The Past Speaks

EH.Net published this review today. I was very excited to see it since Baring Brothers & Company played a crucial role in Canadian Confederation. (See my book British Businessmen and Canadian Confederation).

Peter E. Austin, _Baring Brothers and the Birth of Modern Finance_. London: Pickering and Chatto, 2007. xiii + 265 pp. $99 (hardcover), ISBN: 978-1-85196-922-7.

Reviewed for EH.NET by Peter L. Rousseau, Department of Economics, Vanderbilt University.

The complexity of the confluence of events that led up to the U.S. financial panic in the spring of 1837 has long been appreciated by economic and financial historians. The traditional story advanced by McGrane (1924) and expanded upon by Hammond (1953) points to failed policies of the Jackson administration as the primary cause. And it is certainly plausible that President Jackson’s refusal to renew the charter of the Second Bank of the United States and a removal of the deposits therein to “pet” banks scattered throughout the country led to a sharp increase in bank liabilities that in turn prompted a disruptive executive order (i.e., the “Specie Circular”) aimed at slowing the rapid advance of public land prices, and that all of this together led to panic. But if the traditional story is not adequately convincing, one could always turn to Temin (1969) for an international account in which increases in the Bank of England’s discount rate short-circuited trade and led to declines in cotton prices, failures of cotton factors in the United States, and ultimately a loss of public confidence in bank notes.

Andrew Jackson

My own account (Rousseau, 2002) finds merit in both views but, like the traditional one, sees domestic events as central. In particular, I find that Jackson’s policies in 1836 dislocated the nation’s monetary base and left the banks in New York City short of reserves, and that with the stage thus set, any additional small shock, domestic or international, could have caused the runs that forced banks to suspend specie payments on May 10.

In his recent book, Peter E. Austin fills in many supporting details that the international story has heretofore lacked, albeit through an analysis of one British merchant bank. But an important one it was! Baring Brothers & Company was the premier “American House” in the 1820s and early 1830s. It achieved this status by exploiting an international reputation and first-mover advantage in the American market, and for many years its operations were able to reap substantial profits without taking excessive risks.

Bishopsgate Street, Former Home of the House of Baring

Austin’s engaging narrative makes it quite apparent that Barings saw early on that price inflation, deposit dislocations, and speculations in cotton would lead to a spectacular conclusion. In anticipation of this, a gradual withdrawal of Barings from discounting in the U.S. market commenced in 1834-35. In hindsight this was early given the profits taken at the height of the boom by competitors such as Brown Brothers, yet a conservative stance allowed Barings to avoid the fate of the infamous three “W”s (Wilson, Wildes, and Wiggin) that play such an important role in Ralph Hidy’s (1949) account of the panic and its international roots.

It is exactly on this point, however, that Austin’s monograph seems to take on two somewhat independent objectives. The first is to shed light on the personalities and policies that shaped decision-making at Barings over its early history, and how these policies helped the firm to survive the tumultuous 1830s. The other is an attempt to re-tell the classic tale of 1837 from a British perspective. In my view, the book succeeds in meeting the first objective but is less convincing on the second.

The early history of Barings is certainly impressive if not a bit monochromatic. As the first English merchant house to make strong headway in the young United States, it was well-known in the merchant community and trusted by its patrons. Austin describes vividly how Barings provided credit to only the most upstanding of commercial interests, always placing safety above expected return in deciding whether to begin or continue customer relationships. Joshua Bates, who led the company from the London office in the 1820s and 1830s, apparently placed great confidence in his American colleague Thomas Ward, who in turn evaluated potential accounts very effectively to ensure that Barings was not exposed to extraordinary risks. A wide and impressive range of primary sources, including voluminous correspondence between Ward and Bates, are brought to bear in making this case.

One company policy was to insist that those with trade accounts do business exclusively with Barings, thereby avoiding conflicts of interest or commitment with major competitors. Barings also acted conservatively in deciding how much credit would be extended even to its most desirable accounts. These precautions were not taken as seriously at Brown Brothers, which was more likely to extend credit to customers with multiple accounts or upon only tenuous security.  As a result, Barings began to lose business to competitors, suggesting that its withdrawal from the American trade may have had as much to do with a shift in the competitive landscape than with a well-reasoned decision to back away.  To this reader it seemed likely that both factors were at play.

With respect to the Panic of 1837, it is not always clear where Austin stands on the causes. At times the book seems to embrace the traditional story, seeing the withdrawal of Barings from the U.S. market as a symptom of the domestic problems that were about to take the U.S. economy over the brink. At other times the narrative seems more reminiscent of Hidy in describing the disruption in the American trade caused by changes in discounting policies at the Bank of England in the autumn of 1836 that we now know to have been short-lived.

Note Issued by the Second Bank of the United States

These inconsistencies lead me to view Austin’s story of Barings in the 1830s as better suited for explaining the second suspension of specie payments in 1839 and the ensuing recession than for explaining the events of 1837. And though Wallis (2001) makes a strong case that domestic factors also stood front and center in 1839, the supply of foreign capital did indeed dry up as Temin suggests. If this drying up was a response to the inherent weakness of the U.S. economy, Barings’ move away from the market was perhaps a leading indicator of what was to come. To the extent that its actions changed public expectations about how the inflation of the 1830s would come to a conclusion, it may have also played a causal role in the events of 1837. But more likely the new Barings policy provided a model that other foreign investors would follow as public projects and the state bonds issued to finance them began to go bust at the end of the decade and into the 1840s.

To sum up, Peter Austin makes a strong and lasting contribution to our understanding of Baring Brothers and its operations, especially in the 1830s. I believe that his strong scholarship will help to keep alive the recently renewed interest in this most fascinating period of U.S. economic history and encourage its continued reexamination.

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