After the Napoleonic wars, London emerged as the world’s leading financial center. In the early 1820s, English financiers, riding an economic boom, eagerly invested surplus capital in the newly independent nations of Latin America. At the same time, Latin American leaders were luxuriating in their newly acquired right to obtain capital from wherever they chose. The disruption of local credit networks by the independence wars made foreign capital especially attractive. The interest rates charged by foreign lenders were far lower than interest rates charged by domestic lenders. As long as they could obtain loans, Mexican leaders borrowed abroad.62
British bankers received substantial commissions, in the 4 to 8 percent range, for bond issues they arranged. They usually assumed little risk, since they sold bearer bonds to individual investors who bore the risk. Bankers often used their profits to finance merchandise exports to Latin America. The British press both favored and fueled the investment frenzy.63
Investors plunged into the Mexican bond market for a variety of reasons. Humboldt’s works, which continued to circulate, created the impression of great wealth available for the asking. In the mid-1820s, the general euphoria characteristic of financial market peaks led investors to feel there would no limit to profiteering. Bankers and agents for foreign nations had every reason to present rosy prospectuses. Investors assumed that debts backed by governments, as opposed to individuals, would always be safe. Investors assumed Mexico, with its abundant sub-surface wealth, to be an especially good credit risk.64
Mexico arranged its first bond issue through the banking firm of B. A. Goldschmidt & Co., which sold bonds with a face value of 16 million pesos. Goldschmidt charged an 8 percent commission on the transactions. Francisco Borja Migoni, a Mexican merchant long resident in London, also benefited from the bond sale. The Mexican government had authorized him to arrange the bond sale. As a monarchist and partisan of Iturbide, he had no scruples about defrauding the new republic and lining his own pockets.65
Initially, Borja Migoni’s cronies bought the bonds secretly for an artificially low price. The Mexican government received only the proceeds from this initial sale. An eager public then bought the bonds for 3.5 million pesos more than Borja Migoni’s collaborators had paid. Borja Migoni split the difference between the secret sale price and the public sale price with the initial purchasers. Of the 16-million-peso face value of the bonds, the Mexican government only received 5,866,157 pesos. The Mexican government pledged a third of its customs receipts to repay the 16 million pesos, plus interest.66
The first bond package failed to meet Mexico’s financial needs, so the Mexican government arranged for additional bonds to be issued by Barclay’s, another English banking house. Due to Mexico’s good image and its no longer relying on Borja Migoni, the Mexican government received
11.3 million pesos, or 85 percent of the face value of the bonds sold.67
The government allocated about 20 percent of these bond proceeds to liquidate claims by British merchants, 15 percent to finance the state tobacco monopoly, and 15 percent to the military. The other 50 percent paid salaries and pensions, which went overwhelmingly to military men.68
Mexican bond issues formed part of a boom in Latin American lending. Between 1822 and 1825, more than ?20 million of Latin American government bonds were sold in the London capital market. In addition, shares were sold in companies capitalized at more than ?36 million. These companies engaged in mining, commerce, and other ventures. Buyers were so eager to buy Latin American stocks and bonds that they purchased bonds of the non-existent nation of Poyais, supposedly located on the Mosquito Coast of Central America. An imaginative con artist offered the Poyais bonds.69
Mexico’s expenditure of bond money doomed it to default, since none of the funds enabled it to increase its export capacity. After spending the proceeds from the bonds, the government was saddled with debt liquidation as well as the everyday operating costs that it could not meet before the bond sales.70
Not surprisingly, Mexico defaulted on scheduled bond payments in 1827. Except for Brazil, by 1827 all Latin American nations issuing bonds had defaulted. Brazil could continue payments because its economy had been spared the ravages of an independence war and because of the ready market for its exported sugar.71
Default caused the trust and goodwill that had initially characterized Mexico’s relations with Great Britain to be replaced by disillusionment and resentment. Subsequent Mexican administrations had to rely on much more costly credit from local lenders, since, until Maximilian assumed power in the 1860s, foreigners refused to lend to Mexico.72
Mexico repeatedly renegotiated its foreign debt, adding unpaid interest to unpaid principal to arrive at new, higher, and even more unpayable totals. By 1850, the renegotiated total reached more than $55 million. To partially satisfy this debt, Mexico transferred $2.5 million of the indemnity funds received after the Mexican—American War to British bondholders. Payments to bondholders continued for three years, until the Revolution of Ayutla, when the government once again went into default.73
World History
