Brown Brothers & Co. in Latin America

Global from the start, Brown Brothers has a long history in Latin America.

In the early 19th century, U.S. importers carried credits from the Browns’ Baltimore and Philadelphia offices to South America as payment pay for coffee from Brazil, copper from Chile, sugar from Cuba, and guano from Peru. By the 1830s, the Browns were underwriting journeys such as “Baltimore to Valparaiso and back” and “Philadelphia to Darién [in Panama] and back.”

In 1854, at the request of the British government, William Brown joined a project to build a Honduras Interoceanic Railway linking Atlantic and Pacific oceans, though nothing came of it. In the early days of the U.S. Civil War, with British neutrality in doubt, the firm opened an office in Havana, then a territory of Spain. The office closed within that same year, 1862. Two years later, James Brown acquired a controlling interest in the Pacific Mail Steamship Company, whose ships served destinations in Japan and China via Panama, Mexico, and San Francisco. Meanwhile, Brown Brothers’ “Travelers Letters of Credit” enabled travelers to obtain local currency from the firms’ network of correspondent banks throughout Latin America.

Geopolitics always colored the role of American bankers in Latin America, no more so than in the late 19th century. Eager to curb the influence of European powers in what it considered its own backyard, the United States moved to assert control over governments in the region—sometimes through military interventions, but more often by a policy of economic imperialism backed by force.

This “Dollar Diplomacy” was the backdrop for Brown Brothers’ two ill-fated ventures in Latin America.

The first came in 1911, when the US State Department brokered a loan to the government of Nicaragua. The following year, Brown Brothers & Co. and another New York merchant bank, J. & W. Seligman & Co., each advanced $750,000 in one-year notes at six percent, to be used for currency reform. Banco Nacional de Nicaragua, with Partner James Brown (great grandson of Alexander Brown) as president, was incorporated to serve as a depository and fiscal agent for the loan.

The credit seemed like a safe bet. The loan agreement stipulated that custom duties would be used to service the loan, and at that time Nicaraguan debt remained a sound investment in general. Unfortunately, Nicaragua struggled to repay the loan, and Brown Brothers would have to wait another seven years to recover its principal and interest.

In 1915, Brown Brothers embarked on a second Latin American venture, this time on its own initiative, when it took a 10 percent stake in the Mercantile Bank of the Americas, a consortium bank organized by Guaranty Trust Company.

Partner James Brown had envisioned the Mercantile Bank as an international bank with branches throughout Latin America. By the late 1910s, this vision had become a reality, with the Mercantile Bank having acquired or chartered several smaller banks in Argentina, Colombia, Cuba, Nicaragua, Peru, and Venezuela.

To oversee these branches, Brown Brothers proposed to engage British or other managers with knowledge of the region, but the president of Guaranty Trust, the majority shareholder in the bank, insisted on a “purely American” operation. This, as Brown Brothers Partner Thatcher Brown later concluded, would prove to be a “tragic mistake.”

The worst offender among the branches of the Mercantile Bank was the Banco Mercantil Americano de Cuba, where one manager had an exposure of $25 million in sugar amid a speculative bubble. Default by a powerful sugar planter, followed by the collapse of sugar prices in 1920, sent shock waves through the Cuban economy and left the banking system in disarray. Eventually, the Mercantile Bank of the Americas as a whole succumbed, and it would take Brown Brothers another quarter century to recover 84 percent of its original investment.

Critics assailed Brown Brothers’ role in these ventures as evidence of Wall Street’s outsized influence in government. Nicaragua, The Nation thundered in a 1922 editorial, was nothing more than “The Republic of Brown Brothers”—a claim for which it later apologized.

The story, of course, is more complicated.

The Mercantile Bank failed largely for lack of competent local managers that Brown Brothers had proposed from the start. The Nicaragua loan, meanwhile, was part of a larger policy of “dollar diplomacy” in which the United States government tried to safeguard U.S. diplomatic and commercial interests by guaranteeing loans to countries in Latin America and East Asia. (A 1916 treaty with Nicaragua, for example, gave the United States the right to build a Nicaraguan canal to rival Panama’s and a renewable 99-year option to construct a Navy base on the Gulf of Fonseca.) The U.S. State Department, not the banks, was the main architect of these financial arrangements. Indeed, State Department officials reserved a veto over key positions in the administration of the Nicaragua loan, which in effect gave them veto over the entire venture and leverage over the banks.

The actions of American bankers in Latin America in the late 19th and early 20th centuries, like those of the U.S. government, were controversial in their own time, and they remain so to this day. For the Partners of today’s Brown Brothers Harriman, they are a sobering reminder that no business operates in a political or social vacuum. Brown Brothers’ two Latin American gambits are both cautionary tales, not to be repeated.

 

For Further Reading

  • Experiences of a Century. Privately printed, 1918
  • Thatcher M. Brown, Brown Brothers & Co. Brown Brothers Harriman & Co. 1900–1950, typescript (1950)
  • John A. Kouwenhoven, Partners in Banking. New York: Doubleday, 1968.
  • Emily S. Rosenberg, Financial Missionaries to the World: The Politics and Culture of Dollar Diplomacy, 1900-1930. Durham: Duke University Press, 2003.
  • Joseph Smith, The United States and Latin America: A History of American Diplomacy, 1776-2000. London: Routledge, 2005.
  • Steve Striffler and Mark Moberg, eds. Banana Wars: Power, Production, and History in the Americas. Durham: Duke University Press, 2003.
  • Cyrus Veeser, A World Safe for Capitalism: Dollar Diplomacy and America’s Rise to Global Power. New York: Columbia University Press, 2002.

 

200 Years of Partnership

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