This is the second in a two-part post on Britain’s 1820s bubble in Latin American mining companies. The first post outlined the extraordinary rise in share prices, some 400% or so in just six months and the role of favorable financial conditions and the activities of promoters in bringing this about. Fortunately for those who ‘missed out’ on the mania, and unfortunately for the promoters, the companies, and their investors, the boom proved short-lived. After millions of pounds raised and extraordinary bidding for shares by investors, there would be little gold or silver produced from these Latin American mines in the years of speculative excess. This post will explain how the boom turned to bust.

Prospectuses and Politicians

            The prospectuses distributed by mining company promoters told a common story. Firstly, the inactive mines in 1820’s Latin America had been abandoned because of political upheaval during wars of independence and not because of economic or operational problems. Further, once reopened, new efficiencies could be introduced into their operations, at least partly thanks to British machinery. Lastly, the supply of precious metals was nearly endless. The promotional writings of future Prime Minister Benjamin Disraeli, then a legal clerk supplementing his income promoting mining companies, made these same points. Unsurprisingly, because Disraeli likely relied on the prospectuses in preparing his own writing. These prospectuses were printed in newspapers which appreciated the demand for advertising which the boom created.

           The fantastical assertions made in the prospectuses caused some to worry the future production of these mines would be too much of a good thing. They feared a glut of New World precious metals in Europe causing a return of the inflation that notoriously afflicted Spain in the 16th century. For his part, Disraeli dismissed the possibility, arguing that a country like Mexico needed all the gold and silver its own mines could produce.

            In any case, in a move often repeated in the history of major speculative manias, promoters put prominent citizens, notably politicians, on the boards of these companies. These were not few. Rather, politicians comprised a substantial portion of the leadership of these companies. Indeed, of the 278 directors in Latin American mining companies noted by stockbroker Henry English, forty-five were Members of Parliament and thirty-one of these men were on the boards of at least three of the newly formed companies.

            About £3.5 million was raised in share sales for twenty-six new mining companies in Latin America, of which seventeen companies were to operate in South America specifically. With seven companies, Mexico was the other principal interest of the new mining companies. This £3.5 million was a small fraction of the total authorized capital of these companies and the balance was due to be ‘paid in’ over time or raised by new share issuance in the future. However, this would only be possible if the boom would be sustained long enough.

Turn

            Instead, by the Spring of 1825, the mania was subsiding. Prices for Latin American bonds began to decline. Investors recognized that it took further borrowing by governments just to cover interest payments on their previously issued debts. There were also concerns that the British government was going to crack down on the speculative bubble. This was particularly relevant to the mining companies. By April, the share prices of British mining companies with foreign operations had halved. Shares in Real del Monte issued at £400 had fallen from £1,550 to £300 apiece. By October 1825, shares were trading at £200. By year-end 1825, virtually all of the gains experienced in the boom had been reversed.

            Things only got worse from here. In the summer, the Bank of England began to contract its discounting of bills to preserve capital in the face of declining gold stocks, reduced to just £4 million compared to £19 million in circulating notes. This may have saved the Bank of England but also drove the emergence of a general credit crunch. Bank failures became common, particularly outside London where small country banks had issued excessive banknotes, perhaps contributing to the boom in the first place. Between December 1825 and March 1826, some sixty-three banks in England had failed.

Bad News

            While the market for mining company shares was destined to be lousy, the situation was not helped by news arriving in London about the difficulty of establishing mining operations in these distant countries. The Real del Monte mines were not yet operational because of work needed to develop roads to deliver its ore to smelters. Mine shafts remained flooded after years of disuse. Though over £1 million had been spent by the three large Anglo-Mexican mining companies, their mine shafts were still half-flooded.

            In early 1826, a report by Captain Francis Bond Head, the chief engineer of the Rio Plata Mining Association, rejected the basis for mining company investors’ optimism. He had travelled more than six thousand miles around South America and found that ignorance about the continent had allowed investors to be fooled by promoters.

           The way he saw it, no amount of foreign machinery or commercial creativeness could compensate for the inhospitable and underdeveloped conditions in the mining concessions and the turbulence of the region’s governance. Upon arriving in Argentina, Head found that the government was not respecting the concession granted to the company by President Bernardino Rivadavia, whose agenda was being blocked by opposition politicians and, Head suspected, even the president’s own ministers. Resorting to negotiating with each provincial governor directly, Head largely achieved little.

“On making the necessary inquiries, I learnt that the provinces of Rioxa, Catamarca, Cordova, and San Luis, had sold, to societies at Buenos Aires, the exclusive privilege of working their mines … We thus lost the mines of Famatina and San Luis … The only provinces which offered to receive us were those of Mendoza and San Juan … On our arrival, we found that there had just been an insurrection in the province of San Juan, that the Governor of that province, who had been taken prisoner in his bed, has escaped … The Governor and the people of Mendoza received us in a very cordial manner … [but] answered, that it was impossible I could see the mines, as they were all covered with snow … on my arrival at these mines, I found, to my astonishment, no snow … I respectfully gave it as my opinion that these mines could not support the expense of the English establishment which had been proposed for them”

Captain F. B. Head, ‘An Address to the Directors of the Rio Plata Mining Association’, April 13, 1826

           Recall, this dire assessment came from a sitting prominent officer of a mining company. Furious directors of the Rio Plata Mining Association withheld Captain Head’s salary in response to his report but it was one of the most significant events in the story of this investment boom turned bust.

Francis Bond Head, while later serving as Lieutenant-Governor of Upper Canada

            Machinery was sent to the Americas without consideration of the lack of roads cutting through the mountains and jungle between the ports and the mining concessions. Robert Stephenson, the future railway and locomotive engineer, was then an engineer with the Colombian Mining Association. In South America, he found steam engines and other British equipment impossible to deliver to mines when the only option was strapping such equipment to mules traversing mountain paths. This was a part of the world inhospitable to the fantasies of the mining company promoters, directors, and investors.

“I have now, gentlemen, concluded a rough outline of the state of your affairs, and of the reasons which have brought me into your presence; but you will feel that it has been impossible for me, in so short a time, to give you an idea of the immense tract of country which I have had to visit, or of the physical, moral, and political difficulties which it opposes to your plan.”

Captain F. B. Head, ‘An Address to the Directors of the Rio Plata Mining Association’, April 13, 1826

Continued Drop

            By the summer of 1826, the market value of South American bonds was just £12 million as compared to a face value of £25 million. With the exception of Brazil, every South American government with debts in London had defaulted. The mining concerns were not much more successful. These companies made little, if any, profit. Real del Monte shares were at £115 at around this time.

            By the end of 1826, the shares of General South American, of which £5 per share had been paid in, could be bought for just £1 and 5 shillings, or just one-fourth of the amount of money already sunk in the scheme. Indeed, by the end of the following year, the shares of all foreign mining companies, besides those dedicated to Brazilian mines, were trading not just below their par values, but even below the paid-in value of the shares, the portion of the capital already called by the companies. This discouraged investors from faithfully paying in more capital when called by the companies’ directors.

            Over half of the twenty-six Latin American mining companies formed in this era had failed by 1833. Only seven were still operating by 1842. The future Prime Minister of Great Britain, Benjamin Disraeli, was left so indebted that he would only repay those who financed his speculation much later in life. He did produce something worthwhile out of this experience as his first novel Vivian Grey contains the odd reference to what seems to have been the boom in Latin American mining shares the novelist himself had some role in encouraging.

Lesson

            Speculative manias often have plausible foundations and this one was no different. What Disraeli and others outlined in their prospectuses and pamphlets was not unreasonable to believe. However, the reality on the ground in Latin America was very different than what the company directors and their promoters likely imagined, or at least was different than what investors could have possibly thought while buying into these investments. Some manias meet their undoing by overinvestment; if only the enthusiasm was not so excessive these might have turned out harmless. However, this one was based on outright ignorance. While a global market in emerging country investment arguably took off in the 1820s, it was not because the common investor had become any more knowledgeable of the world outside their own country than before.

More from the Tontine Coffee-House

           Read part one of this post and about the larger boom and bust in emerging market sovereign bonds at this same time as well as the Panic of 1890, which ensnared both Argentina and Britain. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Chancellor, Edward. “Chapter 4: Fool’s Gold: The Emerging Markets of the 1820s.” Devil Take the Hindmost: A History of Financial Speculation, Farrar, Straus, Giroux, New York, NY, 2000, pp. 96–121.

2.      Crosthwaite, Paul, et al. “Chapter 2: Navigating the Market (1800–1870).” Invested: How Three Centuries of Stock Market Advice Reshaped Our Money, Markets, and Minds, The University of Chicago Press, Chicago, 2022, pp. 41–88.

3.      Dawson, Frank G. The First Latin American Debt Crisis: The City of London and the 1822-25 Loan Bubble. Yale University Press, 1990.

4.      Disraeli, Benjamin. Lawyers and Legislators, or, Notes on the American Mining Companies. John Murray, 1825.

5.      Head, Francis Bond. “An Address to the Directors of the Rio Plata Mining Association.” Reports Relating to the Failure of the Rio Plata Mining Association, John Murray, London, 1827, pp. 3–44.

6.      Quinn, William. “Chapter 3: Marketability Revived: The First Emerging Market Bubble.” Boom and Bust: A Global History of Financial Bubbles, Cambridge University Press, 2021, pp. 39–57.

7.      Rippy, J. Fred. “Latin America and the British investment ‘boom’ of the 1820’s.” The Journal of Modern History, vol. 19, no. 2, June 1947, pp. 122–129.

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