This month, I’d like to take another story from Statesmen of the Confederate Cause by
Burton J. Hendrick to tell the tale of the $15,000,000 Cotton Loan.
Having failed to gain English and French recognition in the
first year of the American Civil War, the Confederate government found itself
in possession of 450,000 bales of cotton which it had purchased and held in order to create cotton shortages in the mills of Lancashire and northern
France. The Confederate government had hoped that the subsequent cotton shortage wouls cause such economic turmoil that those nations would ally through
necessity. Last month, we discussed why that did not come to pass.
As winter came to an end in 1862, these cotton bails could have become an extremely lucrative
product if it could be moved to Europe. However, the increasing effectiveness of the
Federal blockade did prevent its shipment overseas, particularly after April
1862 when Farragut captured New Orleans. Even so, the value of this stagnant cotton did offer the potential for future wealth which proved too tempting for European
speculators.
Frederic Emile Baron d'Erlanger |
The banker who rose to the challenge was a certain Ferdinand Emile Baron d'Erlanger,
of Erlanger et Cie in Paris. Erlanger offered to raise $25,000,000 in gold in
exchange for Confederate bonds guaranteed by the cotton bales then sitting in
Confederate warehouses. The success of this arrangement depended of course on
Confederate victory. In the summer of 1862, this seemed a very likely outcome
following a series of Confederate victories in the East and the predisposition
of European elites towards an eventual dissolution of the United States, a
country ruled as a democracy by rabble-rousing, venal politicians instead of a
titled elite.
After negotiations in which Judah P. Benjamin, then
Secretary of State, led the Confederate side, the resulting terms required the
Confederate government to redeem the bonds at face value. Erlanger et Cie would handle sales and would guarantee bonds at 77% of face value. The bonds would carry 7% interest
until redeemed. Unlike the majority of loans to stable governments, the
Erlanger loan demanded the Confederacy redeem these bonds at full value for
Mississippi Valley cotton at the rate of twelve cents per pound not less than
six months following the ratification of a treaty of peace between the United
States and the Confederacy.
Such was the sense among European investors that, following
the paucity of cotton for the duration of the American war, they would control
the European cotton market and thus reap an eight-to-ten-fold bounty on their
investment.
Erlanger had underwritten the entire loan at 77% of face
value; however, when the bonds became available for sale on March 18, 1863, demands
for subscriptions reached $80,000,000 in
the first week of sale, although only $15,000,000 had been put on sale.
Erlanger offered the bonds to the public at 90%, yielding an immediate profit
for Erlanger et Cie of $1,950,000, not including sales commissions. The value
of shares peaked shortly afterwards at 95.5%. Subscribers were required to pay
15% of their pledge upon initial sale and installments thereafter.
The furor continued into early April 1863. However by mid-April, values
began a period of downward fluctuations . The causes for this
downward trend have not been fully documented. Certainly Federal successes in
the Western theater, such as Union victories at Fort Donelson and Donelson,
Nashville, Shiloh, Murfreesboro, and New Orleans had some effect, but probably news of
these victories was off-set by Lee’s victories in Virginia over the same period, since Virginia became the more
widely-reported front.
The efforts of the Federal ministers to France and England, Charles F. Adams and John Bigelow, give a more plausible explanation. Little
documentation exists to identify specifically how the Federals worked to
devalue the loan shares but what does exist implies that William
Seward, Federal Secretary of State, issued instructions, not only to paint Jefferson
Davis as a “Repudiator”, one who had defended the default on Mississippi’s state
debt while the senator from that state, but also to purchase as many shares as
possible and then resell those shares at the lowest possible
prices. Their counter-schemes worked so successfully that concerns arose within
Erlanger et Cie that the investors would abandon their subscriptions altogether,
even forfeiting sums already paid.
These fluctuations continued through the spring and into
summer of 1863. Faced with the possibility of huge losses, Erlanger et Cie went to
work. In order to shore up the value of the shares, the company embarked on a
massive buying campaign. However, as bankers are wont to do, their plan did not
involve using their own resources. By employing coercive tactics on the
Confederate representatives, they used the sums already deposited by investors
in the Confederate loan to buy-back shares of the same loan. Ultimately they
used about $6,000,000 in gold for the buy-back campaign.
Having squandered $6,000,000 of the Confederate government’s
receipts, can you guess who were the greatest beneficiaries of the Confederate
bond offering? Following the buy-back, the Confederate Treasury obtained over $5,500,000 to purchase
European arms, ammunition, medicines, and other military supplies and to outfit
Confederate raiders.
It was the bankers who saw the greatest returns.
Not only did they collect $3,000,000 of the $5,500,000 from the Confederate
government in the form of bankers’ commissions and other contract requirements,
but the majority of the $6,000,000 used to buy-back shares went into the
private accounts of the officers of Erlanger et Cie, since they were the first
owners offered the opportunity to sell their shares back to the Confederate
government!
We can see a number of interesting outcomes from the scandal
of the Confederate Loan. First, the beneficiary of the loan, the Confederate
government, actually paid more in banking fees than they received from the bond
issue. Second, the Confederate Minister to France, John Slidell benefited personally through a
closer relationship to the Erlanger family. In October 1864, his daughter Margaret Mathilde Slidell married the Baron d’Erlanger, the very manager of Erlanger
et Cie responsible for the Confederate bond issue.
Lastly, we have a lesson in the nature of ethics in investment bankers which carries down to our own time.
Sean Gabhann
http://harperswarstories.com/harpers-war-stories/the-stories/
Sean Kevin Gabhann is a Vietnam-era combat veteran of the US Navy. He first became interested in American Civil War history during the centennial celebration and he owns an extensive library of primary and secondary material related to that war. He especially likes to write about campaigns in the West because of a fascination with the careers of U.S Grant and W.T. Sherman. Gabhann lives in San Diego, California.
Not that I really understand the ins and outs of financial speculating, but this reminds me of the early days of the western expansion of railroads and the railroad speculations/railway shares that made some people (who were in the right place at the right financial time) quite wealthy. I recall James Michener including the railroad/land speculators in his book Centennial.
ReplyDeleteKaye, Yes. I thought of the bankers of the Gilded Age as well. But the reason my mind was drawn to this topic was also because of the shenanigans on Wall Street in the past decade.
DeleteNaturally it was the bankers who received the greater amount of money from that cotton. Nothing has changed, has it? Money manipulates governments, public opinion, reputations, and values.
ReplyDeleteI did get a bit lost in the information, but even so, I found this bit of history fascinating.
I wish you every success with both your Civil War novels. They look so interesting and I love the covers. All the very best to you, Sean.
Sarah, I understand about getting lost in the manipulations. I had to read this section of the book several times, very slowly, before I was confident that I understood it enough to write it down!
DeleteThanks for the best wishes. I'm really happy with the way the plot in the second book worked itself out. God bless my writing group who made me work harder to go beyond a simple soap opera.
I read a article under the same title some time ago, but this articles quality is much, much better. How you do this.. blogi
ReplyDeleteThank you for this article. I found it very useful. Keep up the good work!
ReplyDelete1/13/21
ReplyDeleteHi, we too Thank you for this article. We found a very rare Confederate coin we are still writing about It is a 20 dollar Quadruple Cavalier coin that has Frederic Emile d'Erlanger company in the mix of the gold cotton bonds in early 1863 with the tie in of in J.P Benjamin proposal Jan 22, 1863.Before hand we found a tie in with this article above.
More work could make this site and are's very interesting for the future. Reply back at looking at the coinofglory.com we like to bring the story here with the context above. Great write up.
Steve & staff