From the start, then, the wealth of the Rothschilds derived from mobilizing and concentrating scattered but relatively large-scale resources in ways that drew previously untapped power from them. Other prominent family banks operated in somewhat similar ways. The Barings, for instance, who were still chiefly petty bill discounters when the first family members arrived in England from Germany in the mid eighteenth century, achieved their wealth by virtue of personal ties they were able to form with British political figures. These connections allowed them to make highly profitable loans to finance British participation in the French Revolutionary and Napoleonic wars, becoming more important even than the Rothschilds in English government finance. They also did very well by financing Jefferson’s Louisiana Purchase (together with their close associate the Hope Bank of Amsterdam). This project provided them with the contacts that allowed them to become the chief support of the French state in the difficult years following Napoleon’s defeat. In 1817 their loan allowed the restored Bourbon government to pay the war indemnity imposed by the Vienna settlement; to raise the money they sold bonds to people in their orbit of connections, much as the Rothschilds did. A new loan in the following year put the Barings Bank in danger, however, when bad harvests created difficulties in financial markets. What saved them was that a number of prominent European diplomats had taken shares in the loan, and through their influence its terms were renegotiated and payment put off for a year. An air of corruption surrounded these proceedings, and they were much criticized at the time, but as Philip Ziegler points out, “Certainly the consequences would have been dire for France and Europe if Barings had been forced to default at this crucial moment.” It was at this time that the Duc de Richelieu was reported to have called the Barings Bank the “sixth great power.”19
For their part the Rothschilds, despite their innovations, were determined to keep the power their growing riches gave them inside the family, holding their operations private and even regularly marrying their cousins so as to keep outsiders at bay. When they invested in commercial operations, such as railroads beginning in the 1840s, it was their own by then immense funds they offered up. The various branches cooperated in these and other activities, adding to the available resources, exploiting the differences in currency exchange rates between cities, and coming to each other’s aid at critical moments (such as in 1848, a catastrophe for the Vienna branch). Their ability to function in this way depended on having a means of rapid communication between cities, namely (quaint as it may now sound) carrier pigeons, whose advantages they recognized before others did. By 1850 the family was well-enough off that it could hew to generally conservative strategies, relying on steady returns on its vast capital to keep it in prosperity. Partly for this reason, they remained attached to their original forms of doing business into the second half of the century (and to the private character of their enterprise even longer), making them appear in many ways anachronistic and in decline (although the bank, its wealth, and the aura of its name, survives still).
One element in this situation was their suspicion of the telegraph, whose use in commercial affairs became possible at the end of the 1840s. The Rothschilds adopted telegraphy to be sure, but they often complained about it, both because it allowed for what appeared to them as suspect business practices, and because it imposed a new and more demanding rhythm. Doubtless some of their unhappiness can be chalked up to displeasure at being outdone by hungrier and more adventurous competitors, but their reactions testify to the changes under way all the same. In April, 1851, James Rothschild wrote to a relative that “yesterday a great many German scoundrels sold [French] railway shares in London with the telegraph,” and went on to complain that certain people sent a dispatch “every day at 12 … even for trivial deals, and realize [their profit] before the [B]ourse closes the same day.” James was famous for putting in long hours at his desk, but all the same he complained about the way the pressures of keeping up with telegraphic information made people “work much more.” Some years later, while on a vacation, he moaned that “One has too much to think about when bathing, which is not good.” Even in the next generation the family continued to complain about the telegraph, and to conduct business with longhand letters in a kind of nostalgic protest.20
The other growing practice the Rothschilds deplored was raising money in more public ways, both by selling shares in investment banks, and by offering government bonds directly to the public. Much has been written about the rivalries between the Rothschilds and the joint-stock banks set up in the 1850s by other families such as the Péreires and the Foulds, and most historians today believe that the contrast was as much one of personal style mixed with some competition and jealousy as of basic principle. All the same, the practices of the new banks exemplify an expansion of the circle of investors that corresponded to wider changes in European economies after 1850. The two chief examples of this under the Second Empire were Fould’s Crédit Foncier, set up in 1852 to raise capital for property development by selling mortgage bonds, and the Péreires’s Crédit Mobilier, established the next year as a vehicle to funnel the savings of small investors, some of them burned in the speculative crisis of the previous decade, into railway development (as well as some associated industries). James Rothschild criticized the first because its interest rates were too high, and also because it was regarded with suspicion in the countryside; in fact it served mostly to finance urban property development, often of a speculative sort. The second operated by selling short-term bonds to the public, using the proceeds to invest in whatever enterprises its directors chose. Like the Rothschilds’ mode of operation, this one still assumed that only bankers had enough knowledge to invest directly in business, and that share prices were too high to allow ordinary people to participate by themselves, but it was already some way along the road toward the more extended and anonymous later style of banking described by Louis Bergeron. It was just this that James Rothschild lamented, complaining that the directors of the Péreire bank would be “anonymous” and “irresponsible,” and could easily misuse their control over other people’s money. This may have been easy enough to say for someone able to operate almost entirely with his own funds, and may have reflected jealousy about the Péreire bank’s great success in the early boom of railway construction during the 1850s when its bonds reached great heights on the market, but James’s refusal to come to its aid when a financial crisis brought its collapse in 1867 may have reflected a genuine distaste for speculative investments on the part of somebody whose firm no longer needed to risk them.21
One reason to believe that James took such views seriously is that suspicions about rapid industrial development based on easy credit were widely voiced in France during the reign of the second Bonaparte, and particularly in the circles of the Banque de France, of which the Rothschilds were big shareholders and after 1855 directors. The Bank’s historian, Alain Plessis, believes that its higher circles still shared the hostility toward arrivistes expressed in 1840 by Adolphe Thiers (despite his being something of a parvenu himself). In Thiers’s view, easy credit encouraged incompetent and unscrupulous people to set up enterprises whose aggressive practices, such as flooding the market with cheap goods, endangered long-established and worthier ones, as well as the economy as a whole. In 1852 a member of the Bank’s governing body proclaimed that it should not encourage “speculation,” since the more of it there was, the more “nobody wants to remain in his own sphere. Everybody wants to try his luck and make his fortune in a day.” As Plessis puts it, people who thought in this way, and they dominated the inner circles of the Bank, possessed “an ancient and aristocratic conception of society.”22 Such attitudes fit well with those of contemporary French manufacturers and observers such as Auguste Mimerel noted in earlier chapters, and in many ways they retained a powerful presence in French life for a long time. But the practices represented by the Péreires and deplored by James Rothschild (whatever his reasons) were gaining ground, reflecting the more
extended and more deeply inserted networks of economic relations that were transforming French and European life.
A similar development is visible in government finance, the field in which the Rothschilds had made their fortune, and in which they still remained very active. Both the pressures to bypass their private wealth and power and the difficulties of doing so were illustrated in 1854, when Napoleon III offered bonds directly to the public to finance French participation in the Crimean War. A banker who cooperated with him, and who had been involved in a joint-stock bank for railroads, Jules Mirès, claimed at the time that such a practice “liberated the French government from a tyranny incompatible with the dignity of a dynasty born of universal suffrage,” but Bonaparte was unable to raise enough money, so that he was forced to turn to the Rothschilds like it or not. (They would be crucial to financing Bismarck’s wars in the 1860s too.) Before the fall of the Empire however all these practices were making evident that the conditions in which the Rothschilds had been able to achieve their remarkable position were passing. In 1866 the well-known journalist Émile de Girardin wrote that “the great [private] banking houses have lost their influence. They can still, when the political and monetary circumstances do not go against them (which is becoming rare) determine the great [financial] movements, but … from now on the universal suffrage of speculation will prevail over the influence of this or that banker.” As Niall Ferguson remarks at this point, the era of the great independent bankers was coming to an end, to be replaced by “the reign of the institutions, of the great financial companies.”23
An incident from the later history of Barings Bank highlights some of the points along this trajectory. In 1886–87 Baring Brothers did very well from organizing the public sale of stock in the Guinness Brewing Company. High demand for the shares sent the prices up, but many who sought to purchase them were disappointed, because the Barings, despite the public notice the sale attracted, favored their own friends and associates, giving them preferential access. To act in such a way was perfectly consistent with earlier practice, when it was assumed that private bankers were valuable precisely for the personal connections that allowed them to raise capital from a limited number of well-off investors. Such behavior began to appear suspect as the expanding public interest in financial questions generated by widening circles of investors caused people to see these matters in a different light. Even though the Barings did nothing illegal, to many people they seemed guilty of “something approaching sharp practice.”24
What made the earlier practices seem increasingly less legitimate, as Ron Chernow points out, was a changing distribution of knowledge. The moment when banks such as the Rothschilds and Barings could operate independently was one in which information about both investments and the sources of funds was in short supply; bankers knew about potential takers for bond issues through their personal connections, and the same kinds of ties linked them to those in search of capital. An operation like the Crédit Mobilier stood halfway between this situation and one in which the public possessed the more direct relationship to investments already assumed by many people at the time of the Baring sale of Guinness shares: the Péreire bank sold its bonds to the general public, but those who bought them needed to rely on the financiers to place the funds because they had few ways to acquire knowledge about firms and their projects themselves. As such information came to be more widely diffused through increasingly organized print and market networks, people no longer had to look to bankers to provide it. Using an American example, Chernow illustrates the change with the decision by the directors of the International Harvester Company in 1900 to provide details about their operations to potential investors, contrasting it with J. P. Morgan’s prospectus for the New York Central Railroad three decades earlier, which blithely declared that “the credit and status of the company are so well known, that it is scarcely necessary to make any public statement” – meaning that ordinary people wanting to invest in the business understood only the most general things about it, giving them no choice but to rely on those like himself to make judgments for them. The expansion of industry and publicity undermined this assumption, creating a set of more democratic expectations about who would have access to financial information. The basis was now laid for the spread of attitudes that would eventually lead to regarding “insider trading” as a criminal act.25
Surplus value, capital, and money
The importance of the post-1850 transformation on which we place emphasis here has been recognized by many others, but not every mode of thinking that has made a mark on the way we understand modernity and bourgeois life acknowledges its significance. Among those that do not is the one originally developed by Marx, and this seems an appropriate place to suggest that one reason why his analysis failed to provide the predictive power he and his followers hoped to find in it was that it based its understanding of capital and its role in modernity on a productive regime that would be transformed once the mid century crisis was past. Although I cannot claim to do full justice to Marx’s economic theory here, I think it can be shown that it never lost its connection to what Richard Price calls the “economy of manufacture,” as opposed to “modern industry.” Marx gave attention to economic questions from the 1840s, and he published the first volume of Capital, the only one to appear in his lifetime, in 1867 (Engels put out two more volumes, based on Marx’s manuscripts, after the latter’s death). Although the theory that powered his work during the 1850s and 1860s was significantly different from the ideas he had sought to develop before 1848, his understanding of the relations between workers and the means of production they set in motion had not fundamentally changed. His whole understanding of the life-cycle of capitalism was marked and, I think it fair to say, severely restricted, by this connection.
To see how this is so we need to begin with the central category in Marx’s analysis of capitalism, namely “surplus value.” Surplus value was Marx’s name for that part of the revenue manufacturers realize from selling industrial products that exceeds what the capitalist must pay out for the material and labor that go into the process. Surplus value is the source of capitalist profit and of the funds available for reinvestment: capitalism could not exist without it, much less expand and develop. The term does not appear in classical economics, whose theorists were interested simply in the distribution of revenue between the factors of production, that is the proportion that went to wages, to rent, and to profit, and the reasons for shifts in it. They did, however, develop the basic notion that the value of goods depends in the end on the labor required to produce them, and they recognized that an important source of profit and rent was that human labor is able to produce more than people require merely to subsist and reproduce themselves. Marx developed this recognition into a theory that revealed capital’s power to extract more value from production, and in particular from the labor of workers, than capitalists expended to employ it. This analysis gave Marx’s economic theory its sharp critical edge, by showing how capitalists exploited a hidden relationship that allowed them to pay workers less than their labor was actually worth. To do so seemed impossible from the perspective of classical economic theory, since it was premised on the belief that all commodities were exchanged in the market at prices that, however much they might fluctuate in the short term, were in the end controlled by the value of the labor required to produce them. How then could one commodity, labor, be regularly sold below its true value? The theory of surplus value was an answer to this question, explaining how capitalists managed to receive more value from their workers’ labor than they paid in wages.
Marx was justifiably proud of the solution he provided to this mystery, but his understanding of it owed a debt to a figure to whom he was close for a time, but of whom he later became a harsh critic, the French socialist and anarchist Pierre-Joseph Proudhon. He too had a theory of surplus value, and we need to consider it for a moment in order to bring Marx’s into clearer focus. Like Marx, Proudhon saw capitalist profit
as rooted in a difference between what employers paid workers and the value the latter’s labor actually produced. This difference, he believed, arose because the product workers could create when brought together in a group, whether a work gang or a factory, exceeded the sum of the individual values each of them could produce if working alone. When an employer pays each worker individually for the value of his day’s labor, he pays nothing for “the enormous collective force” generated by their combination. And yet society relies on the product of this collective force for much of what allows it to subsist and flourish, as well as for projects that are more ornamental. Proudhon noted: “Two hundred grenadiers set up the Luxor obelisk [in Paris in 1836] in the space of a few hours. Does anyone suppose that one man could have managed it in two hundred days? Yet in the capitalist’s reckoning the wages would have been the same. Now, cultivating a wilderness, building a house, or running a factory is like setting up an obelisk or moving a mountain.”26 The system that allows employers to pay individual workers as if their labor were isolated and not part of the collective that is able to produce such wonders assures both that capitalists grow rich and that workers remain in poverty.
The social and legal order that licensed the capitalist to regard the whole product of the laborers’ efforts as his property assured the continuation of this injustice, and it was this order that Proudhon had in his sights when he famously declared that “property is theft.” Despite its apparent generality, this slogan only genuinely applied to the property acquired by those who bought the product of collective labor; in other regards Proudhon was not an enemy of property, and his famous boutade made him sound much more radical than he was. His way of assuring that workers would receive the full value of their labor did not involve a revolutionary expropriation of property owners, but a new system of direct exchanges between groups of producers. Properly organized, these “mutualist” exchanges would allow all the workers who contributed to the overall value of a given product or quantity of them to receive a fair share of what each one’s labor was really worth. (Proudhon’s focus on such exchanges made his thinking akin to the Abbé Sièyes’s analysis of the economy as a series of mutual representations of each other’s labor by workers of various kinds that we discussed above.) In this way work, like politics, would be democratized, that is liberated from control by outside authorities (the state and the legal order it imposed), making way for a regulative principle that derived from the productive process itself. In the terminology we have adopted here, Proudhon’s mutualist exchanges were a way to make the network of economic relations “autonomous,” that is, organized according to principles that arose out of the proper understanding of the interactions on which it rested; so regulated they would no longer serve social ends imposed from outside.
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