4. The Panic of 1890 was a lesson which markets failed to learn yet again
In the late 1880s England’s Barings Bank – one of its largest – invested heavily in high risk ventures in Argentina. By November of 1890 Barings, faced with heavy debt because of the low return on its Argentinian investments, was at the point of insolvency. In those days there were no government insured accounts held by the bank, and those who had their money in accounts with Barings faced being wiped out. This included not only individual accounts, but corporate and government savings accounts. Insolvency by Barings would inevitably cause a chain reaction across the British banking system, followed by those on the European continent, and a complete meltdown of the world’s investment system was imminent.
William Lidderdale was the governor of the Bank of England, and recognized the potential international collapse which loomed. He organized a consortium of banks which included, among many others, the Rothschilds. Like Lidderdale, Nathan Rothschild recognized the potential for the entire western world’s financial system to collapse as a result of Barings’ shortsighted and ill-advised investment strategy in Argentina. The consortium of banks organized by Lidderdale and Rothschild guaranteed the debts held by Barings, preventing a collapse of the bank and the inevitable backlash, though Argentina, Uruguay, and Brazil suffered from severe economic downturns as a result of the credit machinations in London. The Panic of 1890 demonstrated the potential damage which could be caused by unregulated speculation by banks using their depositor’s money, though the lesson was soon forgotten by the banking industry once again.