The Hamburg crisis of 1857

The background of the crisis of 1857 in Hamburg was that trade had
expanded, particularly because the Crimean War had led to an expansion
of credit. Hamburg was the ‘all-English’ city of Germany, but had close
relations with the United States in sugar, tobacco, coffee, and cotton,
and with Scandinavia. When the deflationary tidal wave swept across the
Atlantic, Hamburg was inundated. The panic touched off by the failure of
Ohio Life on August 24 arrived in Hamburg three months later (following
price declines of 30 percent) with the suspension of Winterhoff and
Piper, a firm that was engaged in the American trade.45 Daily dispatches
from the British consulate in Hamburg by date tell the story:
November 21: Some of the leading merchant houses and two banks
plan for relief.
November 23: Two major houses engaged in the London trade fail,
and the Discount Guarantee Association grows more cautious in en-
dorsing Hamburg bills.46 On one authority the Discount Guarantee
Association is exhausted in three days.47

November 24: A Discount Guarantee Association (Garantie-

Diskontverein) is formed, initially with a capital of 10 million marks

banco, later raised to 13 million (about £1 million), of which the

sum of 1 million marks is to be paid in immediately.

November 28: The chamber of commerce and leading merchants

induce the senate to call parliament (B ̈ rgerschaft) to arrange to

u

issue government bonds in order to lend 50 to 662/3 percent of the

value of hypothecated goods, bonds, and shares to merchants in

distress.

December 1: With the suspension of Ullberg and Cremer, ten to

twelve houses in the Swedish trade have gone down. The Discount

Guarantee Association will not issue any more guarantees. Business

is at a standstill.

December 2: A suggestion is made to change the laws of bankruptcy

to enable creditors to share in attachment of goods.

December 7: A proposal is made to establish a state bank for dis-

counting good bills to the amount of 30 million marks banco (about

2

£2.4 million). The bank would advance government bills bearing 6 3

percent interest on mercantile bills of exchange. Parliament rejects

this, wanting instead to issue 30 million marks banco of paper cur-

rency as legal tender. The senate rejects this, insisting on clinging

to the silver standard.

In the end, a compromise was reached for a State Loan Institute fund

of 15 million marks that included 5 million marks banco of Hamburg

government bonds and 10 million in silver to be borrowed abroad.48

The story of the silver train (Silberzug) is recounted in Chapter 12 as an

example of an international lender of last resort.

One observer totaled the sums available for rescue operations to 35

million marks banco, which included 15 million in the Discount Guar-

antee Association, 15 million in the State Loan Institute, and 5 million

from the chamber of commerce. He compared this amount with 100

million marks banco of protested bills and noted that if merchants spec-

ulated with capital equal only to one-sixth the value of their goods, a 17

percent decline in prices of these goods would be sufficient to wipe out

their capital position. To the suggestion that the senate was 300 years

behind the times, he reported with approval the senate’s answer: The

merchants have been 300 years ahead of the times in issuing debt. State

help in these cases, he insisted, merely means assistance for speculation

and perpetuation of higher prices at the cost of the consumer.49

The most famous guarantee of liabilities was that worked out by William

Lidderdale when he was Governor of the Bank of England during the

Baring crisis of 1890. Similar guarantees had occurred earlier in Great

Britain. In December 1836 the private bank Esdailes, Grenfell, Thomas

and Company, which served as London agents for seventy-two country

banks, was in financial difficulties. The view was that this firm could not

be allowed to fail because of its relationships with the country banks;

moreover, its paper included all the best names in the City. The assets

of the bank far exceeded its liabilities, and the London bankers offered

guarantees. The Bank of England led the list with £150,000. Esdailes

survived, but only for two years.50

The guarantee was worked out as an alternative to a letter of indemnity

that permitted suspension of the Bank Act of 1844. The letter was offered

by the Chancellor of the Exchequer, Lord Goschen, to Lidderdale, who

refused on the ground that ‘reliance on such letters was the cause of a

great deal of bad banking in England.’

If Lidderdale refused to quiet the market by the usual means that

had been employed in 1847, 1857, and 1866, he was not one to let the

market take its medicine. In August 1890 he warned Baring Brothers that

the firm would have to moderate its acceptances for its Argentine agent,

S.B. Hales. Baring Brothers revealed its acute distress to Lidderdale on

Saturday, November 8. Fearful of a panic when Barings’ condition was

made public, the Bank of England met with the Exchequer on Monday,

November 10, turned down the letter of indemnity, prepared for the

problem by seeking assistance from foreign countries (a subject for

Chapter 12), and formed a committee headed by Lord Rothschild to

address the question of the large overhang of Argentinean securities in

the market.