Edward E. Baptist
Toxic Debt, Liar Loans, and Securitized Human Beings
The Panic of 1837 and the fate of slavery
Yet enslavers had already—by the end of the 1820s—created a highly innovative alternative to the existing financial structure. The Consolidated Association of the Planters of Louisiana (despite its name, the "C.A.P.L." was still a bank) created more leverage for enslavers at less cost, and on longer terms. It did so by securitizing slaves, hedging even more effectively against the individual investors' losses—so long as the financial system itself did not fail. Here is how it worked: potential borrowers mortgaged slaves and cultivated land to the C.A.P.L., which entitled them to borrow up to half of the assessed value of their property from the C.A.P.L. in bank notes. To convince others to accept the notes thus disbursed at face value, the C.A.P.L. convinced the Louisiana legislature to back $2.5 million in bank bonds (due in ten to fifteen years, bearing five percent interest) with the "faith and credit" of the people of the state. The great British merchant bank Baring Brothers agreed to advance the C.A.P.L. the equivalent of $2.5 million in sterling bills, and market the bonds on European securities markets.
The bonds effectively converted enslavers' biggest investment—human beings, or "hands," from Maryland and Virginia and North Carolina and Kentucky—into multiple streams of income, all under their own control, since all borrowers were officially stockholders in the bank. The sale of the bonds created a pool of high-quality credit to be lent back to the planters at a rate significantly lower than the rate of return that they could expect that money to produce. That pool could be used for all sorts of income-generating purposes: buying more slaves (to produce more cotton and sugar and hence more income) or lending to other enslavers. Clever borrowers could pyramid their leverage even higher—by borrowing on the same collateral from multiple lenders, by also getting unsecured short-term commercial loans from the C.A.P.L., by purchasing new slaves with the money they borrowed and borrowing on them too. They had mortgaged their slaves—sometimes multiple times, and sometimes they even mortgaged fictitious slaves—but in contrast to what Walsh had to promise Nolte in 1824, this type of mortgage gave the enslaver tremendous margins, control, and flexibility. It was hard to imagine that such borrowers would be foreclosed, even if they fell behind on their payments. After all, the borrowers owned the bank.
Using the C.A.P.L. model, slaveowners were now able to monetize their slaves by securitizing them and then leveraging them multiple times on the international financial market. This also allowed a much wider group of people to profit from the opportunities of slavery's expansion. Perhaps it was no accident that the typical bond issued by the C.A.P.L. and the series of copycat institutions that followed was denominated at $1,000, which was roughly the price of a field hand. For the investor who bought it from the House of Baring Brothers or some other seller, a bond was really the purchase of a completely commodified slave: not a particular individual, but a tiny percentage of each of thousands of slaves. The investor, of course, escaped the risk inherent in owning an individual slave, who might die, run away, or become rebellious.