We Banked on Them (July/August 1995 | Volume: 46, Issue: 4)

We Banked on Them

AH article image

Authors: John Steele Gordon

Historic Era: Era 3: Revolution and the New Nation (1754-1820s)

Historic Theme:

Subject:

July/August 1995 | Volume 46, Issue 4

It is not often that even the most ardent believer in capitalism mourns the passing of an economic institution, unless, of course, he or she has personally lost money as a result.

 

After all, the people involved are still around even if the institution is gone. So, too, are the capital assets, if now in other hands. What is actually lost is just such stuff as lawyers make, the corporate or partnership agreement that governed the way the parts made up the whole. To be sure, one of the miracles at the core of capitalism is how the whole always exceeds the sum of those parts.

But the Barings bank is different, and I, for one, mourn its loss. Old capitalist institutions, like old generals, tend to just fade away when they fail to change with the ever-changing economy. But Barings suffered no such protracted disappearance. It had been adapting successfully to changing times since 1762, seven years before James Watt perfected the steam engine that set off the Industrial Revolution. By the time the revolution was far enough advanced to be noticed and the phrase entered the English language, the Barings bank was 86 years old and flourishing as never before. It continued to flourish—with one serious illness in 1890—until this spring, when it suffered something akin to murder, at the age of 232.

Historians, of course, are likely to have a weakness for the venerable for no better reason than that it is venerable. But there is another reason all Americans might mourn Baring Brothers. The firm was a friend of the United States from its earliest days, when most members of the British establishment treated this country as something between a traitor and a banana republic. How big a friend was it? Consider this: Technically, we didn’t buy the Louisiana Purchase from Napoleon. We bought it from Baring Brothers.

The Baring family had its origins in Germany. Their involvement in the wool trade brought them to Exeter, in the west of England, in the early eighteenth century. There they prospered mightily, and the family soon evolved into gentry while the family firm evolved into a new kind of business, one that the British now call merchant banking and Americans call investment banking.

Investment banks, very roughly, are wholesale bankers. They do not deal with individuals (unless, of course, the individuals are very, very rich). Rather, in the beginning, they facilitated trade by handling cargoes for foreign merchants on consignment as well as traded on their own account. Soon they were financing this trade by making loans to trading firms to cover the period between when a cargo and the payment was received.

As their loan business expanded, merchant bankers slowly left the actual buying, selling, and handling of commodities behind and concentrated on the finances. Governments and businesses also began using merchant bankers to facilitate borrowing money long-term, using them as agents to sell bonds in the