England has always speculated largely in both North and South America, and the result has almost invariably been a panic. In 1890 it was the Argentine Republic which was to prove an Eldorado for the British investor, and Baring Brothers were so convinced that this wonderful land must prove a veritable gold mine that they practically staked the existence of their firm upon it, but Argentina sadly disappointed its backers. Having staked their all and lost, there were many who thought that Barings should have paid the penalty of their mistake, for Fate certainly was not so kind to some of the smaller losers in the gamble as was the Bank of England to Baring Brothers.
In June the Buenos Ayres Western Railway was unable to raise capital in this country; and when at a later date Baring Brothers failed to place a new Argentine loan, the worst was feared. Earlier in the year the United States had increased its circulation of silver currency, thereby creating a sudden demand for that metal and a proportionate rise in those securities upon which the interest is payable in silver. A fall soon followed; and when it was found that the Argentine Government was in straits, Stock Exchange settlements became difficult. The banks, which had advanced huge sums to the Stock Exchange on American securities, increased their margins directly the markets looked dangerous; consequently high rates of interest, together with the rapid fall in South American securities, made "carrying over" in the House an expensive operation. Speculators became alarmed, and sold out at panic prices in order to cut their losses, and on 7th November pressure upon the Bank of England became so great that the rate was raised from five to six per cent.
Lord Revelstoke, who was a partner in the firm of Baring Brothers, was also a director of the Bank of England, and, finding that his firm was in difficulties, he disclosed his position to the Bank directors, who, when they heard that Messrs. Barings' liabilities to the public amounted to over £28,000,000, felt that even the Bank of England could not afford to guarantee so large a sum; so, after much deliberation, it was decided to invite the co-operation of Lombard Street in the bolstering up of Barings, and, for the first time in its history, the directors of our large banking institutions met the directors of the Bank in their sacred parlour to discuss what steps should be taken in order to avoid a disturbance of credit which, should the suspension of Barings be announced, would probably produce a crisis even more disastrous than that caused by the Overend and Gurney crash in 1866.
The resources of Lombard Street combined are infinitely greater than those of the Bank, which, we have seen, largely draws its own power therefrom, and the directors of the Bank of England, in consulting with the directors of the joint stock banks, proved that they thoroughly understood the constitution of the money market. Moreover, this new step created a precedent which bound the whole market more closely together, for each division clearly recognised how essential it is that the great machine should work smoothly. This can only be accomplished by the best of feeling existing between its constituent parts, and the wise step taken by the directors of the Bank in November, 1890, undoubtedly generated a feeling of sympathy which had formerly been noticeably absent between the various sections of the money market, and which augurs well for the harmonious working of the system in the future. Such sympathy may be the outcome of enlightened selfishness, but it is none the less valuable.
The directors of the joint stock banks, when the position of Baring Brothers was revealed to them, instantly recognised the danger of the position, and, as their advances to the Stock Exchange were considerable, they were naturally anxious to prevent a catastrophe which would create a panic in the House, and the end of which it was impossible to foresee. Barings, who are financiers in the English sense of the word, not bankers, had at the worst only been guilty of imprudent speculation, and, as all inquiries were answered in the most straightforward manner, Lombard Street was as anxious as the Old Lady herself to assist Baring Brothers over the stile. Undoubtedly Lombard Street would have liked to make an example of the firm that was caught short of cash, but it was afraid to leave it to its fate, because it knew that discrimination is not one of the characteristics of excited depositors, and that, were Barings to close their doors, the credit of Lombard Street would next be questioned.
The outcome of the meeting at the Bank was that the Bank of England agreed to make advances to Baring Brothers in order to enable them to meet their liabilities as they matured, and the large banking companies, on their side, guaranteed the Bank against loss to the extent of £15,000,000.
Immense sums had been invested in South America, and when it was rumoured that the wealthy firm of Barings was tottering, Argentine securities were practically unsaleable on the Stock Exchange, where a state of panic prevailed. For a few days the wildest rumours were noised abroad, and the tension, just at the height of the panic, became so acute that even the Consol market was idle. The market then turned in despair to the Bank, which was compelled to borrow £3,000,000 from the Bank of France as a precautionary measure, and also to accept help from the Russian Government.
The British Government, fully alive to the gravity of the Bank's position, promised to suspend the Act in case of need; but when it became known that Barings were to be supported, and that the Bank of England was lending freely on approved securities at high rates of interest, confidence was restored, though a few days earlier it had looked as if a dangerous crisis were imminent. The Bank Act, however, was not suspended, but it is difficult to say what might have happened had not the Bank of France come to the rescue, for the gold advanced by that institution at so awkward a time doubtless tended to greatly alleviate the feeling of apprehension which existed in this country, and which, at any moment, might have overcome restraint.