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The Encilhamento

Brazil went through an economic bubble in the 1880s that burst in the 1890s during the first Brazilian military dictatorship.  Two finance ministers in Brazil adopted a policy of unrestricted credit for industrial investments in the 1880s.  This led to speculation, fraudulent IPOs, inflation and ultimately, a crash that lasted from 1889 to 1893.

Saddle Up

The word “encilhamento” means to saddle up or mount a horse and refers to jumping on a get-rich-quick scheme.  Brazil had slowly industrialized during the 1800s and founded corporations that developed rail transport, gas lighting, banks and steamships.  The “Land Law” of 1850 and the “Barriers Act” of 1860, which limited access to agricultural land by slaves and immigrants, had held back the country’s growth. Under the Encilhamento, big rentiers were better able to invest their money where it provided the highest rate of return.  Merchants, businessmen, financiers, politicians and tradesmen could invest their money in either local companies or in Brazilian companies that listed in Paris or London. A new banking act was passed in 1888 which reversed the 1860 Barriers Act, and in the same year, slavery was abolished after a long campaign by Emperor Pedro II. Changes in the Land and Real Estate Law occurred in 1889.  Government debt fell, reducing the issuance of government bonds and freeing up capital to flow into equities.  With all of these positive changes, stock prices in Rio de Janeiro started to boom. On November 15, 1889, a military coup d’etat established the first Brazilian Republic.  It overthrew the constitutional monarchy of the Empire of Brazil and Emperor Pedro II.  Unfortunately, this also marked the apex of the bull market and the Brazilian stock market declined over the next four years.  Ruis Barbosa was appointed the new Finance Minister under the Republic, and he instituted many of the changes he had promised to pop the bubble.  This included introducing a new banking bill and introducing a Central Bank to regulate the money supply.  

The Baring Crisis

During the 1880s, there were huge capital flows from London into South America with the current account deficit of Argentina averaging 20% of GDP between 1884 and 1889. During those years, the Argentine money supply grew at the rate of 18% per year, inflation averaged 17% and the paper peso depreciated at the rate of 19% per annum.  By the end of the decade, Argentina was the fifth largest sovereign borrower in the world; 40% of foreign borrowing was going toward debt service and 60% of imports were for consumption goods.  Argentina defaulted on £48 million in debt in 1890. The military tried to overthrow the Argentine government on August 6, 1890, but failed. After the crisis hit, real GDP in Argentina fell by 11% in 1890 and 1891. The collapse this caused in the price of Argentine sovereign bonds that resulted is illustrated in Figure 1.  

 Figure 1.  Argentina 5% Bond of 1884, 1884 to 1925

  The decline spread to Brazil. Barings Bank had invested heavily in Argentina and the default by Argentina pushed Barings Bank into bankruptcy in November 1890. An international consortium, led by William Lidderdale, governor of the Bank of England, the Rothschilds and most of the major banks in London put together a fund to guarantee the debt of Barings Bank. Failure to provide these funds could have led to the collapse of the British banking system.  The default affected Brazilian bonds as is illustrated in Figure 2.  

Figure 2. Brazil 4.50% Bond of 1883

  As the Baring Crisis spread throughout South America, the bubble that had built up in Brazil burst.  This led to a steady decline in equity prices in the years that followed. Brazilian share price steadily declined from 1889 to 1893 as is illustrated in Figure 3.  

Figure 3.  Brazil Stock Price Index, 1885 to 1895

  The Baring Crisis led to a world-wide depression which, although it was not as severe as some of the other depressions of the 1800s, affected Europe, the United States and South America.  Argentina, Brazil and Uruguay were all affected by Argentina’s default and the Baring Crisis that followed. The crisis spread to South Africa and Australia, and in the United States.  The global economy suffered throughout the 1890s.  No country was left unaffected.  Brazil may have suffered from the Great Depression of the 1890s, but so did every other country in the world.

The Ohio Life Insurance And Trust Co. and the Panic of 1857

The Panic of 1857 was one of the first global panics in financial history.  The failure of the Ohio Life Insurance and Trust Co. of Cincinnati, Ohio precipitated a world-wide panic that would last for the next two years. The Panic of 1857 traces its origins back to the Crimean War which was fought between 1853 and 1856 between Russia and the Ottoman Empire, France, Britain and Sardinia over the rights of Christians in the Holy Land.  During the war, many European agricultural workers were involved in the war, making Europe more reliant on agricultural imports and increasing Europe’s dependence on American crops. The American economy had boomed since the discovery of gold in California in 1849 and railroads expanded into the Midwest. American banks took advantage of this prosperity to increase their loans to farmers. The US stock market peaked in August 1853 and continued its decline until October 1857 by which time the stock market had fallen by 33%.  After the Crimean War ended in March 1856, European agricultural production picked up and American exports declined.  In January 1857, railroad stocks peaked and declined for the rest of the year as is illustrated in Figure 1.  Railroads lost over one-third of their value between January and August 1857.  The Delaware, Lackawanna and Western and the Fond du Lac Railroads were forced into bankruptcy.

Figure 1.  GFD Indices Railroad Price Index, 1850 to 1860

  On August 11, 1857 N.H. Wolfe and Co., the oldest flour and grain company in New York failed. The Ohio Life Insurance and Trust Co. had invested heavily in agricultural loans and many of these loans went bad. On August 24, a cashier at the Ohio Life Insurance and Trust Co. was revealed to have embezzled almost all the assets of the firm to sustain his stock market operations.  The bank’s New York office suspended payments on August 24, and the company failed. When this occurred, the bank’s failure threatened to precipitate the collapse of other Ohio banks or even cause a bank run.  The collapse of the Ohio Life Insurance and Trust Co. is illustrated in Figure 2 with the company’s stock price declining to zero in 1857. Bank failures followed in Liverpool. London, Paris, Hamburg, Oslo and Stockholm. The Bank Act was suspended in Britain on November 12, and Hamburg provided a loan to save Austria on December 10. The firm of Winterhoff and Piper, which was engaged in American trade, was suspended in Hamburg.

Figure 2.  Ohio Life Insurance and Trust Co. Stock Price, 1835 to 1857.

  The market bottomed out in October 1857. It took two years for the stock market to recover from the Panic of 1857 and begin its move upward.  The market rose for the next seven years.  It wasn’t until the Panic of 1873 that the market would see a similar financial panic ricochet through the world’s financial markets.

Events in Time Anniversaries: October 2019


25 years ago: October 1994

S&P 500: 472.35 (vs. 2938.79 in 10/2019) 10-year U.S. Government Bond Yield: 7.81% (vs. 1.56% in 10/2019) Gold: $383.85 (vs. $1501.25 in 10/2019) Oil: $18.165 (vs. $52.84 in 10/2019) GBP/USD: 1.6357 (vs. 1.229 in 10/2019) US GDP: $7,331 billion (vs. $21,340 billion in 06/2019) US Population: 260 million (vs. 328 million in 2019) 10/02/1994: The U.S. and Japan reach a trade accord after months of sticky disagreements. State Farm raises its loss estimate from the January California earthquake to nearly $2 billion, the largest of any insurer. 10/09/1994: U.S. forces deploy to the Persian Gulf as Iraqi troops move toward Kuwait. 10/11/1994: The Russian ruble plummets 21.5% versus the dollar on what would be called Black Tuesday. 10/12/1994: NASA loses radio contact with the Magellan spacecraft as the probe descends into the thick atmosphere of Venus (the spacecraft presumably burned up in the atmosphere). 10/19/1994: The Justice Department investigates alleged price-fixing on the Nasdaq market. 10/21/1994: North Korea nuclear weapons program: North Korea and the United States sign an agreement that requires North Korea to stop its nuclear weapons program and agree to inspections. 10/26/1994: Jordan and Israel sign a peace treaty. 10/29/1994: Francisco Martin Duran fires over two dozen shots at the White House (Duran is later convicted of trying to kill US President Bill Clinton).  

50 years ago: October 1969

S&P 500: 97.12 (vs. 2938.79 in 10/2019) 10-year U.S. Government Bond Yield: 6.94% (vs. 1.56% in 10/2019) Gold: $39.75 (vs. $1501.25 in 10/2019) Oil: $3.21 (vs. $52.84 in 10/2019) GBP/USD: 2.3946 (vs. 1.229 in 10/2019) US GDP: $1,030 billion (vs. $21,340 billion in 06/2019) US Population: 205 million (vs. 328 million in 2019) 10/01/1969: Concorde breaks the sound barrier for the first time. 10/05/1969: The first episode of Monty Python's Flying Circus airs on BBC One. 10/09/1969: In Chicago, the United States National Guard is called in for crowd control as demonstrations continue in connection with the trial of the "Chicago Eight" that began on September 24. 10/14/1969: Peace hopes bolstered market. Volume highest in nearly a year. The United Kingdom introduces the British fifty-pence coin, which replaces, over the following years, the British ten-shilling note, in anticipation of the decimalization of the British currencyin1971, and the abolition of the shilling as a unit of currency anywhere in the world. 10/15/1969: Vietnam War; The Moratorium to End the War in Vietnam is held in Washington D.C. and across the US. Over two million demonstrate nationally; about 250,000 in Washington D.C. 10/17/1969: Arthur Burns succeeded Martin as FRB chairman. 10/20/1969: Sugar strong on government ban of cyclamates. 10/22/1969: Willy Brandt (Social Democratic Party ) became Chancellor of Germany 10/28/1969: Australian federal election, 1969: John Gorton reelected as Prime Minister. 10/29/1969: The first-ever computer-to-computer link is established on ARPANET, the precursor to the Internet.  

100 years ago: October 1919

S&P 500: 9.6235 (vs. 2938.79 in 10/2019) 10-year U.S. Government Bond Yield: 4.71% (vs. 1.56% in 10/2019) Gold: $20.67 (vs. $1501.25 in 10/2019) Oil: $4.25 (vs. $52.84 in 10/2019) GBP/USD: 4.16 (vs. 1.229 in 10/2019) US GDP: $84 billion (vs. $21,340 billion in 06/2019) US Population: 104 million (vs. 328 million in 2019) 10/02/1919: U.S. President Woodrow Wilson suffers a massive stroke, leaving him partially paralyzed. 10/07/1919: Italian currency depreciates in value, the lire being quoted at 41.35 to the 1. British Currency Notes increase by 3,847,000 to 335,021,000. 10/09/1919: Black Sox Scandal: The Cincinnati Reds win the World Series. 10/15/1919: French Senate approves of Peace Treaty. Special rate of 4 1/2 percent on foreign money withdrawn. There was a reduction of 1,050,000 in Currency Notes to 338,436,000. Government securities reduced by 1,098,000, and the balance at the Bank of England was 120,000 higher. 10/17/1919: RCA is incorporated as the Radio Corporation of America. 10/28/1919: The U.S. Congress passes the Volstead Act over President Woodrow Wilson's veto, paving the way for Prohibition to begin the following January.  

200 years ago: October 1819

S&P 500/GFD US-100: 1.5716 (vs. 2938.79in 10/2019) 10-year U.S. Government Bond Yield: 4.545% (vs. 1.56% in 10/2019) Gold: $19.39 (vs. $1501.25 in 10/2019) GBP/USD: 4.48 (vs. 1.229 in 10/2019) US GDP: $727 million (vs. $21,340 billion in 06/2019) US Population: 9.379 million (vs. 328 million in 2019) 10/03/1819: Erie Canal first navigated from Utica to Rome, 15 miles. 10/11/1819: For order of Francisco de Paula Santander, Spanish colonel Jose Maria Barreiro and 38 Spanish officers were executed in Bogota.

Events in Time Anniversaries: September 2019


25 years ago: September 1994

S&P 500: 462.69 (vs. 3006.79 in 09/2019) 10-year U.S. Government Bond Yield: 7.62% (vs. 1.79% in 09/2019) Gold: $394.85 (vs. $1500.70 in 09/2019) Oil: $18.355 (vs. $58.19 in 09/2019) GBP/USD: 1.5775 (vs. 1.2524 in 09/2019) US GDP: $7,331 billion (vs. $21,338 billion in 06/2019) US Population: 260 million (vs. 328 million in 2019) 09/01/1994: The largest product-liability settlement ever, a $4.2 billion agreement between women and the manufacturers of silicone breast implants, is approved. 09/03/1994: Sino-Soviet split: Russia and the People's Republic of China agree to de-target their nuclear weapons against each other. 09/08/1994: USAir Flight 427, on approach to Pittsburgh International Airport, suddenly crashes in clear weather killing all 132 aboard; resulting in the most extensive aviation investigation in world history and altering manufacturing practices in the industry. 09/13/1994: An interstate-banking bill wins final congressional approval. 09/14/1994: The Major League Baseball season is canceled because of a strike. 09/27/1994: A money-market fund shuts down after its net asset value falls below $1 a share, hurt by derivative investments. The GOP signs a Contract with America promising large-scale reforms. 09/28/1994: The cruise ferry MS Estonia sinks in the Baltic Sea, killing 852 people.  

50 years ago: September 1969

S&P 500: 93.12 (vs. 3006.79 in 09/2019) 10-year U.S. Government Bond Yield: 7.51% (vs. 1.79% in 09/2019) Gold: $40.675 (vs. $1500.70 in 09/2019) Oil: $3.21 (vs. $58.19 in 09/2019) GBP/USD: 2.3826 (vs. 1.2524 in 09/2019) US GDP: $1,030 billion (vs. $21,338 billion in 06/2019) US Population: 205 million (vs. 328 million in 2019) 09/01/1969: Muammar Gaddafi (Military/Arab Socialist Union) became Chairman of Libya 09/02/1969: AFL-CIO President George Meany said only wage-price controls can halt inflationary spiral. 09/03/1969: Ho Chi Minh died. Concern about Ho's death caused heavy selling.  Power failure halted trading temporarily on the New York Stock Exchange. 09/05/1969: My Lai Massacre: U.S. Army Lieutenant William Calley is charged with six specifications of premeditated murder for the death of 109Vietnamese civilians in My Lai. 09/09/1969: In Canada, the Official Languages Act comes into force, making French equal to English throughout the Federal government. 09/15/1969: Possibility of more troop removals from Vietnam helped market rally. 09/26/1969: Abbey Road, the last recorded album by The Beatles, is released.  

100 years ago: September 1919

S&P 500: 8.941 (vs. 3006.79 in 09/2019) 10-year U.S. Government Bond Yield: 4.73% (vs. 1.79% in 09/2019) Gold: $20.67 (vs. $1500.70 in 09/2019) Oil: $4.25 (vs. $58.19 in 09/2019) GBP/USD: 4.18 (vs. 1.2524 in 09/2019) US GDP: $84 billion (vs. $21,338 billion in 06/2019) US Population: 104 million (vs. 328 million in 2019) 09/09/1919: Boston Police strike. 09/10/1919: The Treaty of Saint-Germain with republic of Austria. It confirms the break of Austria-Hungary. Its territory comes down to newly formed countries Austria, Hungary, Czechoslovakia, Poland, Romania, and the Kingdom of Serbs, Croats and Slovenes. South Tyrol with its German population and Trentino fall to Italy. 09/11/1919: U.S. Marines invade Honduras. 09/18/1919: Fritz Pollard becomes the first African-American to play professional football for a major team, the Akron Pros. The Netherlands gives women theright to vote. 09/22/1919: Major steel strike began that lasted until January 20, 1920. The steel strike of 1919, led by the Amalgamated Association of Iron and Steel Workers, begins in Pennsylvania before spreading across the United States. 09/28/1919: Race riots begin in Omaha, Nebraska.  

200 years ago: September 1819

S&P 500: 1.5876 (vs. 3006.79in 09/2019) 10-year U.S. Government Bond Yield: 4.615% (vs. 1.79% in 09/2019) Gold: $19.39 (vs. $1500.70 in 09/2019) GBP/USD: 4.5065 (vs. 1.2524 in 09/2019) US GDP: $727 million (vs. $21,338 billion in 06/2019) US Population: 9.379 million (vs. 328 million in 2019) 09/12/1819: Joaquin Jose Melgarejo y Saurin became Prime Minister of Spain 09/25/1819: Rev Marsden plants 100 vines, the first grapes grown in New Zealand.

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Our comprehensive financial databases span global markets offering data never compiled into an electronic format. We create and generate our own proprietary data series while we continue to investigate new sources and extend existing series whenever possible. GFD supports full data transparency to enable our users to verify financial data points, tracing them back to the original source documents. GFD is the original supplier of complete historical data.