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The British Bank That Forever Altered the U.S. Economy

By Kristin Aguilera
January 22, 2013 12:01 PM EST
Bond
Bond

This month marks 250 years since Barings Bank, one of the first significant international investment banks, opened its doors.

Much of Barings’s early success can be attributed to its willingness to invest in the development of the U.S. in the late 18th and early 19th centuries, despite the nation’s newly established credit and undeveloped economy. Without Barings’s involvement, the U.S. would probably be a very different place - - geographically and economically -- from what it is today.

Founded by Francis and John Baring on Christmas Day, 1762, the company began operations on New Year’s Day 1763, with offices in London and Exeter, England.

By 1774, the bank was conducting business in the U.S., and by 1818, the Duc de Richelieu declared it to be “the sixth great European power,” after England, France, Prussia, Austria and Russia.

In 1796, Barings was involved in the purchase of about 1 million acres of remote land that would eventually become part of the state of Maine. While the deal wasn’t as lucrative for the bank as its directors had hoped, Alexander Baring (son of Francis) leveraged the transaction to ingratiate himself with the American financial elite. This paved the way for future U.S. business for Barings, including important government accounts, such as the Bank of the United States.

Louisiana Purchase

Barings’s most significant land deal came in 1803, when it helped finance the Louisiana Purchase, in which the U.S. bought more than 800,000 square miles of territory from France. As the largest financial transaction of its day, the $15 million deal doubled the geographic size of the nation and became one of the most historically significant trades of all time.

This was no small accomplishment for Barings and its Dutch investment partner, Hope & Co. The negotiations for the territory were conducted during a brief time of peace between France and England, when another war was imminent. British Prime Minister Henry Addington expressed concern that although the transaction might financially benefit Barings, it could ultimately hurt his country.

“In view of the projected invasion of this Kingdom ... I have ... to desire that you would decline being party to any remittances to France on account of the debt due from the United States of America in consequence of the cession of Louisiana,” Addington advised Sir Francis Baring in 1803.

Addington’s fears were realized, as Barings successfully helped in the sale of $11.25 million of U.S. government bonds to finance the purchase of the territory from France, which by the end of the year was again at war with Britain. Barings’s involvement in the purchase essentially meant that the firm was contributing to the war effort against its own country.

But Barings wasn’t deterred from making further investments in the future of the U.S. The bank assisted companies and governments in raising funds by issuing securities, and like many other investors in the 19th century, it participated in the U.S. railroad boom. In the 1870s and ’80s Barings was involved in 22 U.S. public issues, 14 of which were railroads, including the storied Atchison, Topeka and Santa Fe Railway.

Another of Barings’s most significant -- and profitable -- corporate investments was in the U.S. communications network. In 1905, Barings was responsible for selling $6.5 million of AT&T (T)’s securities in Europe. The following year, it participated in a $100 million bond offering for the company, and from 1905 to 1908 the bank shared in the issue of more than $150 million in AT&T stock, plus an additional $70 million in stock for its subsidiary, New York Telephone Co., from 1909 to 1912.

AT&T turned out to be one of Barings’s most lucrative American investments, and the funds raised enabled the company to expand its long-distance phone network across the U.S.

Rogue Trader

Although Barings had its share of successes, some of its investments in America and elsewhere were failures. Its investment in the American Bicycle Co., for example, was a major disappointment.

The venerable bank was ultimately taken down not by miscalculated investments or a drop in business, however -- but by one man.

In 1995, rogue derivatives broker Nick Leeson lost the bank about $1.3 billion through unauthorized trading, and Barings couldn’t recover. Dutch bank ING Group subsequently purchased the bank for a token 1 pound, a minuscule amount for what was once a driving force behind the economic and physical development of the U.S.

(Kristin Aguilera is the deputy director of the Museum of American Finance and the editor of Financial History magazine. “Barings in America: An Interactive Investment Experience” is on view at the museum until April 27. The opinions expressed are her own.)

Read more from Echoes online.

To contact the writer of this post: Kristin Aguilera at kaguilera@moaf.org.

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.

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