Financial Crisis Final Paper

Topics: Monetary policy, Finance, Bank Pages: 3 (955 words) Published: April 3, 2015

Panic of 1890: The Baring Crisis

The Baring Crisis was a unique panic happened in Argentina during 1890 as it was related to sovereign debt. This financial crisis was not just affecting the country, but it was also affected some European countries like England and France. The name of the crisis itself came from one of the largest merchant bank in England, Baring Brothers & Co. Before the crisis happened, Argentina attracted a huge amount of foreign investors to invest and loan money to them. They got a large capital inflow through the foreign investors and used the money they had to finance long-term investment projects in infrastructure (Mitchener & Weidenmier, 2006). Everything worked so fine for Argentina until the government passed the Law of National Guaranteed Banks on 1887. This law gave permit to the banks to issue paper notes while the government gold bonds backed this act. This gave confidence for the foreign investors to invest more in Argentine bonds as the gold bonds backed their investment. Towards the end of the decade, a lot of negative situations occurred in the country. The stock of gold in the banks had decreased significantly and couldn’t afford to back the paper pesos. As this government ran a significant amount of budget deficit, the paper pesos were not enough to cover their internal and external debts. This lead to the series of failed coups, strikes and demonstrations by military leaders, which later makes the foreign investors unwilling to hold Argentine securities.

Earlier in 1890s, the real GDP for Argentina was at average 20 percent. During the panic in 1890 to 1891, the real GDP fell by 11 percent, and lead to Argentina’s default (Mitchener & Weidenmier, 2006). Politically, the government was in chaos as they failed to implement right policy to cover up the crisis. They tried both monetary and fiscal polices to solve this issue, but the inconsistency in their own policies make situation even worst. They implemented the...

Bibliography: Flores, J.-H. (2006). Econometric Laboratory. Retrieved April 2014, 2014, from A Macroeconomic Analysis of the Baring Crisis, 1880-1890: http://eml.berkeley.edu/users/webfac/eichengreen/e211_fa05/211_baring.pdf
Mitchener, K. J., & Weidenmier, M. D. (2006, September). The Baring Crisis and the Great Latin American Meltdown of the 1890s. Retrieved April 18, 2014, from Econometric Laboratory: http://eml.berkeley.edu/~webfac/eichengreen/e211_fa06/Mitchener.pdf
Paolera, G. d., & Taylor, A. M. (2001, January). Strainng at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stabilty, 1880-1935. Retrieved April 20, 2014, from The National Bureau of Economic Research: http://www.nber.org/chapters/c8837.pdf
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