Impeachment!The impeachment of Andrew Johnson was driven by differences between the Radical Republicans, who favored reconstruction, requiring southern states to enact new constitutions, ratify the Fourteenth Amendment and guarantee voting rights for black males and those who were sympathetic to the defeated rebels. Edwin M. Stanton was a staunch Radical Republican who had been appointed as Secretary of War under Abraham Lincoln and remained in office after Lincoln’s assassination. To ensure that Johnson did not get rid of Stanton, Congress passed the Tenure of Office Act in 1867 over Johnson’s veto. The Act required the President to seek the Senate’s advise and consent before removing any member of his Cabinet or any official who had required the Senate’s advise and consent before being appointed. Johnson suspended Stanton from office on August 5, 1867 and appointed Ulysses S. Grant in his place. The Senate reinstated Stanton in January 1868 and Grant resigned. On February 21, 1868, Johnson ordered the removal of Stanton from office and appointed Lorenzo Thomas as his successor. On February 24, the House of Representatives voted 126 to 47 to impeach President Johnson on eleven articles of impeachment. The Articles of Impeachment were presented to the Senate on March 4, 1868. The proceedings began on March 23 and the trial on March 30. At the time, there were 54 members of the Senate representing 27 states. The 10 Confederate states were not part of the Union. On May 16, the Senate voted on the Articles of Impeachment which required a two-thirds majority to pass and remove Johnson from office. Three Articles of Impeachment were voted on and each were passed by 35-19; however, this fell one vote short of the two-thirds requirement and Johnson was not removed from office. The vote weakened the President at the expense of the Congress, but the failure to remove Johnson from office reduced the likelihood that a President could be impeached for purely political reasons.
The MarketHow did the stock market behave during the trial? The GFD Rail index had begun the year at 11.07 and had risen to 11.65 by the time that Johnson removed Stanton from office on February 21. The market actually rose in price between then and March 4 when the Articles of Impeachment were presented to the Senate. The market declined until April 20 when the Rail Index dipped below 11; however, the market recovered to 11.66 when the first Senate vote failed to remove Johnson from office, and to 11.89 when the second vote failed to remove Johnson from office. The market moved up from there, peaked on June 27, and declined after that. The failure to find Johnson guilty clearly impacted the stock market, driving it down in price while Johnson was on trial in the Senate, but rising in value as the Senate failed to remove him from office. The Tenure of Office Act was repealed by the Senate in 1887. As Lyman Trumball of Illinois, who voted for acquittal, noted, the failure to remove Johnson from office preserved one of the President’s most important rights – to disagree with Congress without there being any consequences. Because President Johnson was opposed by the Radical Republicans, he did not receive any support at the Republican National Convention, and Ulysses S. Grant was chosen unanimously as the Republican candidate on the first ballot. Ulysses S. Grant went on to win the election in November and served as President for the next four years.
Figure 1. Argentina Merval Index Adjusted for Inflation, 1988 to 1991Similar stock market volatility occurred during the hyperinflation of 1976. The market declined 29% on March 19, 1976 and 18.2% on June 14, 1976. What is interesting is that all the past declines occurred during periods of hyperinflation. On the other hand, August 12’s decline was purely event-driven, caused by election results that could portend a return to high inflation and a possible default in Argentina. Nevertheless, on August 13, the Argentine market bounced back, rising 10% in one day. However, the Argentine Peso continued to decline falling to 60 on August 14 from 45 on August 11. Investors are expecting the worst from the elections due October 27. Fernandez has maintained his lead and it seems likely that he will become the next leader of Argentina. Macri’s attempt to bring Argentina back into the international financial system has apparently failed. Back in the 1920s, Argentina was one of the ten richest countries in the world as measured by GDP per capita, but since the 1940s, Peronist policies have caused stagnation and inflation that has pushed Argentina’s per capita income down to where it barely makes the top 50 today. Unless Argentina can get its economy moving again, it is likely to fall further.
Saddle UpThe 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 CrisisDuring 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 1925The 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 1883As 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 1895The 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.
Figure 1. GFD Indices Railroad Price Index, 1850 to 1860On 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.