Cotton bonds: 20th century finance in 1863

erlanger cotton bond

The depth and breadth of the New York Times’ Disunion series never ceases to amaze. The articles focus on the War Between the States, but go far beyond examinations of battles and leaders, delving into an amazing array of topics, including the medical, legal and financial aspects of the 1861-65 period.

Recently, Disunion, which is written by a variety of historians, academics and other individuals knowledgeable on specific aspects of the war, focused on the ingenious concept of cotton bonds, financial instruments issued by the Confederacy in 1863.

In January of that year, the Confederate Congress secretly authorized bankers at the noted Paris-based financial house of Erlanger et Cie. to underwrite $15 million of Confederate bonds, to be denominated in British pounds or French francs.

“But unlike ordinary bonds backed only by the faith and credit of the issuing country, at the option of the holder an Erlanger certificate could be converted into a receipt for a pre-specified quantity of cotton,” Phil Leigh writes for Disunion.

This was important because Confederate currency was all but worthless in Europe at that point of the war.

The conversion rate for the cotton bonds was fixed at 12 cents a pound, regardless of the commodity’s market price, at the time about 48 cents. In addition, the bonds paid a 7 percent annual interest rate.

Continue reading

‘If it’s too good to be true…’

The $50 billion fraud allegedly perpetrated by Wall Street businessman Bernard Madoff is just the latest installment of the good ol’ Ponzi Scheme.

Named for Charles Ponzi, an Italian immigrant who fleeced thousands of Americans nearly a century ago, a Ponzi or pyramid scheme lures investors by paying abnormally high returns on money paid in by subsequent investors, rather than from the profit from any real business.

When the scheme ultimately collapses, which it always does, the most recent investors lose everything.

While the Madoff case may be one of the highest-profile Ponzi schemes ever, it’s by no means an isolated incident. In South Carolina alone, numerous examples have been uncovered in recent years.

Among the best known: Carolina Investors, a Pickens-based investment company, that cost 8,000 investors a total of $278 million when it collapsed in 2003; and former Charleston Southern economist Al Parish, who was found guilty earlier this year of defrauding investors of $66 million.

Keep your eyes peeled because it’s all but guaranteed that yet another Ponzi scheme will make the news before long. Folks just can’t seem to resist the lure of easy money.