, for a noted New York chemical firm, a new pill warranted to cure fever and ague and several other malhelvetica ills to which flesh is heir in sultry climes. He was also equipped by the same firm with samples of the famous Florida water, which was presumed to exercise about the same healing influence externally that the pill possessed internally. He was by birth a natural hypnotist, improved by art, and had been a pupil of the famous Charcot, the French hypnotist, but was not particular about his master's advice never to take advantage of his power for selfish purposes. This young man had been employed by the firm, and was in trusted with the South American mission on account of his linguistic abilities and his amazing hypnotic power in convincing the people of every tongue and clime that the pill and the water were exactly what he represented them to be, only a little superior in quality, perhaps, modesty being one of his many personal characteristics. The wanderings of this disciple of Esculapius over the pampas of South America would afford material for a new Odyssey, but I will omit most of his adventures, and confine myself as closely as possible to those more immediately connected with the Baring failure. He did not meet with any particular siren or other enchantress, to my knowledge, until he arrived at Buenos Ayres, where he encountered one of nature's loveliest daughters, a Venus of the pampas. The hypnotist was bent on combining business with pleasure, and lost no time in securing his newly found prize against the possibility of recapture by leading her to Hymen's altar. He went through the formality of politely asking the consent of her father, who was the head of the firm of Barings' agency in Argentina, and who at first objected to the marriage on such short acquaintance; but he soon surrendered to the irresistible influence of the hero's magnetism, and his new son-in-law became a member of the firm. This modem Ulysses, taking Shakespeare's advice, threw his pill and Florida water to the dogs, and went into another line of business. Like a dutiful son-in-law, he exhibited gratitude toward his bride's parent by taking the burden of managing the firm off his hands, and through the same hypnotic propensity became manager of the concern, showing that, like Ulysses again, he was " a man of many resources." He visited London just at the time the Barings were looking out for new financial worlds to conquer, saw Lord Revelstoke, who was then at the head of the house, as well as one of the directors in the Bank of England, and pictured to his lordship the new imaginary worlds in the Republic of Argentina. Revelstoke had some doubts at first as to the magnitude of Argentina's wealth, and in order to remove these, he sent an agent to Argentina with our hypnotic hero who, like Elijah with Elisha, threw a double portion of his persuasive spirit upon the agent, sending him back to Revelstoke with a story of prospective wealth, compared with which the exaggerated accounts first given seemed mild and unassuming. Revelstoke no longer hesitated, but began to organize these newly discovered properties, adding the new securities to those of Guinness's XX. But Englishmen are proverbially conservative. As soon as purchasers became aware of the fact that the properties behind the fresh securities were not virtually gold mines and valuable concessions in Argentina, but rather castles in Spain, they began to realize quickly on all Barings' securities. The result can be easily imagined. The Baring riches began to take wings. The Barings tried hard to impede their flight, and might have done so with the $100,000,000 of Russian gold which was still in their vaults; but the astute Rothschilds, it is alleged, or somebody in their interest, informed the Czar of the firm's unfortunate situation, and his Imperial Highness of Russia ordered that gold transferred from London to the vaults of the Rothschilds at Frankfort-on-the-Main, and elsewhere. Down went the great house of Baring, as if struck by lightning. Now comes the second part of this chapter which describes one of the greatest feats in all the history of financiering. It was performed by Mr. Lidderdale, Chairman of the Board of Governors of the Bank of England, who had been for a considerable time a resident of New York, representing the great mercantile firm of Rathbone and Company of London. By his able work at this crisis he averted a panic which, but for his timely intervention, would in all probability have been worldwide. At that time merchant ships on every sea with their precious cargoes were relying on the Barings to credit their bills of lading. Merchants and business men everywhere were depending on the house for credit to tide them over. Then there were thousands upon thousands who had Barings' paper, which had hitherto been considered as good as gold everywhere. When we take a retrospect of these things, we can imagine the Herculean task Mr. Lidderdale had undertaken; viz., to stand in the place of the broken-down Barings, to act as substitute for them, to answer all immediate claims, and to pay all immediate demands until the clouds should roll by and the Barings again be put upon their feet. It took seven million pounds sterling, equal to $35,000,000, to essay the mighty task, and this he procured from the Bank of England through his great influence with the governors of that institution. In fact, the majority of the banks and bankers in London also lent their aid in the work of rehabilitation. Perhaps there was no man in England qualified to attempt the gigantic operation except Mr. Lidderdale. Where did he learn how to do it? It had never been done in England before. There was no attempt in the case of Overend, Gurney and Company, in I866, to ward off the blow by such means. Mr. Lidderdale must have learned his modus operandi from his experience in the methods of the New York Clearing House, particularly its mode of warding off panics by the issue of certificates. This famous transaction on his part, therefore, reflects the highest credit upon New York banking management, and acknowledges the managers of our united city banks to be in the foremost rank of the world's financiers. There are certain circumstances connected with the reorganization of the house of Barings heretofore known to but few, which are of the most interesting character. How the firm got so suddenly on its feet again has puzzled many financiers, who thought they were very clear-sighted in such matters and could see through almost anything in the financial world, no matter how dense it might appear to others. It was not the Bank of England that did it, though most people think it was. That institution carried over only the outstanding obligations, though this operation undoubtedly was a great deal for the bank to do, and, as previously stated, it averted a panic the extent of which, from the nature of things, must have been world-wide. But setting the Barings on their feet again, and making them once more conspicuous in the eyes of the world and as fully trusted as before, was wholly another matter, and cannot be confounded with the operation so ably managed by Mr. Lidderdale. Some people may infer that it must have taken a powerful syndicate to perform this work. I admit that such an inference would be quite natural, for the task was a huge one; and if the event had occurred in New York, the chances are that only a syndicate with millions at its back would have essayed the undertaking. It may therefore seem to the reader that I am taxing his credulity too severely when I ask him to believe that the reorganization of the Baring Brothers into a limited liability company was accomplished by one man. He came forth from a well-earned retirement and placed his whole fortune, a million pounds sterling, $5,000,000, at the disposal of the Baring Brothers. He was simply a relative of the family, but alas! how few are the relatives so unselfish as he proved himself to be. In fact, many relatives would, in the circumstances, have brought railing accusations against the unfortunate ones and played Job's comforters. This man was not of that stamp. He was one of nature's noblemen. What a lesson such a man teaches to those cold-hearted, grasping misers, who hold fast to their wealth even on the brink of the grave. He had made a fortune in the old house of the Barings and had retired to enjoy it in the evening of life. He was a bachelor, well known in financial circles in New York, and had lived here several years, being a member of the banking firm of Ward, Campbell and Company, 52 Wall Street. These are the bare facts, the mere outlines of a financial episode of real life in our own times, and I believe it is hardly an exaggeration to say that they would afford material to an imaginative author, which I make no pretense of being, for the production of a most thrilling fiction. The great firm of Barings was the result of the growth of a hundred years, during which its ramifications extended all over the world, but the blooming of this great century plant of commerce in South American fields overtaxed the strength of the parent stock, so that it must needs have a period of recuperation. The position occupied by this great house was unique in the history of the world. Decade after decade had fostered the establishment of the greatest credit ever accorded a private firm. Its activities were world-wide. Through this ever increasing confidence its bills were accepted without question and without limit, as equivalent to cash the world over. The merchant at Hong Kong, at Yokohama, at Melbourne, at Cape Town, or at Rio de Janeiro, who in return for his shipments received their documents, no matter whether these were dated at two months, three months, or six months, had the immediate equivalent of cash. Such a credit virtually provided an addition of many hundreds of millions to the world's currency. It may be considered doubtful if such a position will ever again be held by any single private concern; at least, it is not likely in our time. Still, it is a source of very great satisfaction that the old house has, since its rehabilitation, again advanced in popular confidence. "You may break, you may shatter the vase if you will, But the scent of the roses will hang round it still," is peculiarly applicable. The fragrant odor of a great and honorable name has not suffered destruction, while the vessel has been cemented together. An effect of the tremendous shock which their misfortunes caused may be observed in the course of the London money market since I890. Prior to that time, for years the maximum interest rate scarcely ever exceeded 3 per cent., ruling almost invariably at a much lower rate. Since then, however, London discount rates have been subject to the wider fluctuations of other money centers. Does not this unsettling of stability presage a shifting elsewhere of the great money center of the world? And if so, why not to New York? We have here the metropolis of what is acknowledged the richest country in the world - a city rapidly becoming as cosmopolitan as London, financial institutions and great business firms which rival those of the Old World, and in addition a geographical position at the very gateway of this continent which places it, in that respect, beyond rivalry. All these factors tend toward the establishment here of that necessary foundation of stability which fosters commercial and financial supremacy.