In 1801, Robert Livingston, the U.S. Minister to France, was sent to Paris to negotiate the purchase of New Orleans. The purchase of the entire territory of Louisiana, all 800,000 square miles of it, was still two years in the future. In 1801, the territory was in the midst of being transferred from Spain, which had held it since the 1760s, back to France, its historic ruler.
To move the negotiations to buy New Orleans along, James Monroe was sent by President Jefferson in 1803 to help Livingston in securing a deal; Monroe had previously served as Ambassador to France. By the first decade of the 19th century, the French were frustrated by their weakness in North America, which they had at one point controlled swaths of. They had lost control of Haiti, failed to recapture it, and Spain was slow in finalizing its transfer of Louisiana. The French were also skeptical of their ability to defend the territory anyway.
So before Monroe had even arrived, the French offered to Livingston the sale of the entire Louisiana Territory for $15 million. Livingston believed the President and Congress would approve of the purchase. The only immediate problem was it was more than Livingston and Monroe were authorized to pay and more than the country could afford to pay without debt financing; it was about twice the annual federal budget at the time. The Americans needed help from one of the most successful and largest banks of the period.
Barings
The Barings Bank, founded in Britain by the sons of a German wool trader who immigrated to England, was just the bank to help the Americans finance the Louisiana Purchase. Despite its founding in Britain in the middle of the 18th century, the bank had close tied to the United States since its earliest days. This wasn’t always easy given the politics involved in working across countries in that period, especially between countries periodically at war. Nonetheless, Barings would go on to provide financial backing to the American government and some of its oldest companies.
Barings already had done substantial business with the new country by 1803. Take the following for example. In the late 1700s, the Barbary pirates of North Africa, such as in Algiers, attacked ships in the Mediterranean unless they were paid off by their respective countries. For years, many nations in Europe, including Britain, simply paid the pirates rather than deal with them militarily. The US sought to do the same and it was Barings which was hired to raise the money to pay off the pirates by leading a sale of US government bonds in London. These were not insignificant sums, as the other Barbary States in North Africa, such as Tunis and Tripoli, caught on to how much money could be made, they got in on the act too. By 1800, the payments to the pirates added to 20% of US government revenues.
Barings had also done other business in America. Fresh after the country’s independence, the bank engaged in land speculation in Pennsylvania and Maine. They paid a little over £100,000 for over a million acres in Maine, then part of the state of Massachusetts; they knew cheap land when they saw it. They would also go on to secure weapons and raise money for the US during its “Quasi War” with France in the late 1790s. Nonetheless, financing the Louisiana Purchase would be their biggest deal yet.
“We all tremble at the magnitude of the American account” – Sir Francis Baring
Louisiana Purchase
The War of the Second Coalition, between Britain and France among other countries, had ended with the Treaty of Amiens in March of 1802, making it possible for a British bank to do business with the French state; though war would break out again before the Louisiana deal was finalized. Regardless, the role of Barings, and its Amsterdam partners Hope & Co., was tremendous.
The price agreed to for the territory was $15 million, though the treaties between the US and France actually quoted the price in francs. Because a part of the deal was financed with dollar-denominated bonds transferred to the French, the exchange rate between the two currencies was fixed at 5 and 1/3 francs per dollar in the treaty. Of the 80 million franc ($15 million) purchase price, 20 million francs ($3.75 million) was paid by the United States assuming certain debts due by France to American citizens.
The remaining 60 million francs ($11.25 million) was paid for by the transfer of US government bonds to France. The bonds carried a six percent interest rate or $337,500 semiannually on the $11.25 million face value. The bonds’ principal would amortize in four annual payments starting in 15 years. Of course, the French were not particularly keen on waiting around for payment; they had wars to pay for. This was where Barings came in.
Almost immediately after receiving the bonds, delivered to France by Alexander Baring himself, the French sold them to Barings for a one-eighth discount, 87.5 cents on the dollar. The bank thus paid a little over 52 million francs for the entire bond issue. Even this sum was not paid all at once, but at least the French state got an accelerated payment; 6 million francs were paid within one month and then 2 million francs per month until the remainder was paid off in a little under two years. Barings would later be paid an additional fee by the French for accelerating the payment even further.
The fact that part of the American payment came in the form of debt forgiveness and that the French sold the bonds they received at a discount to Barings meant that the French actually received under $10 million in hard cash for the territory.
After purchase by Barings, the bonds were then sold to the investing public in London. Thanks to the discount and fees they obtained from the French, underwriting the deal likely made Barings a more than decent profit. The deal also served Britain’s national interest, which was why the British government allowed it to proceed even after the start of the War of the Third Coalition against France in May 1803. They were pleased to see the Americans, as opposed to the hostile French, bordering their own North American possessions in Canada and the Pacific Northwest. Britain’s Prime Minister thought £1 million a small price to pay for this security (at the exchange rate of 4 shilling and 6 pence per dollar, the entire face value of the bond issue came to a little over £1 million)
“It would be wise for this country to pay a million sterling for the transfer of Louisiana from France to America.” – Prime Minister Henry Addington
Barings in the 19th and 20th centuries
Barings would continue to do business in America for well over a century. During the mid-19th century railroad boom, Barings was active in raising money for American railroads. From 1870 to 1890, Barings was involved in 22 U.S. public bond issues, 14 of these were for the nation’s expanding railroads. In the eight years after the end of the US Civil War, the country doubled the length of its rail network. Barings financed the Atchison, Topeka and Santa Fe Railway (ATSF) and had a large role in running the railroad in the late 19th century. It eventually merged with another railroad in the 1990s to form the Burlington Northern and Santa Fe Railway (BNSF), today America’s largest railroad, wholly owned by Berkshire Hathaway.
In the early 20th century, the American Telephone and Telegraph Company (AT&T) needed capital to connect the country by telephone lines. It turned to Barings as well. In 1905, Barings sold over $6 million in AT&T bonds in Europe. It was the start of another lucrative relationship for the bank. In the following few years, a further $100 million in bonds were sold by Barings and even more in an issue of AT&T stock.
So what became of Barings, which collapsed in 1995? Early that year, it was found out that a rogue trader, Singapore-based Nick Leeson, lost the bank over $1 billion in unauthorized derivatives trading. It greatly exceeded the bank’s capital; Barings was eventually sold to the Dutch bank ING Group for just £1. With that, Barings was gone.
Lesson
In contrast to its abrupt and unanticipated collapse, Barings had an established and long-cultivated relationship with the American government and its largest companies. Barings was an example of the role banks had, not just in financing companies, but also in building countries. Despite how small the sum of $15 million might seem today, it was by no means small in 1803, and given the logistical and political pitfalls of cross-national banking in the late 18th and early 19th centuries, the task Barings took up in financing the Louisiana Purchase was a great one. This post adds some well-earned detail and attention to what would otherwise be a footnote to one of America’s most worthwhile financial transactions.
Further Reading
1) Aguilera, Kristin. The British Bank That Forever Altered the U.S. Economy. Bloomberg, 22 Jan. 2013.
2) Barings PLC – Company History. Company-Histories.com.
3) De Cesar , Wayne T, and Susan Page. Jefferson Buys Louisiana Territory, and the Nation Moves Westward. National Archives and Records Administration, 2003.
4) “Exhibition: The Louisiana Purchase.” The Baring Archive: Exhibitions, The Baring Archive.
5) Gordon, John Steele. “We Banked On Them.” American Heritage, American Heritage Publishing Co, 1995.
6) Louisiana Purchase Transcriptions . National Archives and Records Administration.
7) Museum of American Finance. Barings in America Notebook.
Mike