![]() ![]() As evidence of the information gaps during the bubble, Neal notes that mythical Poyais was able to borrow at yields barely higher than those charged real countries like Peru, Chile, and Colombia. ![]() So convincing was MacGregor that he was able to float a large bond issue on the London Stock Exchange in 1822. Upon his return to England, MacGregor toured the wealthiest drawing rooms of London touting the vast resources, civil service, and army of the entirely fictional Central American principality of Poyais (see map above). ![]() The starkest example was Gregor MacGregor, a Scottish adventurer who had fought for Venezuela in its war of independence against Spain. ” (Gayer, Rostow, and Schwartz 1953)Īs happens, the lax underwriting, poor information, and general speculative fever invited fraud. Even with favorable winds, a round trip from South America to London took six months, so new information was both slow and scarce. Neal blames this on investors’ “reach for yield” after returns on safe British Consols declined substantially following the end of the war, and on the inherent difficulty of assessing risk at such long distances. The underwriting of these emerging market securities was not always rigorous. The share price of one such company, Anglo Mexican, rose from £33 to £158 in a single month ( The Economist). English mining firms entered the fray as well by forming joint stock companies devoted to developing South American mineral interests. The sovereign bonds issued by these emerging nations, despite the nations’ lack of the tax structure needed to repay the debt, were all the rage in the early 1820s. These fledging nations were eager to develop infrastructure, as well as exploit their mineral resources, and their needs created a huge demand for funds and technical expertise from the financial centers in Europe, particularly London, which had replaced Amsterdam as the financial capital of Europe. ![]() The Latin American/Emerging Market ConnectionĪs Spain lost control of its South American interests, several independent nations emerged, including Chile, Colombia, Argentina, Peru, Mexico, and Guatemala. Lastly, with the monetary base increasing, country banks-small banks located outside of London-were issuing notes in the hinterland to finance investment in infrastructure, such as gas lighting, canals, and railroads, as well as stock market speculation (Bordo). Second, the Bank, with plentiful gold reserves accumulated in the drive to convertibility, was running traditional open market operations by buying up war bonds from the public in exchange for cash. First, the Treasury was conducting a version of market operations by issuing Exchequer bills to the Bank, then using credits at the Bank to retire high-interest long-term bonds held by the public. In Neal’s telling, liquidity was flowing from three sources. At that point, monetary policy started to become more expansionary. The resulting deflation, apparently unanticipated, had its usual pernicious effect of increasing real debt burdens, but it nevertheless led to successful resumption of convertibility in May 1821. With the end of the Napoleonic Wars in 1815, the Bank of England embarked on a tight monetary policy to resume specie convertibility at the pre-1797 parity ( Neal 1998, Bordo 1998). In this edition of Crisis Chronicles, we explore the Panic of 1825 and visit the mythical nation of Poyais. But it is perhaps best known for an infamous bond market swindle surrounding an entirely made-up Central American principality. And while the panic displayed many of the key elements of past crises we have covered-fluctuations in money growth, an investment bubble, a stock market crash, and bank runs-this crisis had its own twists, including a Bank of England that hesitated before stepping in as lender of last resort. Centered in London, the banking panic of 1825 has been called the first modern financial crisis, the first Latin American crisis, and the first emerging market crisis. ![]()
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