In the history of the United States the Louisiana Purchase is a hugely important event which doubled the size of the country. Less well-known is the way the Purchase was financed, which was through the issue of US government bonds in Amsterdam and London.
It was an event of the utmost importance in the development of international finance, involving for the first time on a significant scale the co-operation of the major European capital markets in financing the requirements of the New World. This was to become the hallmark of international finance in the nineteenth century.
The Territory of Louisiana formed the western boundary of the United States. It was a vast and unmapped area extending, it was thought, to cover one million square miles. It stretched across the entire Mississippi Valley, to the Rockies in the west, to Canada in the north and southwards to the Gulf of Mexico. Thirteen states were to be carved from it, either in whole or in part.
In 1801 Spain secretly ceded the Territory of Louisiana to France, but this only became publicly known in 1802 following the temporary outbreak of peace between Britain and France. The strategic implications of the transfer alarmed the US government, which feared French territorial ambitions over its own territory. President Jefferson dispatched an emissary to France. He was well received by Napoleon, who had already concluded that Louisiana would be a liability in any future war with Britain. So when the US government offered to buy Louisiana, France was a willing seller. It is a rare example in international history of land transfer through voluntary negotiation rather than by military action.
The question for the US government was how to raise the necessary finance. Such a large sum could neither be taken out of revenue nor be borrowed from US investors. It could only be found by borrowing in the European capital markets which were then dominated by Amsterdam and, to a lesser extent, London.
And so the United States government turned for help to the two leading houses in these markets, Hopes of Amsterdam and Barings of London. Both were already exceptionally friendly and well able to work together on this transaction, Hopes contributing their abundant expertise in issuing sovereign bonds and Barings providing their well established US connections. But the operation would even stretch them to the limit.
It is an operation of the utmost magnitude and importance, might stagger us in ordinary times and in the present (times) would hardly attract the serious attention of any.P. C. Labouchère writing from Amsterdam
Sir Francis Baring was more to the point when writing that ‘we all tremble at the magnitude of the American account’.
In January 1803, in the early stages of the transaction, PC Labouchère of Hope & Co wrote to Alexander Baring, son of Sir Francis, the senior partner of Barings, about the arrangements for the loan. He described The Louisiana Purchase as being 'of the utmost magnitude and importance'.
Soon both houses found themselves at the centre of negotiations between the United States government and the Republic of France, appearing to act as advisers to both parties!
We all tremble at the magnitude of the American account.Sir Francis Baring
Between them they exercised great influence, for example persuading the French government to scale down its asking price from FF100 million to FF80 million.
Barings and Hopes were well known to both the French and US governments and joined forces to determine a solution to financing the transfer. The sheer size of the financial operation caused them cold feet. ‘We all tremble at the magnitude of the American account,’ reckoned Barings’ senior partner, while the top man at Hopes thought it verged on the foolhardy. ‘It is an operation of the utmost magnitude and importance and might stagger us in ordinary times,’ wrote Henry Hope, ‘and in the present would hardly attract the serious attention of any.'
Everyone was jittery about secrecy. ‘I must request that no calculations may be made’, Francis Baring told Hopes, ‘and those sent to (the bankers’ representative at the negotiations) should be burnt... My nerves are equal to the operation but not to the imprudences which I see committed to paper.’ By the end of 1803 he was writing down even less ‘from a persuasion that our correspondence is being watched’.
The bankers’ representatives, Alexander Baring of Barings and Pierre Labouchère of Hopes, arrived in Paris in April 1803 to join America’s negotiators Robert Livingston and James Monroe and Napoleon’s minister, François de Barbé-Marbois. Because of the long journey time between London, Amsterdam and Paris and because of the prospect of letters being intercepted, they were granted full power to do a deal. ‘We must leave the decision to Alexander,' the bankers agreed, ‘who must be governed by circumstances, his own prudence and judgement’.
With negotiations under way, Sir Francis Baring wrote to PC Labouchère in April 1803 to discuss the pricing of the Louisiana bonds and the possibility of Alexander Baring travelling to America to undertake negotiations.
Alexander Baring proposed that the financing could only be achieved by the issue of bonds and, sitting between the two sides, counselled that France's initial demands for FF100 million were excessive. That sum could neither be afforded by the Americans, he said, nor provided by investors.
The price finally agreed was FF80 million (the equivalent of US$15 million). US$3.75 million (FF20 million) would be covered by the US government assuming responsibility for certain French government debts owing to US citizens, while the remaining consideration – US$11.25 million (FF60 million) – would be paid to France in the form of US government bonds.
Agreement, subject to ratification by both governments, was reached on April 30 1803. Having advised the Americans thus far, the bankers now sat alongside the French government and negotiated to purchase their Louisiana bonds for resale in the markets. That the bankers could operate in this way is testimony not just to their standing but also to the absence of effective competitors as, simply put, Hopes and Barings dominated the Amsterdam and London markets.
The bonds – which were some of the very first US securities issued in the international markets – carried six per cent interest payable in half yearly installments in Amsterdam, London or Paris and were redeemable between 1819 and 1822 (although by later convention earlier redemption was made possible). The exchange was fixed at 4 shillings 6 pence (22.5p) to the dollar.
By agreement of April 3rd 1803, the bankers undertook to purchase the bonds from the French government for FF52 million – a 13.3 per cent discount – in an initial installment of six million francs and then in 23 monthly installments each of two million francs. The first installment would be paid within 30 days of notice being received in Paris of one third of the bonds being handed to the bankers’ representative in Washington. These arrangements in place, Alexander Baring left for the USA to ‘complete the agreement in a regular manner’.
Alexander Baring wrote to his father, Sir Francis, from Washington in October 1803. He related the progress of his negotiations and the problems being caused by Spain.
Napoleon Bonaparte ratified the agreement for the sale of Louisiana in late May 1803 and in late October Congress agreed to its purchase.
It would be wise for this country to pay a million sterling for the transfer of Louisiana from France to America.Prime Minister Henry Addington
In November Congress also consented to the creation of US$11.25 million bonds. On 16th January 1804 the first tranche of the bonds was handed to Alexander Baring in Washington. Within 30 days of notification of this being received in Paris, which was not until March 1804, the first installment of FF6 million was paid to France by the bankers. But long before this Napoleon had become desperate for funds and in July 1803 the bankers had consented to a FF10 million advance.
His problems were not eased for long and in mid April 1804 agreement was reached for the installment payments, formerly to be spread over 23 months, to be compressed into a matter of days. By late April this had been completed and Barings and Hopes were discharged from their obligations to the French government. But this concession came at a price. The bankers received a further discount of FF1.65 million.
The precise outcome of the transaction for the bankers is not known but they seem to have fared well. All the bonds allocated to the markets were disposed of without difficulty and, it seems, at or above par.
We have lived long, but this is the noblest work of our whole lives. From this day the United States take their place among the powers of the first rank.Robert Livingston, 2 May 1803
As they would have been purchased from France at about 86.5% of face value, excluding the subsequent discount, and as the expenses of the issue would have been comparatively modest, much of the FF8 million (US$1.5 million) discount would have pocketed by Barings and Hopes. On the basis of the cost of US real estate at the time, the purchasing power of US$1.5 million would have enabled the acquisition of an area equivalent to the State of Nebraska!
For the USA the whole transaction was immensely successful. The country was now the unquestioned power in North America and any European threat to its sovereignty had been removed. No blood had been spilled. US credit in the international markets had been firmly established and was confirmed by the service of the Louisiana bonds with impeccable regularity and by their repayment as scheduled. This was largely out of customs revenue, much of which was collected in the port of New York and processed at the site of Federal Hall.
And while Amsterdam and London bankers had made handsome profits – although their risk had been high – the cost to America had been a mere US$15 per square mile of territory. The last words should be those of General Horatio Gates. ‘Let the land rejoice,’ he told President Jefferson in 1803, ‘for you have bought Louisiana for a song.' It was surely the greatest real estate transaction of all time.