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THE BARING CRISIS AND THE GREAT LATIN AMERICAN MELTDOWN OF THE 1890s Kris James Mitchener Marc D. Weidenmier Working Paper 13403 http://www.nber.org/papers/w13403

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2007

We thank seminar and conference participants at UC Berkeley, the 2006 World Economic History Congressin Helsinki, and the UCLA Conference on States and Capital Markets in Historical Perspective for comments and suggestions. We also thank Nilisha Agrawal, Lydia Fung, Genna Tan, and Sean Hannley for research assistance, and Moritz Schularick for generously providing data. The National Science Foundation (NSF Grant 0518661) and Santa Clara University (Leavey Grant) provided financial support for thisproject. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2007 by Kris James Mitchener and Marc D. Weidenmier. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

TheBaring Crisis and the Great Latin American Meltdown of the 1890s Kris James Mitchener and Marc D. Weidenmier NBER Working Paper No. 13403 September 2007 JEL No. F34,F4,G15,N2 ABSTRACT The Baring Crisis is the nineteenth century's most famous sovereign debt crisis. Few studies, however, have attempted to understand the extent to which the crisis mattered for countries other than Argentina andEngland. Using a new database consisting of more than 15,000 observations of weekly sovereign debt prices, we assess the extent to which the Barings Crisis affected other emerging market borrowers and find empirical evidence of a regional crisis. We find that Latin American yield spreads increased by more than 200 basis points during the crisis relative to the rest of the world, even after controllingfor macroeconomic, trade, political-institutional factors, and other country-specific effects. Our evidence suggests that European investors may have sold off or reduced their holdings of Latin American securities in the wake of the Baring Crisis. Kris James Mitchener Department of Economics Leavey School of Business Santa Clara University Santa Clara, CA 95053 and NBER kmitchener@scu.edu Marc D.Weidenmier Department of Economics Claremont McKenna College Claremont, CA 91711 and NBER marc_weidenmier@claremontmckenna.edu

The Baring Crisis and the Great Latin American Meltdown of the 1890s

I. Introduction The widespread occurrence of emerging market financial crises in the past two decades has sparked interest among economists and investors in understanding their nature, causes, andconsequences. These episodes are often characterized by volatile capital flows, unsustainable or non-credible commitments to fixed exchange rates, currency mismatches, liquidity mismatches, and weak regulation and supervision of banking systems. Other studies have emphasized the role of contagion, the process through which a shock in one country can lead to a price movement in another country inexcess of the underlying fundamentals (Forbes and Rigobon, 2002; Forbes and Claessens, 2001; Kaminsky, Reinhart, and Vegh, 2003). For example, some research has pointed to the role of asymmetric information, informed and uniformed investors, and political variables in the transmission of the Asian financial crisis (Calvo, 1999; Drazen, 1999; Hahm and Mishkin, 2000; Radelet and Sachs, 1998). Otherstudies have noted the importance of common creditors in propagating crises. To reduce overall portfolio risk, financial institutions in the common-creditor country (one with large holdings of emerging market debt) reduce and/or sell off their assets in the entire region, especially in countries that have characteristics similar to the crisis country (Kaminsky and Reinhart, 1998; Dornbusch,...