Part 2: The Crisis Unfolds

The Suspension of Convertibility

By late 1889, Argentina’s economic situation had deteriorated to the point where maintaining the gold standard had become impossible. The peso, officially pegged to gold at par, had been trading at substantial discounts in unofficial markets for months. Gold reserves had fallen to critically low levels as capital flight accelerated and foreign creditors demanded repayment. On December 19, 1889, the Argentine government announced the suspension of convertibility, formally acknowledging what market participants had already recognized.

The Immediate Aftermath

The suspension of convertibility marked the beginning, rather than the end, of Argentina’s difficulties. The peso immediately depreciated further, reaching a discount of approximately 150 percent against gold by mid-1890. This depreciation had severe consequences for Argentine debtors who had borrowed in gold-denominated instruments but earned income in pesos. The real burden of debt increased dramatically, creating widespread insolvency throughout the economy.

The banking system came under intense pressure as depositors sought to withdraw funds and convert peso holdings into gold or foreign currency. Several banks failed in the months following the suspension of convertibility, and even the strongest institutions faced liquidity difficulties. The guaranteed banks, which had expanded aggressively during the boom years, proved particularly vulnerable, with many ultimately requiring government intervention.

The real economy contracted sharply as credit conditions tightened and uncertainty increased. Construction activity, which had been a major driver of growth during the 1880s, collapsed almost entirely. Land prices fell precipitously, erasing the speculative gains of the previous decade and creating massive losses for investors and banks alike. Unemployment rose, and many recent immigrants who had arrived seeking opportunity found themselves destitute.

Political Crisis

The economic crisis triggered a severe political crisis that would result in the resignation of President Juárez Celman. Popular unrest grew throughout early 1890, fueled by economic hardship and resentment at the corruption and mismanagement attributed to the government. The Unión Cívica, a coalition of opposition forces, organized demonstrations that drew thousands of participants in Buenos Aires.

The Revolution of the Park on July 26, 1890, represented the culmination of political tensions. Though militarily unsuccessful—government forces suppressed the uprising after several days of fighting—the revolution fatally undermined Juárez Celman’s authority. Abandoned by his political allies and facing continued unrest, the president resigned on August 6, 1890. Vice President Carlos Pellegrini assumed the presidency with the daunting task of managing the economic crisis while restoring political stability.

Baring Brothers’ Exposure and Near-Collapse

The Extent of Baring’s Commitment

While Argentina descended into crisis, the full extent of Baring Brothers’ exposure was becoming apparent in London. The merchant bank had accumulated enormous holdings of Argentine securities, far exceeding prudent limits relative to its capital. Baring had underwritten £15 million in Argentine government and corporate bonds during 1888-1889, but market conditions had deteriorated to the point where these securities could not be placed with investors at acceptable prices (Ziegler, 1988).

The firm’s commitment to the Buenos Aires Water Supply and Drainage Company proved particularly problematic. Baring had agreed to underwrite £2 million in bonds for this enterprise, expecting to distribute them rapidly to investors. However, by late 1890, Baring found itself holding nearly the entire issue, with no prospects for distribution given the collapse of confidence in Argentine securities.

Baring’s difficulties were compounded by the structure of its liabilities. As a merchant bank, Baring relied heavily on short-term funding from other financial institutions. When rumors of difficulties began circulating, these counterparties began withdrawing their facilities, creating an acute liquidity crisis. By early November 1890, Baring faced the prospect of being unable to meet its obligations—a failure that would have catastrophic consequences for the entire financial system.

The Systemic Risk

The potential failure of Baring Brothers threatened to trigger a systemic financial crisis that would extend far beyond Argentina. Baring was not merely a large bank; it was one of the most prestigious and well-connected institutions in the City of London. Its failure would impose direct losses on numerous counterparties while destroying confidence in the broader financial system.

The interconnections among major financial institutions meant that Baring’s difficulties could rapidly spread to other banks. Baring owed money to virtually every significant bank in London, and many held Baring acceptances as liquid assets. A Baring failure would force these institutions to write down their assets, potentially triggering further failures in a cascading pattern.

Moreover, Baring’s collapse would likely precipitate a broader crisis of confidence in overseas investments. If such a prestigious institution could fail due to its foreign exposures, what did that imply about the soundness of similar investments held throughout the British financial system? The potential for panic-driven liquidation of overseas assets threatened to transform a single bank failure into a global financial crisis.

The Bank of England Intervention

Recognition of the Crisis

The governor of the Bank of England, William Lidderdale, learned of Baring’s difficulties on Saturday, November 8, 1890. Baring’s directors, recognizing that they could not meet their obligations without assistance, had approached the Bank seeking support. The situation they described was grave: Baring faced obligations of approximately £21 million, with insufficient liquid assets to meet them.

Lidderdale immediately recognized that allowing Baring to fail was not an acceptable option. The systemic consequences would be catastrophic, potentially triggering a financial crisis that would dwarf the panic of 1866 or any previous disturbance. Yet the Bank of England’s own resources were insufficient to absorb Baring’s liabilities—the central bank faced the challenge of organizing a rescue without possessing adequate means on its own.

The weekend of November 8-9, 1890, witnessed frantic activity as Lidderdale worked to assemble a support package. He consulted with the Chancellor of the Exchequer, George Goschen, securing government backing for the rescue effort. He also approached the major joint-stock banks and other financial institutions, seeking commitments to participate in a guarantee fund that would assume responsibility for Baring’s liabilities.

The Guarantee Fund

By Monday, November 10, Lidderdale had assembled the outlines of a rescue package. The major banks agreed to contribute to a guarantee fund that would assume responsibility for Baring’s obligations, preventing a disorderly failure. The initial fund totaled approximately £17 million, with the Bank of England contributing £1 million and soliciting the remainder from private institutions (Clapham, 1944).

The structure of the guarantee fund reflected careful attention to incentive problems. Contributing banks received a share of any eventual recovery from Baring’s assets, aligning their interests with the orderly liquidation of the firm’s portfolio. The fund also included provisions for additional contributions if initial estimates of Baring’s losses proved insufficient.

Critically, the rescue was designed to prevent immediate collapse while imposing costs on Baring’s owners. The firm was reconstituted as a limited liability company, Baring Brothers & Co., Ltd., with existing partners bearing substantial losses on their capital. This approach sought to maintain market discipline while preventing systemic contagion—a balance that would inform subsequent approaches to financial crisis management.

International Cooperation

The Baring rescue also involved significant international cooperation. The Bank of France provided £3 million in gold to the Bank of England, strengthening its reserves and demonstrating solidarity among central banks. The Russian government, which maintained substantial deposits at Baring, agreed not to withdraw these funds precipitately. These international contributions proved essential to the success of the rescue operation.

The role of the Bank of France deserves particular attention. France and Britain were geopolitical rivals in many respects, yet the French central bank recognized that a British financial collapse would have severe consequences for France as well. The gold loan demonstrated that shared interests in financial stability could overcome national rivalries—a precedent that would prove relevant in subsequent crises.

Contagion and International Effects

Spread to Other Semi-Peripheral Economies

The Baring Crisis did not remain confined to Argentina and Britain. Other countries that had received substantial British capital during the 1880s experienced financial pressures as investors reassessed risk and withdrew funds. Uruguay, which had developed in parallel with Argentina and shared many of its characteristics, faced a severe financial crisis that required restructuring of its external debt.

Portugal experienced a banking crisis in 1891 that, while having domestic roots, was exacerbated by the general withdrawal of British capital from peripheral economies. Greece defaulted on its external debt in 1893, following years of fiscal difficulties intensified by reduced access to international capital markets. Australia’s banking crisis of 1893, while primarily reflecting domestic speculation in land and mining, occurred in an environment shaped by post-Baring caution among British investors.

The pattern of contagion following the Baring Crisis illustrates how financial crises can spread across countries that share similar characteristics in the eyes of international investors. Countries dependent on British capital and specialized in primary commodity exports faced common pressures as investors reassessed the risks of such exposures. The concept of “semi-peripheral” status captures this shared vulnerability.

Impact on British Overseas Investment

The Baring Crisis marked a turning point in British overseas investment. While capital exports resumed after the immediate crisis passed, the composition and direction of these flows shifted significantly. Latin America, which had received approximately 20 percent of British overseas investment during the 1880s, saw its share decline in subsequent years. Investors displayed greater caution and demanded higher risk premiums on peripheral sovereign debt.

The crisis also affected the institutional structure of international lending. The merchant banks that had dominated overseas lending during the nineteenth century gave way to more diversified investment vehicles. The development of investment trusts and other collective investment schemes reflected lessons learned from the concentrated exposures that had nearly destroyed Baring Brothers.

The Crisis in Argentina: Deepening Depression

Economic Contraction

While London was occupied with the Baring rescue, Argentina was experiencing the full force of economic crisis. GDP contracted sharply in 1890 and 1891, with some estimates suggesting a cumulative decline of 20 percent or more from pre-crisis levels. The contraction was particularly severe in sectors that had expanded most rapidly during the boom—construction, real estate, and financial services.

The banking system’s difficulties deepened as the depression continued. The Banco Nacional, the largest bank in Argentina, failed in April 1891, creating further disruptions to credit and commerce. Provincial banks failed throughout the country, eliminating not only their shareholders’ capital but also the deposits of businesses and individuals who had trusted them with their savings.

The monetary situation remained chaotic as the government struggled to stabilize the currency while managing its fiscal crisis. Multiple competing currencies circulated, with significant variation in their acceptability and value. The confusion added transaction costs to economic activity and complicated efforts at stabilization.

Debt Restructuring

Argentina’s inability to service its external debt necessitated negotiations with foreign creditors. The Romero Agreement of 1891 provided temporary relief by reducing interest payments and extending maturities, but it represented an acknowledgment of effective default. Argentina’s reputation in international capital markets was severely damaged, restricting access to foreign finance for years to come.

The debt restructuring process illustrated the power asymmetries between debtor and creditor in the nineteenth-century international system. While Argentina succeeded in obtaining some relief, the terms reflected creditors’ superior bargaining position. The country committed to fiscal reforms and the resumption of gold payments, constraints that would shape economic policy for the remainder of the decade.

Social Consequences

The crisis imposed severe costs on Argentine society, particularly on the urban working class and recent immigrants who had arrived seeking opportunity. Unemployment reached levels unprecedented in the country’s modern history, and real wages declined substantially. Many immigrants, unable to find work, returned to Europe or sought opportunities elsewhere in the Americas.

The social disruption contributed to labor unrest that would shape Argentine politics in subsequent decades. The first major strikes occurred during the depression years, as workers organized to resist wage cuts and deteriorating conditions. The seeds of Argentina’s labor movement, which would become a major political force in the twentieth century, were planted during the post-crisis depression.

Assessing the Crisis Response

The Pellegrini Administration

President Pellegrini, who assumed office amid the crisis, pursued a policy of fiscal austerity combined with attempts to stabilize the monetary situation. Government expenditure was reduced sharply, even as the depression reduced tax revenues. The budget was eventually balanced, but at the cost of prolonged economic contraction and social hardship.

Pellegrini’s administration also undertook reforms aimed at preventing future crises. The guaranteed bank system, which had contributed to monetary disorder, was abolished. Efforts were made to strengthen fiscal institutions and improve the management of public debt. These reforms, while insufficient to prevent all future difficulties, represented learning from the crisis experience.

International Lessons

The Baring Crisis generated important lessons for international financial management. The Bank of England’s successful coordination of a private-sector rescue established precedents for crisis management that would influence subsequent episodes. The importance of the lender of last resort function, previously articulated by Walter Bagehot, received practical demonstration in the Baring rescue.

The international dimension of the rescue—particularly the Bank of France’s gold loan—suggested the potential for cooperation among central banks in managing financial crises. While the nineteenth century would not see the development of formal international financial institutions, the Baring episode demonstrated that ad hoc cooperation could prove effective in preventing systemic collapse.

Conclusion

The crisis of 1890-1891 unfolded through interconnected processes in Argentina and Britain. Argentina’s suspension of convertibility and subsequent depression reflected the unwinding of an unsustainable boom fueled by foreign capital and domestic speculation. Baring Brothers’ near-collapse demonstrated how concentrated exposures to a single country could threaten the stability of major financial institutions. The Bank of England’s rescue operation prevented a broader financial crisis but could not eliminate the real economic costs that Argentina would bear for years to come.

The final part of this series examines the long-term consequences of the Baring Crisis for Argentine development and draws lessons for understanding financial instability in semi-peripheral economies. The patterns established in 1890—boom, crisis, and painful adjustment—would recur throughout Argentina’s subsequent history and in other countries occupying similar positions in the world economy.

References

Clapham, J. (1944). The Bank of England: A History. Cambridge University Press.

Ford, A. G. (1962). The Gold Standard, 1880-1914: Britain and Argentina. Oxford University Press.

Joslin, D. (1963). A Century of Banking in Latin America. Oxford University Press.

Williams, J. H. (1920). Argentine International Trade Under Inconvertible Paper Money, 1880-1900. Harvard University Press.

Ziegler, P. (1988). The Sixth Great Power: A History of One of the Greatest of All Banking Families, the House of Barings, 1762-1929. Alfred A. Knopf.