The Amazing Archives of England's Oldest Private Bank: Junk Bonds from 1863

Pardon me, I meant 'High-yield'.

I've mentioned the archives of C. Hoare & Co. a half dozen times, from the scholarly work of Temin & Voth to the bite-sized ephemera of their archivist's "Manuscript of the Month".
In August 2011 I pointed to one in particular:

Posted October 2010 Coupon Bond, 7% Cotton Loan, 1863
That last little story is almost a parable, it has so many instructive principles and lessons.
We'll link to more next week.
Thanks to C. Hoare & Co. for sharing

Since then the bank has published a compendium, "Through the Years: Tales from the Hoare's Bank Archive" (50 page PDF) that brings together 40 of these tiny treasures.

Despite the attraction of the rest of the manuscripts, I keep going back to that 1863 Cotton Loan:

Although now officially designated Meeting Room 9, the bank’s newest meeting room is still universally referred to as the Coupon Room. The framed examples of stock certificates and coupon (bearer) bonds that hang on its walls serve as reminders of a not so distant past, when the bank routinely administered shares and bonds on behalf of customers, clipping the interest coupons and remitting them for payment. Many more bonds, some beautifully illustrated, form part of the bank’s archive. One of the mostinteresting relates to the 7% Cotton Loan of 1863, otherwise known as the Erlanger Loan.

In 1863 the United States of America was in the grip of civil war. Two years earlier, eleven Southern States had seceded from the Union and formed what became known as the Confederate States of America. But the Confederacy’s economy, based on agriculture rather than industry, was ill- equipped to sustain a war that required large numbers of weapons, ships and other goods

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Early hopes that Britain and France would join the fight against the Unionists were soon dashed, while a blockade of Southern ports prevented much needed supplies being able to enter the region.

Huge quantities of a new Confederate currency were printed, but this merely led to inflation, which in turn ate into the Confederacy’s dwindling revenue

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By the end of 1862 it was clear that a new approach was required if the South was to generate enough money to continue the war.

 

The most obvious solution was a European loan based on the South’s most valuable commodity: cotton. But the political and military uncertainty that surrounded the 

 

Civil War made European banks wary of committing themselves Both Rothchild’s and Barings’ refused to underwrite such a loan.

 

Eventually, in early 1863, the Confederacy managed to negotiate a contract with a Paris bank, Emile Erlanger & Co . Under the terms of the agreement, Erlanger & Co undertook to issue £3M or $15M (c. £129M today) of Confederate bonds, redeemable over twenty years.

The bonds would be made available to Erlanger and Co at $77 per $100, and sold on by them for $90, with the bank pocketing the difference as well as a 5% commission on each sale and 1% on each interest payment

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Investors were to receive 7% interest, payable in twice-yearly instalments, and two annual payments representing 1/40th of the principal sum

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Alternatively, the bonds could be redeemed for cotton at a rate of 6d per pound

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As cotton was then trading at four times that figure, the bonds offered speculators an attractive return, if they could figure out a way to beat the blockade

During the spring of 1863, Confederate agents worked hard to publicise the bonds. Offices were opened in Paris, Amsterdam,  Frankfurt, London and Liverpool, although ultimately it was British investors who were most attracted to the scheme.

 

The bonds themselves were issued in four denominations: £100 (Fr 2,500 or 4,000lbs cotton), £200 (Fr 5,000 or 8,000lbs cotton), £500 (Fr 12,500 or 20,000lbs cotton) and £1,000 (Fr 25,000 or 40,000lbs cotton).

 

The one shown here, illustrated with an image of Liberty clutching a Confederacy flag and leaning against bales of cotton, was fort he maximum £1,000.

 

Presumably it was purchased by a bank customer, although as coupon bonds are unregistered instruments the owner’s name does not appear on the certificate.

The signatures of four men do though: Emile Erlanger (loan banker), J Henry Schröder (London banker), Colin J McRae (Confederate agent) and John Slidell (Confederate commissioner)....

...MORE

See also:

 

Riding the South Sea Bubble
By PETER TEMIN AND HANS-JOACHIM VOTH

This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems....MORE 

The bank has opened their records to academics and Temin and Voth have taken full advantage.
Along with the above they published "Banking as an emerging technology: Hoare’s Bank, 1702–1742" in Financial History Review and "Private borrowing during the financialrevolution: Hoare’s Bank and its customers, 1702–24" in Economic History Review.