The House of Rothschild, Volume 1

by Niall Ferguson

  On the other hand, the financial position of the restored Bourbon regime was less shaky than it appeared, and this helps explain the rapid rise in the price of rentes during 1817 and the first half of 1818 which made the loan so profitable for its contractors. Because of the great assignat inflation of the 1790s, France—unlike Britain—had more or less wiped out the accumulated debts of the eighteenth century. Its total public debt in 1815 stood at just 1.2 billion francs, roughly 10 per cent of national income—so much less than the equivalent figure for Britain that it amounted to a clean slate. It was therefore easy, once Baring had started the ball rolling, for France to issue further loans without in any way depressing the price of rentes. As the price of rentes rose, Baring was getting, as James ruefully observed, “money for nothing.” France’s resources were in reality “formidable” and the political situation stable: “If the Allies withdraw, France will remain quiet. Be assured that there is no party left here which could put up resistance to the Government, at least not soon.”

  The Rothschilds’ failure to secure the 1817 and 1818 reparations loans was therefore a costly defeat. The implication was clear: if they had stolen a march on other bankers in early 1814, now they had to face a determined effort by the Barings and Bethmanns to reclaim their earlier predominance in European public finance, as well as new competition from less established figures like Gontard and the Bavarian financier Adolph d’Eichthal.5 As Carl had put it in 1814, “The main thing is that people are hostile towards us because we have the business.” “We have enemies aplenty,” James lamented a year later, “though it is more a matter of envy than enmity. Every five minutes someone else is going to the [Prussian] minister and asks: ‘Why does Rothschild get given everything?’ ” It had been easier before, commented Carl, when the risks were greater, because there had been less competition. Indeed, James even acknowledged that, in seeking to exclude them from the reparations payments, the Viennese bankers were only “doing what the Rothschilds had done” over the subsidies. Baring seemed to pose the biggest threat at this stage. Not only did he and his associates “want to subject all of France according to their will so that they can do what they like”; they also posed a threat to Nathan’s position in London. As Amschel said, Nathan seemed to be “rather upset if somebody else does any business transactions with London. He feels that he more or less owns London.” It cannot have pleased him to hear it said “that [because of Baring] you don’t play any longer the first [role] on the Stock Exchange and that you are unable to fix the quotation” of stocks. However, the growth of competition was just as marked in smaller financial markets like Kassel, where the end of the war and the return of the Elector led to frenetic efforts to end the Rothschilds’ near-monopoly over his finances, built up during his years in exile, and to win a share of the Rothschilds’ “mountains of gold.”6 As James put it in early 1818, “The whole world is jealous.”

  The Rothschilds did not suffer competitors gladly. Indeed, they had a wide range of abusive terms for them, such as Schurken (scoundrels), Bösewichte (rogues) and Spitzbuben (rascals). Even before Waterloo, there had been much talk of “putting spokes in wheels” of rival “scoundrels” and “sharpshooters,” and dealing them “blows where it hurts.” The question in 1818 was how best to “hurt” Baring and Labouchère. Tradition has it that the brothers did so by means of a huge intervention in the market for rentes. First, they invested heavily in the new rentes being created under the Baring scheme. Then, just as the great powers met at Aix-la-Chapelle to negotiate the final reparations payments, they allegedly turned from bulls into bears, dumping rentes on the market with devastating consequences for prices. In this way, they decisively weakened Baring’s position, forcing him to call off the final loan which he had been on the point of making on behalf of France. There is no doubt that we need an explanation for the remarkable speed with which the Rothschilds outstripped their more established rivals. And it is true that Baring was acutely embarrassed by the sharp drop in rentes to a nadir of 60, and was saved only by the fact that so many of the ministers present at Aix—including Nesselrode, the Austrian Chancellor Prince Metternich and his Prussian counterpart Prince Hardenberg—had themselves taken shares, and therefore had a common interest in cancelling the final loan.7 However, no archival evidence has come to light to support the notion that the Rothschilds were directly responsible for the crisis.

  The brothers undoubtedly sought to join in the bull run in the French bond market after 1816. James held rentes worth 3 million francs (nominal) at the beginning of March 1817, and by the end of the month he had acquired a further 7 million, all bought on the assumption of a sustained rise. Soon he was inundated with orders to purchase rentes for Nathan and his London relatives too, though he himself still felt “in the dark” as to how long the rise could be sustained. It also seems quite likely, as Ouvrard later claimed, that James took advantage of the system of part-payment to maximise his speculative purchases. But there is no evidence of a concerted policy of selling at any time in 1818. When James did take profits, he took care that his sales should not be noticed, precisely to avoid weakening the market as a whole; and when rentes did weaken in the summer of 1817, the brothers actually made purchases to support the market. Indeed, it is from this period that we can date that keen preoccupation with the health of the rente, and any news which might affect it, which was to be a feature of his correspondence for the next fifty years. A year later, in July 1818, he saw no reason to question Laffitte and Delessert’s assumption that rentes would reach par by the end of the year.

  None of this should surprise us. The Rothschilds would have been taking a grave risk if they had sought to subvert the final “liquidation” of the French indemnity. In February 1818 Salomon explicitly argued against an attack on Baring: it would be counter-productive if people were able to say, “The Rothschilds organised a diversion, the loan fell through, the troops can’t be withdrawn.” In any case, Baring was an MP and had already asked enough awkward questions about Herries’s activities as Commissary-in-Chief. There were good reasons not to antagonise him. The best explanation for the downturn in the price of rentes during the Aix conference in fact lies in the policy of the Banque de France, which had fuelled the surge in rente prices after May by lending over-generously to the Paris banks. When a run on its reserves alerted the Banque to its mistake, it over-compensated by tightening its discounting terms. It was this contraction on the money market which temporarily halted the speculation in rentes and depressed prices. Once the Banque had been persuaded to relax its policy again, rentes recovered rapidly, though it was not until 1821 (with prices at 87) that sufficient confidence had been recovered to float the final reparations loan. Moreover, if the Rothschilds had hoped to benefit from Baring’s retreat from the French market, they were disappointed: the 1821 loan went to the Paris bankers Hottinguer, Delessert and Baguenault.

  In reality, it was British consols, not French rentes, which the Rothschilds sold, and they did so at the end of 1817, not in late 1818—making a profit in the process which more than compensated for any losses they may have suffered in the summer of 1815. As we have seen, at the end of that year Nathan had, at Herries’s recommendation, made substantial purchases of 3 per cent consols at prices of 61.1 and 61.5 as well as £450,000 of Omnium stocks at 107. Throughout 1816 he ignored his nervous brothers’ repeated advice to take profits, so that by the end of that year he held altogether £1.2 million (nominal) worth of consols. This must have been very nearly equivalent to the entire capital of the firm. Family opinion on this strategy was divided: cautious as ever, Amschel regarded it as “stupid . . . to invest one’s whole fortune in one single security” and continued to urge that Nathan sell, especially as he and Carl found themselves increasingly strapped for cash in Frankfurt. James was more enthusiastic—as he said, this single investment had already earned them “as much as a loan”—but he questioned Nathan’s assessment that consols would reach 80, and by April 1817 he too was urg
ing a halt. Those closer to New Court, however, joined in Nathan’s “spec” with their own private savings. Caroline, Salomon’s wife, had evidently caught the bug while staying with her brother-in-law: by August 1816, she was actually having dreams about consol prices reaching 86!—a revealing insight into the indirect participation of the Rothschild women in the family business in this period. In May of 1817, when the upward trend was momentarily checked, Nathan finally gave in to his brothers’ pleas by selling around £600,000, but he evidently did so with the greatest reluctance and moved quickly to reinvest even more before the rise resumed the following month. By July, with consols leaping to above 82 and a total holding of £1.6 million (nominal), Salomon had to acknowledge that his brother had pulled off another business “masterwork.”

  It was at this point that Nathan began to sell, realising profits of more than £250,000. Interestingly, this was five months ahead of the market’s final peak at 84.25 in December 1817 (see illustration 4.i) and this may explain why he delayed slightly before relaying the advice to sell to others. Even his brothers-in-law and his oldest client in the market, the Elector of Hesse-Kassel, were not tipped off until after Nathan had sold. As it became apparent that the market had indeed peaked—by 1820 prices were back below 70—Moses Montefiore hailed his brother-in-law’s coup:

  I am very happy to learn you make as good a Bear as you formerly did a Bull, you must have had some difficulty with my brother Abraham, indeed it is quite a new character for both . . . You have beaten your antagonists so frequently that I am surprised there are any so hardy to be found in the Stock Exchange to oppose you in any considerable operation.

  There is no simple explanation for the Rothschilds’ triumph over their rivals in the 1820s: but this great coup undoubtedly played an important part.

  What had made Nathan decide to dispose of his consols at the end of 1817? Part of the reason may have been a premature alarm sounded by his brothers in Paris about the possibility of war over Spain: not for the last time, the brothers interpreted any threat of armed conflict between the great powers as an argument for selling government bonds. But of greater importance was the invaluable inside information he was receiving about changes in British fiscal and monetary policy. This was the fruit of Nathan’s growing proximity to the Chancellor of the Exchequer, Nicholas Vansittart, as well as his brothers’ first direct contacts with the Duke of Wellington—“old Stiff-back”—in Paris. As the Rothschilds hastened to point out, it was not only they but the British government too which had benefited from the rise in consols. The surplus funds in the military chest which had been left over after Napoleon’s defeat had also been used to purchase £650,000 (nominal) of consols at 62 in 1816. Now that consols stood at over 82, the Treasury stood to make a profit of around £130,000. This good turn was clearly felt to deserve another: Nathan was tipped off about a funding operation—involving the issue of £27 million in new 3.5 or 3.25 per cent government stocks—which was bound to depress the market for 3 per cents. As Salomon’s letters at this time show, it was this inside information more than anything else which determined Nathan’s move:

  Vansittart is a very fine man, insofar as he gave you a hint of a forthcoming funding operation. He well knows that you were the only one who drove up the stocks, who lifted England’s credit, and that you are the great holder of stocks . . . Now it is time to work out a plan. We agree with you that in the case of a funding carried out . . . stocks will fall to 80 or even a little less . . . I assure you that the whole of New Court as soon as they get wind of it are going to be “bears” of millions.

  4.i: The average price of 3 per cent consols, 1780-1830.

  As he put it to an incredulous James: “Nathan’s relation with these gentlemen [of the Treasury] is such as between brothers . . . Our New Court gives me the impression of being like a Freemasons’ lodge. He who enters becomes a Stock-mason.” The significance of this remark will be returned to below.

  In fact, the operation Vansittart mentioned to Nathan ran into trouble because of mounting political opposition to the Chancellor’s financial policy. Indeed, Nathan’s sale of consols at the end of 1817 may have been one of the abuses which Vansittart’s critics had in mind when they accused him of being “at the Mercy of the Money Market” and fuelling “the inordinate spirit of gambling.” Vansittart’s task was in many ways a hopeless one. As noted in the previous chapter, the British public debt had grown to immense proportions—£900 million, or roughly 200 per cent of national income—as a consequence of the wars against France. But in 1815 the House of Commons defied the government by refusing to renew the wartime income tax (and the malt tax), causing an immediate loss of over £14 million in revenue. Faced with annual debt service charges of over £30 million, to say nothing of the continuing costs of the army and navy, the government had little option but to increase indirect taxes—of which the duty on imported corn or “Corn Law” was to become the most controversial—and to carry on borrowing.

  Vansittart’s strategy in 1818, which aimed at concealing the extent of the deficits he was running in order to boost consol prices, was to borrow short term by issuing exchequer bills, in order to continue making payments to Pitt’s sinking fund. This hand-to-mouth system undoubtedly suited those, like Nathan, who bought and sold both bills and consols. But it was criticised, given the inflationary consequences of issuing exchequer bills to redeem consols, by those political economists who regarded the continuing depreciation of paper money and the exchange rate in terms of gold as the principal post-war problem. Led within the government by William Huskisson and supported (after initial doubts) by Robert Peel, the proponents of the resumption of gold or “cash” payments by the Bank of England gradually gained the upper hand over Vansittart and the directors of the Bank itself. With the setting up of the “Secret Committee on the Expediency of the Bank Resuming Cash Payments” under Peel’s chairmanship in 1819, the “bullionists” had effectively won.8 Dismayed, Nathan sought to dissuade Liverpool from going back on to gold, even pursuing ministers into the country to make his case. But the Prime Minister’s mind had been made up, as he indicated to Vansittart in October 1819:

  Nothing can be more foolish than Rothschild’s following you, and intending to follow me, into the country. If his proceeding is known it can of course only augment the general alarm, and increase all the evils he is desirous of preventing . . . The point . . . upon which I feel most anxiety is the idea suggested by Rothschild, of a continuance of the Bank restriction. I am satisfied that no measure could be more fatal, and that the very notion of its being a matter for consideration would do harm . . . As to continuing the restriction from the dread of their diminishing their [the Bank of England’s] circulation too much, this would be a ground for perpetual restriction, and is the idea of all others that it was most necessary to combat last year. Let us therefore determine to stand upon our present system, and let no one entertain a doubt that this is our determination.

  Given the ultimate triumph of the gold standard in the nineteenth century, it is easy to dismiss Nathan’s position as special pleading. Yet Nathan’s opposition to cash payments was far from unjustifiable, and it was an error on the part of the bullionists and radicals to assume that he was motivated solely by self-interest. Nathan never opposed the resumption of cash payments as a matter of theoretical principle: he and his fellow bankers made a practical argument that the short-run effects of a deflationary policy would be economically destabilising, and that this might tend to run counter to the government’s goal of fiscal and monetary stabilisation. The Treasury official George Harrison was right to worry in October 1818 about the consequences of tightening monetary policy at a time when the budget remained unbalanced. As he said to Vansittart,

  Its effect upon our concerns and upon the Stocks may be very considerable—for such a proceeding would drive . . . our Agent [meaning Nathan] in all probability to become a Seller of his stock . . . and would inevitably affect the Funds more or less . . . We c
ould not with justice or propriety be pressing him to extend his accommodations to us, when the Bank refused to accommodate him by Discounts—as he would then be driven to become a Seller to a larger extent to enable him to meet our Wants.

  In fact, as we have seen, Nathan had already done most of his selling. But his brokers and their clients felt the effects of the government’s deflationary policies when he issued a new loan of £12 million for the government in the summer of 1819. The decision to stick to 3 per cents more or less precluded a rapid rise in the new stock at a time when consol prices were already in the doldrums not far above the issue price of 69. It was this link between monetary tightening and the continuance of government borrowing which he had sought to point out to Liverpool, who preferred to believe Baring that there would soon be “a reaction” (that is, a recovery) in consol prices. Similarly, in his evidence to the Committee of Cash Payments in 1820, Nathan did not deny for a moment that the depreciation of sterling and outflow of specie into foreign bonds was due in part to the suspension of gold payments. The key point was that the combination of tight money and a mountainous government debt was a perilous one for the economy as a whole: