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Updated February 11, 2023Bonnie Martin argues in her recent work on slave mortgages that this financial practice was the “invisible engine” of slavery. By offering an enslaved person as collateral, men could acquire an enslaved person, a plot of land, or other plantation product without having the full purchase price in cash. In addition to increasing the number of potential borrowers and the acquisition rate of slaves, mortgages enabled slaveholders to maintain their workforce in the fields while also exploiting the same enslaved men and women financially. Without necessarily exploiting an enslaved person’s labor in the field or selling an enslaved person outright, slaveholders could still reap a tremendous financial benefit as human property owners. According to Martin’s analysis of more than 8,000 mortgages issued after the American Revolution, enslaved people served as collateral for 41% of the loans and generated 63% of the capital.*
The Consolidated Association of Louisiana Planters (CAPL) used slaves as collateral to establish a lending institution. The Louisiana state legislature established CAPL in 1827, using the European brokerage services of Baring Brothers of London. European investors purchased slave mortgage bonds from US state governments. This led to an increase in slaves. In 1836, New Orleans had the most bank capital. Following Alabama’s example, other states supported banks that offered slave-based bonds to Europe.
The price of cotton continued to rise, and more money flowed into the slave economy, with increasing numbers of individuals in the Western world continuing to invest.
This caused a speculative second slave-related bubble in the Southwest (following the earlier documented South Sea Bubble), which burst in 1839 due to the South’s excessive cotton production. Consumer demand exceeded supply and prices began to decline in 1834, resulting in a recession known as the Panic of 1837. Investors and creditors called in their debts, leaving plantation owners in significant debt. They could not sell their enslaved labor force or land to pay off debts because, as the price of cotton declined, so did the cost of enslaved labor, and land. The toxic debt caused the majority of state-sponsored banks to fail, but investors still wanted their funds.
Following the economic downturn, state governments could have raised taxes to redeem the bonds, but their constituents voted against it, and the governments listened. They could have taken possession of the plantations, effectively ending the cotton industry. However, because the cotton industry held everything together, foreclosing on it was equivalent to foreclosing on the entire economy. So they opted for inaction, largely because the cotton industry was “too big to fail.”
Eight states, including Florida, defaulted on their debts, and as a result, Southern planters became dependent on Northern credit despite having three million slaves as capital. Northern capital journeyed south to purchase cotton, thereby establishing a new system. The Lehman Brothers (bankrupt in 2008) began as “factors,” lending money to slave-owners for future crops and slave mortgages. The term factory has its origins in the Portuguese word feitoria, the term used from the 15th century to designate a trading post on the coast of Africa. In the context of the transatlantic slave trade of the 19th century, a factory commissioned a locale that “produced” enslaved people and was managed by a “factor.”
Brown Brothers, a London-based bank, extended credit to these factors. Numerous household names in the financial services industry began their existence in this manner. The significance of cotton grown by West Indian slaves to the Lancashire textile industry led to the emergence of Liverpool cotton brokers who later rose to prominence in the US cotton broking industry. Slavery was inextricably intertwined with cotton production and cotton trade, spawning numerous parallel business streams.*