It was probably the scale of Nathan’s purchases of bullion in London which first brought him to Herries’s attention. It may also be that some of the bills which were finding their way back to London through the Rothschilds were Wellington’s, having been sold on by his Spanish, Portuguese and Maltese bankers to Paris houses. And it is just possible that James was already using the bullion sent to him by Nathan to buy bills on Spanish and Portuguese houses which were then sent across the Pyrenees to Wellington. Although evidence for this assertion is scant, it is not implausible. After all, money had been sent in 1806 and 1807 from Spain’s American colonies to France by an even more circuitous route starting in Vera Cruz, heading north to New York and then crossing the Atlantic, via London, to Paris. Indeed, on one occasion Mexican piasters worth over 14 million francs were shipped across the Channel to the French Treasury by a British warship! Generally speaking, the profits to be made from such transactions were regarded as outweighing the benefits the enemy derived from the money itself. In addition, there was a degree of theoretical confusion as to the economic significance of such transfers of bullion, which helps to explain why the French authorities tolerated James’s activities in Paris and Bordeaux (about which they were quite well informed). Although some French police officials had their suspicions, Napoleon followed the advice of his Minister of the Public Treasury, François Nicholas Mollien, who argued that any outflow of bullion from Britain was a sign of economic weakness and therefore advantageous to France.
This was a bad miscalculation; on the contrary, the Rothschilds’ ability to relay specie across the Channel was about to become a decisive source of strength to Britain. On January 11, 1814, Nathan was officially charged with the task of financing Wellington’s advance through France. In Vansittart’s words, Herries was to “employ that gentleman [Nathan] in the most secret and confidential manner to collect in Germany, France and Holland the largest quantity of French gold and silver coins, not exceeding in value £600,000, which he may be able to procure within two months from the present time.” These were then to be delivered to British vessels at the Dutch port of Helvoetsluys, whence they would be relayed to Wellington via St Jean de Luz, near Biarritz. It was to be “distinctly understood by Mr Rothschild . . . that he is to take upon himself all risks and losses, which may occur, prior to the delivery on board His Majesty’s ship.” If successful, he would be entitled to a commission of 2 per cent on the sum delivered. But, at all costs, secrecy must be maintained. This was a breakthrough, in that it was the Rothschilds’ first official commission from the British government and it brought Nathan into direct contact not only with Herries—by March, he was “almost continually” in Herries’s office—but with Vansittart and the Prime Minister himself, Lord Liverpool.
Admittedly, the operation proved to be rather more difficult than Nathan had anticipated. Meyer Davidson, whom Nathan sent to Amsterdam, complained repeatedly about the short supply of suitable coins in the wake of the French occupation, and quickly concluded that new napoléons d’or (the imperial successor to the old louis d’or coin) would have to be struck if Nathan was to fulfil his contract. By the end of February Davidson had been able to accumulate no more than £150,000, “Yet this is like a drop of water in the ocean. Why? Because it is . . . an English government commission and the English government could make use of all the cash that exists on the continent and even this would not satisfy them.” Davidson began to fear that the transaction could not be carried out, and there was talk of reducing the target figure from £600,000 to half that amount.
Despite these difficulties, however, Herries was impressed. As early as February 22 Wellington was writing to thank Bathurst for “the supplies of money which are very ample.” By April Nathan and James were able to convert over £20,000 into guilders for immediate use by the British forces, and the Rothschilds continued to furnish the advancing army with money until the end of the year, when the government resumed normal methods of payment. As Herries told Sir George Burgman, the British paymaster in Amsterdam, “Rothschild of this place has executed the various services entrusted to him in this line admirably well, and though a Jew, we place a good deal of confidence in him.” One reason for Herries’s satisfaction was that the Rothschilds delivered substantial amounts of the cash to Helvoetsluys in advance of being paid by the government, leading some historians to assume that Nathan was using Prince William’s London stocks as collateral for large-scale borrowings in London and Paris. This is possible, but it cannot have been the brothers’ sole source of credit, given the size of the sums involved. As Neal has put it, Nathan was “financ[ing] the war against France with the resources of the continent”—merchants’ bills on London which the Rothschilds were buying up and converting into bullion, which they then sent to Wellington’s army on Herrries’s account. By the middle of May Nathan was owed as much as £1,167,000 by the government—a sum large enough to terrify his brother Salomon, and evidently more than even Nathan could sustain. As Herries told Drummond, his representative in France, he was
not surprised at the extreme solicitude of the brother in London to obtain money from you. They are now serving us to a very considerable extent by their credit and if we fail to supply [them] with funds to meet these engagements the weight is greater than any individual however rich could be expected to support. The brother here is doing the business remarkably well and seems capable of supplying one with money to any extent.
It was not only the British army which received money from the Rothschilds on Herries’s account in 1814. Of rather more importance—because potentially more lucrative—were the payments which had to be made by the British government to finance the military efforts of its less solvent allies on the continent. Such payments had previously been handled by banks such as Barings and Reid, Irving, but now Nathan, having won Herries’s confidence, was well placed to take them over. The only difficulty lay in persuading the recipient countries to place similar confidence in his brothers on the other side of the Channel. This was achieved most easily with Russia, rather less easily with Prussia and only to a limited extent with Austria. Smaller Allied states—including Mecklenburg and, predictably, Hesse-Kassel—also received money through the Rothschilds, as did the returning French monarch, Louis XVIII. The total amounts involved were huge. Altogether between 1811 and 1815 Britain paid around £42 million to her allies. The Rothschilds became involved late in the day, but swiftly established a dominant position. In June 1814 Herries listed the payments they had so far made to Prussia, Austria, the French King and the British army. Including money that had not yet been disbursed, the total was 12.6 million francs, and more was to come. Small wonder Lord Liverpool referred to “Mr Rothschild” as “a very useful friend.” “I do not know,” he told Castlereagh, “what we should have done without him last year [1814].”
It proved relatively easy to secure a substantial share of the Russian business. The agreement reached between Britain, Russia and Prussia at Reichenbach in June 1813 had promised a total payment of £1,333,333 to Russia and £666,666 to Prussia, partly in the form of interest-bearing treasury bills. However, the cash-strapped British government repeatedly deferred payment and it was not until the end of May 1814 that an agreement was reached which provided for fifteen monthly instalments of a million Prussian thaler each (in the form of interest-bearing drafts), two-thirds to Russia, one-third to Prussia. Gervais, the Russian diplomat charged with converting the subsidy into cash, initially turned to Hope & Co., seeking an advance on the first seven months’ payments and offering a discount of 2 per cent. But the Hope director Labouchère hesitated and the Rothschilds—represented ably by Salomon and James—snapped up the business. They offered not only to convert instalments worth 4 million thaler into louis d’or and ducats, but to deliver most of the money to Hamburg, Dresden and Warsaw, where it was urgently needed to pay Russian troops.
The Rothschilds’ terms were evidently attractive enough, especially in the initial absence of competi
tion. As James said, Gervais “needed cash, and soon,” and no other firm would risk delivering so much cash to remote Warsaw. It was also advantageous from a British viewpoint to let the Rothschilds handle the transaction, as they undertook to reduce the interest Britain had to pay and to secure a more favourable exchange rate from pounds to thalers than had originally been agreed. Indeed, James exuberantly claimed that “a better deal had never been made for [a] government.” “You can confidently tell Lord Liverpool,” he told Nathan with youthful bravado, “that this transaction is a masterpiece.”
It was a masterpiece in more ways than one. As their father had taught them, the brothers were always careful to make their terms attractive not only to governments, but also to the individual officials with whom they were negotiating. Thus, to ensure that Gervais acquired a personal interest in doing business with Rothschilds—to make him a reliable “friend” or “helper” of the house—he and other Russian officials were discreetly plied with money in the form of commissions and interest-free loans. This was, as the brothers themselves privately acknowledged, no more or less than bribery. Under the terms of a separate agreement with Russia, a 1 per cent commission went straight into Gervais’s pocket. “Our friend baksheesh” (“der Freund Schmiergeld”) had, as James and Carl said, played a vital role not only in clinching the deal, but in paving the way for future deals. For, as Davidson archly put it, “Now the Russian knows Salomon and Salomon knows the Russian.” Characteristically, the brothers had widely differing views as to how much Gervais should receive. Salomon knew—or thought he knew—Gervais’s price. On reflection, he felt James had given the Russian “too much of the profits” and “obviously [did] not understand how bribes are given”: the gift of a watch and some English stocks would have sufficed. But James dimissed this as “really stupid,” assuring his brothers that he would be able to secure an even bigger commission on the next Russian transfer: “The money given to Gervais makes all the difference and I happen to know the man.” Carl appears to have sided with James in this argument, but could not resist pointing out that bribing Gervais had originally been his idea.
Such payments to politicians and civil servants should not, of course, be judged by the standards of late-twentieth-century Britain, where holders of public office are forbidden to accept bribes, and Members of Parliament are obliged to declare their private business interests, consultancy fees and even gifts. As we shall see, bribery was common practice in most of Europe for most of the nineteenth century, and the Rothschilds frequently obliged the more venal politicians and civil servants they encountered with cash payments. To be sure, as contemporaries often remarked, “corruption” varied in its character and degree from place to place as well as over time. Even in 1814—long before the spread of Gladstonian notions of public probity—British officials were understood to be more scrupulous than Russian; or, rather, they were known to be more subject to parliamentary and press scrutiny. For this reason, the payments to Gervais were carefully concealed from Herries, and there was no question of Herries himself receiving similar sums. But more subtle ways could be found of taking his private interests into consideration. In July 1814 Amschel sent Nathan a letter from Madame Limburger relating to her illegitimate child—a letter he advised his brother to show to the child’s father, Herries. “It would be good [if you could],” he wrote, “because he may give you the Prussian and Russian business, as he would very much like the child to make some more money. And if the child gets a quarter of the profit, then we would have our profit, too.”
The Russian subsidy deal was indeed a Meistergeschäft—for the British government, for Gervais, and above all for the Rothschilds themselves. Taking into account their 2 per cent commission from Britain, an additional 2 per cent to cover costs and a further 4 per cent from the Russian government, their gross profit on the first tranche of 4 million thaler was of the order of 8 per cent. Later payments (of 3.7 million francs and 5.3 million thaler) yielded comparable returns. Other governments were equally willing to pay substantial commissions in order to convert their subsidies into ready cash. The government of Mecklenburg “needed money like bread,” James reported from Schwerin, and was willing to forgo up to 30 per cent of its 1.5 million thaler subsidy entitlement—and pay a 5 per cent commission—if the Rothschilds could arrange “immediate payment.” “They would do anything we want them [to do],” wrote James gleefully, “in order to obtain money quickly.” The returning French King, Louis XVIII, was also furnished with money by Rothschilds in the form of bills on Paris. There were equally easy pickings in Hesse-Kassel, where, following the departure of Dalberg and prior to the return of the Elector, a skeleton administration struggled to pay the costs imposed by Allied armies in transit. With the Russian Second Army Corps requisitioning already scarce grain and not a penny left in the War Chest, William’s officials turned in desperation to the Rothschilds for a 250,000 gulden loan. Initially intended to be for only six months, part of this loan had to be prolonged because of the virtual impossibility of raising adequate taxation from the “plundered” and “exhausted” populace.
By contrast, the Prussian subsidy business proved at once harder to secure and less lucrative. In part, this was because Prussian negotiators were less biddable than Gervais. The brothers made overtures to the Finance Minister Prince Bülow and to Prince Hardenberg’s adviser Christian Rother, but elicited only a lukewarm response, despite the positive impression made by Herries’s recommendation. James managed to secure three instalments totalling a million thaler, but the Prussians dismissed the 2 per cent commission he asked as too high. “There’s money to be made from Russia,” James suspected, “but none from Prussia.” Six months on, he saw no reason to revise that initial judgement: “There is generally no pleasure in doing business with the Prussians,” he grumbled as yet another bid was rejected. In the end, the brothers had to do without a commission altogether, and although the 3 per cent profit finally realised on this deal was better than had initially been expected, they had to console themselves with the thought that they had at least secured a foothold in Berlin, which might prove more profitable in the future. “At any rate,” James reflected, “we have now, thank God, managed to push our way into the business, and it will be of considerable use in bringing us into contact with the Prussian court.”
It proved harder still to “establish contact” with the Austrian court. Under the Treaty of Treplitz of 1813, the Austrians were to be paid a million pounds as a subsidy, and the Treaty of Chaumont of January 1814 increased the total by two-thirds, to be paid in monthly instalments of £138,888. After the French defeat, the total due was scaled down to £555,555. Again the Rothschilds put in a bid to handle part of the transfer, backed up as usual by Herries. The terms were deliberately generous: not only did the Rothschilds offer to waive any commission, but they offered to convert sterling into gulden at the rate of 8.48 to the pound. But Barbier, the Vice-President of the Austrian Treasury, and his superior, the Finance Minister Count Ugarte, rejected the offer in the belief that Viennese banks should be employed. A second bid to transfer monies to Austria from Belgium (to defray the costs of occupation) also fell through because the Austrians sought to attach unacceptable conditions to the Rothschild offer.2
All the diverse inter-governmental payments the Rothschilds succeeded in making in 1814 had one thing in common: in each case, there were at least two ways (and sometimes three) to make a profit. The first and most obvious took the form of commissions, which ranged, as we have seen, from as much as 8 per cent to as little as zero. The second—potentially more lucrative but also riskier—lay in exploiting the often rapid and large exchange rate movements which occurred in this period. This was how the otherwise unattractive Prussian transfer was made to yield a profit; and it seems to have been attempted on most of the other transfers too. Essentially, the brothers were able to take advantage of the variations in exchange rates from place to place, which reflected the absence—especially pronounced in wartim
e—of an integrated European foreign exchange market, and the effects of political uncertainty—also at a peak in 1814-15. On a given day, a draft or bill denominated in sterling might be worth quite different amounts in terms of gulden in London, Amsterdam and Frankfurt. Arbitrage transactions sought to exploit those differences by buying a currency cheap in one market and selling it dear in another. In the same way, the exchange rate of the thaler or the ducat could vary dramatically within a short space of time. Classic forward exchange speculation meant timing payments so that a particular currency could be bought when its exchange rate was weakest and sold when it was strongest.
The Rothschild brothers were singularly well placed to carry out such transactions. Not only did they have permanent bases in Frankfurt and London and semi-permanent offices in Amsterdam and Paris; individual brothers also continued to undertake business trips as far afield as Berlin and Prague. Moreover, thanks to their relationship with Herries, they had a large advantage over their competitors. For one of the main causes of volatility on the foreign exchanges was the very transfers of money from Britain to the continent which the Rothschilds themselves were being asked to undertake. Long before 1814, British observers had realised that large purchases of foreign currency with sterling bills tended to cause the pound to depreciate. The bigger the deficit on the British balance of payments—in effect, the more such unrequited subsidy payments had to be made—the more the pound’s exchange rate slid. It was precisely Nathan’s commitment to Herries to undertake the transfers with the minimum exchange rate depreciation which secured him the subsidy business in the first place; and the brothers never ceased to draw Herries’s attention to their success in this regard. (This was what James was driving at when he described the first major Russian transfer as a “masterpiece” from the British point of view.) At the same time, however, the Rothschilds were able to derive substantial benefits for themselves by exploiting the effects of their transactions on the various currency markets.
The House of Rothschild, Volume 1 Page 16
