The $15,000,000 Cotton Loan – a 7% Solution?

erlanger-cotton-bondThis 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 in Confederate bonds.

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 port in order to create cotton shortages in the mills of Lancashire and northern France, causing such economic turmoil that those nations would ally through necessity. Last month, we discussed why that did not come to pass.

Accordingly, as winter came to an end in 1862, the Jefferson government held possession of what should have been an extremely lucrative product if it could be moved to Europe. The increasing effectiveness of the Federal blockade did prevent its shipment overseas, particularly after April 1862 when Farragut captured New Orleans. Nevertheless, the cotton did present the potential for future wealth which proved too tempting for European speculators.

Erlanger,_Frederic_Emile

Baron Emile Erlanger

The banker who rose to the challenge was a certain Emile 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 September 1862, this seemed the likely outcome following the Confederate victories of the previous summer 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. The bonds could be purchased for gold at 77% of face value. They would carry 7% per annum 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, values began a period of downward fluctuations by mid-April. 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, and New Orleans had some effect, but that probably news of these victories was off-set by Lee’s victories in Virginia, the more widely-reported front.

A more plausible explanation is the efforts of the Federal ministers to France and England, Charles F. Adams and John Bigelow. Little documentation exists to identify specifically how the Federals worked to devalue the shares in the loan but what does exist implies that Wiulliam Seward, Federal Secretary of State issued instructions not only to paint Jefferson Davis as a “Repudiator” who had defended the default on Mississippi’s state debt while a senator from that state; but also, to purchase as many shares as possible in the loan 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. 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 want 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 the buy-back campaign.

The fluctuations continued until the European public realized the impact of the trio of defeats at Gettysburg, Vicksburg, and Port Hudson in late July 1863. Thereafter, the value of shares plummeted.

Having squandered $6,000,000 of the Confederate government’s receipts, can you guess who were the greatest beneficiaries of the Confederate bond offering? Confederate Treasury obtained over $5,500,000 to purchase European arms, ammunition, medicines, and other military supplies and to outfit Confederate raiders. However, it was the bankers who saw the greatest returns. Not only did they collect $3,000,000 of the above amount 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, James Slidell developed a closer relationship to the Erlanger family. In October 1864, his daughter Mathilde married Frederick Emile Baron d’Erlanger, the very manager of Erlanger et Cie responsible for the Confederate bond issue.

Lastly, it is interesting to speculate about the post-war politics surrounding a Confederate victory won in part through bonds held by the Federal government. These held a commitment to deliver $15,000,000 (plus 7% interest) worth of New Orleans middling cotton, at twelve cents a pound, not less than six months following the ratification of the treaty of peace.

Sean Gabhann

Book 1 of the Shiloh Trilogy

Book 1 of the Shiloh Trilogy

Book 2 Harper's Rescue Front Cover

Book 2 of the Shiloh Trilogy, available March 23rd, 2017.

 

 

Seward vs Toombs: British and French Recognition of the Confederacy

William

William H. Seward

As an amateur historian of the American Civil War, I believe myself to be well schooled in the military aspects of that war. Recently, a good friend gave me the book: Statesmen of the Lost Cause: Jefferson Davis and his Cabinet which he purchased at an estate sale for $0.50. Published in 1939, the book offers biographic sketches of these political leaders and draws out their characters through examples of their statesmanship. It sat in my To Be Read pile for several months because it appeared to be an academic tome written to conform to the publish-or-perish mandate of university professors between the World Wars. Frankly, I did not have a great deal of interest in the civilian side of the Confederate government. It was much more fun to do the final edits of Harper’s Rescue and get that in to Sundown Press.

Eventually, I did crack the front cover of the book and discovered a wonderful world of political farce nearly equivalent to the American political campaign of 2016 but for far more lethal stakes.

The book was written by Burton J. Hendrick, a Pulitzer-Prize winning biographer of politicians and other great men. It is written in the literary style of its time and reflects the prejudices of that time as well.  Hendrick also published a companion title: Lincoln’s War Cabinet in 1946.

Moving past the venerable nature of the prose, I was actually able to get into the stories of these men and I continue to learn of the political half of the War Between the States. For example, Jefferson Davis was not the first choice for most of the delegates to the Confederate Convention in Montgomery, Alabama. That honor goes to Robert A. Toombs, a former U.S. senator from Georgia. Davis himself felt he was better suited to the role of Secretary for War or Army Commander-in-Chief because of his military background and by virtue of be the Secretary of War during the Franklin Pierce administration.

Robert A. Toombs

Robert A. Toombs

In the event, however, Toombs’ candidacy was destroyed by late-night rumor that, instead of Toombs, the Georgia delegation would nominate Howell Cobb for the Presidency, a man under much suspicion for having sided with Unionists during a brief attempt to secede in 1850. The rumor was not true, however, the delegates from the other seceding states had voted for Davis before the error became known. As a consolation, Davis selected Toombs for the prestigious position of Secretary of State. It is this position that Toombs came against the Federal Secretary of State William H. Seward, best known for “Seward’s Folly”, the purchase of Alaska in 1867.

The greatest conflict between Seward and Toombs was the attempt by the Confederate government to achieve recognition of their independence from Great Britain, France, and Mexico. This was the most delicate task facing the new Confederate government. Success might mean immediate triumph for the Secession, since it would have involved the Federal government in war with Great Britain and France which would lift the blockade and open European markets to cotton, the Confederacy’s “white gold”. Continuation of sales of cotton to the European powers would give the Confederate government a financial strength which could have secured the Southern cause.

I’ve always know that recognition never happened and after reading this book, I now know why. For a political junkie, this is a fascinating story.

201701 Yancy Photo

William L. Yancy

From the outset, Confederate orthodoxy held that the loss of cotton imports from the Gulf states posed such an economic threat to France and, especially, Great Britain that these countries would become natural allies despite their avowed hatred of slavery. Toombs selected a legation of three representatives for the mission. Of the trio, William Lownes Yancy of Alabama, a former U.S. congressman and long-time pro-slavery man was the only man who possessed the essential reputation and distinction.

201701 Rost Photo

Pierre A. Rost

Pierre A. Rost of Louisiana, was a lawyer and judge, not known on the national stage. His chief recommendations were his French origin and a supposed familiarity with the Gallic tongue. Both of these supposed assets actually worked to his detriment. His broken creole-French became the object of ridicule in Paris and led to a second criticism that the Confederacy had sent him to patronize the French rather than send an “authentic” American.

 

A. Dudley Mann

A. Dudley Mann

Nor did A. Dudley Mann prove any acceptable to British diplomats. Here we see the hand of Seward who injected into the reports being sent from the British minister to the U.S. the notion that Mann was of low family origins and a man of bad character. These allegations were untrue, however, Mann’s actions in England showed that he lacked judgement and good sense and was too unobservant to understand events occurring around him.

 

Napoleon III of France

Napoleon III of France

In addition to the threat of loss of cotton to mills in Normandy, the Confederate approach to France included pandering to the ambitions of Napoleon III for an empire in the Americas. At that time, Mexico was in a state political disorder as a result of revolution. However, by attempting to conspire in a French invasion of Mexico, the duplicitous nature of the envoy revealed itself when the French learned of the Confederacy’s parallel mission to ally with Juarez’ government. The final, fatal flaw in the Confederate strategy to France was Yancey’s out-spoken advocacy and defense of slavery in the parlors of Paris, which most Frenchmen found abhorrent seventy years after the French Revolution.

Lord Palmerston of Great Britain

Lord Palmerston of Great Britain

In Britain, Seward had fouled the water well before the Confederate envoys arrived. In a truly astonishing chapter in American diplomacy considering the state of the United Sates in Spring 1861, Seward was able to convince the British Foreign Secretary that recognition of the Confederacy would mean a war with the United States. As a senator in the later 1850s, Seward had proposed that the United States could reunify a people fatally divided over the issue of slavery by finding a pretext to go to war with some European power. As Lincoln’s Secretary of State, Seward drafted an extremely bellicose statement of position in an open letter to be read by the American ambassador to the Foreign Secretary and posted in British papers. This letter announced under the Monroe Doctrine the intent of the U.S. to declare war on any foreign power which attempted to interfere with the suppression of the domestic enemies of the United States (the secession). Although Lincoln later moderated the tone and directed the U.S. ambassador to deliver it in a more respectful manner, Seward laid the groundwork for this presentation by inviting the British ambassador to a dinner where he read the full text of his original letter. Having been prepared by his ambassador, the foreign Secretary received the American ambassador’s presentation with deference. He had decided to pacify the high-tempered Yankees. Britain cut off all further formal correspondence with the Confederate delegates.

Given the fact that a war with Britain and France concurrent with an internal rebellion might eventually spell total disaster for the Federal government, Seward’s actions were a huge gamble but Seward knew his man. Fortunately, the Liberal government of Lord Palmerston was not prepared to engage in a trans-Atlantic war just five years after the end of the Crimean War, with the Wars of Italian Unification continuing, and nationalist revolts simmering in the Russian and Austrian empires and becoming a force in Germany. Especially, if such a war required an alliance with a rebellious population dedicated to the preservation of slavery.

Having failed in this most important diplomatic ploy, Toombs resigned as the Secretary of State and accepted a commission as a Confederate brigadier general. He led a four regiments of Georgians through the Peninsular and Antietam campaigns until he was wounded at Antietam. At the end of the war, he fled to Cuba and thence to Paris. In 1867, he returned to Georgia but never took the Loyalty Oath, thus ending his public life. He died in 1885 at 75 years.

William H. Seward continued as United States Secretary of State until 1869. He died three years later at 71 years.

Although I love to read about the military history of the American Civil War, I cannot help but be intrigued by these behind-the-scene high-stakes machinations and the subtle and overt factors which affect the outcome. It adds another, huge dimension to the story and begs for a new respect to these little-know personalities.

Now it’s time to speculate about the impact on Jamie Harper and the men of the First Iowa if things had gone differently and to figure out how to shoe-horn some of this information in future Harper’s War Stories.

So thanks, John, for a great read.

Sean Gabhann

Book 1 of the Shiloh Trilogy

Book 1 of the Shiloh Trilogy

Book 2 Harper's Rescue Front Cover

Book 2 of the Shiloh Trilogy, available March 23rd, 2017