Baring Brothers and the Birth of Modern Finance

Peter E Austin

• Publisher: Routledge
• Year: 2015
• Edition: 1
• eBook ISBN:
  9781317314707
• Topic: Business
• Subtopic: Finance
• Index: Business

In 1995, the Baring Brothers collapsed over a weekend, brought down by the 'rogue trader' Nick Leeson. Utilizing British and American archives, this work charts Baring Brothers development from wool merchants to one of the most powerful global financial institutions. It also analyses the errors which led to its downfall.

1 Growth of Confidence (1763–1828)

Strong, sensible, self-reliant men, with a profound belief in themselves, in their family and in their country — eminently just and fair; no trace of hypocrisy or cant; not only solid and square but giving the impression both of solidity and squareness ... not subtle or agile, but endowed with that curious combination of character which lends authority even to doubtful decisions, and makes those who possess it respected in counsel and obeyed as rulers.

Viscount D’Abernon on Barings¹⁰

The early history of Barings reflects the early history of merchant banking in general, and the foundations the banker must lay if he is to garner trust and a good reputation among traders, manufacturers, correspondents and, on occasion, governments. Before the turbulence of the 1830s, Barings had been in business for nearly seventy years. These years involved finance in war and peace, European reconstruction loans in 1815, and a widespread financial panic in the middle of the 1820s. The Barings, particularly Sir Francis and his second son, Alexander, were also among the first British merchant bankers to realize that westward across the Atlantic, in America, lay a land of very large possibilities. Barings forged its American connection almost before the United States was a nation.

This chapter will show, in outline, the characteristics of Barings’ early experience and operations, which provided continuity with later years, and likely benefited the firm. In sequence, the narrative includes the establishment of the firm, the anchoring of the firm’s reputation in Great Britain and Europe, contact with America, the 1825 downturn, and formation of the third Baring partnership that navigated the events leading to the troubles of 1836–7. From the start, the firm was not local or regional in orientation, but international. It made influential financial and political contacts, including those by marriage. It exhibited caution, made mistakes, and incited fear and envy among peers and those outside the banking community. Above all, the illustrious position which it established firmly in its early years allowed Barings to play a coveted role of objective helpfulness in questions of high finance in both the United States and Great Britain in the first important decades of the nineteenth century.

Establishment and Early Reputation-Building

The House of Baring is a classic example of an international merchant and trading firm which, over time, changed into an organization almost wholly devoted to finance. It began modestly as a manufacturer and dyer of serge cloth under Johann Baring (1697–1748), who emigrated from Bremen to Exeter, Devon, in 1717.¹¹ After Johann’s death in 1748, business continued under his wife and three sons, John, Francis and Charles. The end of the Seven Years War in 1763 promised increased commercial opportunities, and the firm reorganized into Exeter and London offices. The Exeter firm continued the emphasis of the original cloth business, whereas the London House was an import and export commission operation from its inception, albeit having as its most important client its Exeter complement. Through its London partner, Exeter bought raw materials from the Continent for its own and other Exeter manufacturing enterprises. It also secured wider markets for its merchandise, and an effective agency for negotiating bills of exchange on the major money market in London.¹² In its earliest years the firm forged ties to the Low Countries and northern Germany in the textile trade, and made contacts in Spain, Portugal and the Canary Islands for imports of spirits.

John Baring’s grandson, Francis (1740–1810), de-emphasized the merchant aspects of business when he took over from his older brother John in 1777, and established Barings as a world banking force. Francis steered the London operations, which soon eclipsed Exeter in importance and influence. Francis started from meager resources, sharing perhaps £4,200 with Exeter, but he established the contacts for the firm which opened doors and provided diversification, safety and options in future decades.¹³ He made connections with commercial Houses throughout the Mediterranean, northern Europe, the Baltic and West Indies. Among these was the well-known Dutch banking and trading House, Hope & Company of Amsterdam, whose relationship provided an important fulcrum into Continental commerce, countering the growing influence of Rothschilds. The London branch of the House had always bought and sold commodities on commission for correspondents and for its own account. Now it did a growing business in exchange as well, with Continental Houses and with its longstanding Exeter correspondents.¹⁴ Only later, after years of mercantile service and an enhanced reputation in the wake of the Napoleonic indemnity, would Francis fully establish the acceptance business that proved so lucrative to the House.

From 1777 until the outbreak of the French Wars in 1793, capital of the House grew threefold to £61,177, and rose as high as £75,891 in 1792. Profits from trade fluctuated wildly — from as low as £352 in 1784 to as high as £13,268 in 1792. On the other hand, commission income increased steadily from £4,248 to £10,448, and the direction of business becomes clear from the dramatic expansion in acceptances. Liabilities on acceptances rose from £41,608 at the close of 1777 to a staggering £121,202 in 1793.¹⁵

Increases in business complemented the House’s expanding political contacts and associations. Not long after arriving in London, Francis Baring was appointed a director of the Royal Exchange Assurance, the leading insurance company in the City. Baring investments in the East India Company began in 1776, were followed by a directorship for Francis in 1779, and the chairmanship in 1792. Francis’s developing international knowledge and experience interested a growing list of politicians and organizations which enlisted his advice on matters of money and politics. His circle of associates in politics included William Pitt the Younger, the Duke of Rockingham, Edmund Burke, Henry Dundas and Jeremy Bentham. During the American War, the Earl of Shelburne chose Francis as an adviser on American commercial and financial matters.

Government wartime contracts led to Barings’ heightened reputation by the 1820s. The House had secured its first significant assignment as contractor for public loan subscriptions to finance the rebellion in Britain’s American colonies, placing stock among the public and its private client list. This was new ground for the House, but turned out to be a lucrative revenue stream that complemented more volatile income from trade. Between 1780 and 1784, loan contracting yielded Barings £19,000 and accounted for over half of overall profits. Throughout the American war, commission and acceptance income from trade grew 90 per cent.¹⁶

Barings distanced itself from its merchant banking peers most of all, however, by its participation in Britain’s financing of the coalition wars against France and funding the French indemnity loans thereafter. France declared war on England in February 1793, and the commercial crisis, brought on the previous autumn by poor harvests and growing anxieties over developments in revolutionary France, intensified. A run on the Bank of England met with restricted note issue and a raising of the discount rate. London and country banks refused to undertake discounting in an attempt to maintain cash solvency, and British industry slowed almost to a standstill in 1794. Leaders of the City, including the newly-knighted Sir Francis Baring, met Prime Minister William Pitt at Mansion House in April, and issued ‘exchequer bills’ for immediate discount in order to relieve the commercial pressure and restore confidence. Gold continued to flow out of the country, however, and the Bank ceased convertibility of its notes in 1797, and did not resume again completely until 1821.

Between 1793 and 1816 the British national debt swelled from £243 million to £778 million.¹⁷ This colossal increase in government obligations offered London financiers great opportunities, which the House of Baring seized through its earlier experience with government finance, connections in government circles, and high standing in the eyes of the investing public. The House headed the group of contractors for twelve public loans marketed for the wars against France. It took the majority share of the £28 million British loan in 1813 at 60, which went to a 3 per cent premium on the day of offer. The British government tapped Barings (Smith, Payne and Smiths) again to handle a £30 million issue of 3 per cent bonds that coalition forces used to defeat Napoleon at Waterloo.¹⁸ Barings profited handsomely from British wartime borrowing and public loan contracting. For example, the House made £21,000 in 1799 and £18,646 in 1801, which represented 47 per cent and 34 per cent of total profits respectively.¹⁹ The war provided other business opportunities. In the 1790s the House shared in contracts for the supply and finance of provisions for Jamaica, for example, as well as for the British expedition to Hispaniola. Francis also offered the services of the East India Company in Asia to Pitt.

However significant the opportunities of the war itself, it was the management of the loans for the rebuilding of Europe that gave Barings its greatest triumph since Johann founded the House, and indeed cemented Barings’ prestige in the banking community in the postwar years. In 1815, the second Peace of Paris imposed an indemnity on the restored monarchy of France to pay England, Prussia, Austria and Russia 700 million francs in war reparations, and 150 million in occupation costs per year for five years.²⁰ To pay these sums, the French government had to overcome major difficulties. In 1816 the government ran a deficit serviceable only by drawing down cash advances made by British loan contractors against French rentes sold on exchanges or through mercantile and banking firms. French public credit was at low ebb, and investors and financiers recalled the insolvency of former Bourbon regimes. The French capital market was also weak, and bonds could be issued only at deeply discounted prices. France and the Allies alike were anxious to come to some sort of terms — France so the occupation of its country might end; the Allies so they could secure badly-needed funds to stabilize their war-torn economies.

A foreign loan seemed the solution, and Messrs Baring and Hope visited Paris in January 1817 to explore possibilities. Shortly after the French defeat, Barings had arranged provision contracts for the armies of occupation through the agency of Gabriel-Julien Ouvrard, Paris banker and financial advisor to Napoleon. This relationship was taken up again now and, by February, Baring Brothers, together with Hope & Company, agreed to buy enough rentes at 52.5 francs, less a commission of 2.5 francs, to provide the French government with an initial 100 million francs. The contractors paid all expenses for marketing the loan and transferring the funds to foreign states.

The February rentes sold promptly and prices rose. In April, Barings took a second 100 million franc tranche at 55 francs and, amidst market enthusiasm, took still a third at 61.50. The latter furnished 115 million francs to the French treasury. These 1817 transactions cemented Barings’ reputation as a lead underwriter of government debt. The loans were so successful that Paris bankers and the French public overcame their caution, and three years after Waterloo — in May 1818 — the French treasury itself sold rentes with a face value of 290 million francs. The loan was oversubscribed ten times, with much of the bidding coming from the provinces. Despite French public enthusiasm, however, the victors in the war were chary of the safety of French internal flotations, and the bulk of loans remained in the hands of major Allied financiers who managed their affairs from London.²¹

Banking syndicates took up several subsequent French loans, but most profit and risk of the French transactions remained in the hands of the Baring-Hope partnership. Considerable friction developed between Barings and the firm of Rothschild & Sons over loan apportionment, but since the French firm wished not to be too unpopular in London, it agreed to take only junior interests in the last major French securities offerings which were placed in March and September 1818 for issue in the first nine months of 1819. Rothschilds desired participation in the indemnity loan business, but had lost much of its influence when many of its contacts inside the French government resigned or were discredited in 1815. Hence Barings secured management of the second and enormous 480 million franc loan series in May 1818. Barings parcelled out a total of just 11 per cent between Rothschilds, the Anglo-German banker David Parish and the Paris banks Hottinguer & Company and Jacques Laffitte. The large remainder Barings took at optimistic prices of 74–6 francs.²²

The loan did not go well. Deteriorating economic conditions caused by poor harvests in England and Holland made 1819 a trough year in the postwar adjustment period to such an extent that the Bank of England had to postpone resumption because of a drain of specie. Prices had already peaked by the time the loans were consummated, and 1819 turned out to be a year of severe economic dislocation. Falling prices, high unemployment and severe labour strife — all adjustments to peace after twenty-five years of war — caused Sir John Clapham to designate 1819 as ‘one of the most wretched, difficult, and dangerous in modern English history’.²³

Francis Baring’s son, Alexander (1774–1848), sued for a rescheduling of loans in light of exchange bids dropping to 60 francs. Rescheduling took place and by 1821 the loan issues had risen to over 87 francs, by 1823 to nearly 90.²⁴ But Barings’ timing had been poor in terms of what is now known economically; its judgement as financial professionals precipitate. Their high government loan bid was based on earlier successes of 1817 as well as the illusory prosperity of the year 1818. Rescheduling took place easily because participants at the Allied indemnity negotiations at Aix-la-Chapelle had themselves taken shares, and wished to preserve their positions. In the years 1818–25 Barings shared Russian, Austrian and Danish loans with several firms, such as Parish, Rothschilds, Thomas Wilson & Company and Bethmann Brothers of Frankfurt. It was the French reparation loans, however, which transformed Barings from a prominent British merchant bank to a major international financial force.

Profits were considerable from these loan operations, though difficult to assess. Estimates from some sources cite profits from loan operations as high as £1,500,000 but were most probably lower. Swinton Holland, Baring partner and manager of the counting house at 8 Bishopsgate from 1809 to 1827, wrote that business related to the French loans produced a profit of £720,000, a titanic sum for a mercantile House from a single operation.²⁵

In the winter of 1818 the Duke of Wellington told Lord Liverpool that he thought that, with Barings in control of French securities and French securities all the rage in London, the House was beginning to control the money market of the world. Even in 1817 James Rothschild in Paris had commented that Barings had grown so dominant in the area of postwar finance that, if they handled the loans exclusively, this in itself would make the busine...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Charts, Tables and Figures
• Nomenclature
• Chronology
• Introduction
• 1 Growth of Confidence (1763–1828)
• 2 Opportunity and System (1828–30)
• 3 Good Timing (1830–2)
• 4 Silver Linings (1832–4)
• 5 Changing Too Soon (1835–6)
• 6 Barings Alone (1837–9)
• Conclusion
• Epilogue: Argentina and Singapore (1890, 1995)
• Notes
• Glossary
• Bibliography
• Index