The House of Rothschild, Volume 1

by Niall Ferguson

  Have the goodness to state to the Committee in detail, what you conceive would be the consequence of an obligation imposed upon the Bank to resume cash payments at the expiration of a year from the present time?—I do not think it can be done without very great distress to this country; it would do a great deal of mischief; we may not actually know ourselves what mischief it may cause.

  Have the goodness to explain the nature of the mischief, and in what way it would be produced?—Money will be so very scarce, every article in this country will fall to such an enormous extent, that many persons will be ruined.

  This was no exaggeration. Events would amply demonstrate that in embarking on monetary stabilisation before resolving the post-war fiscal crisis, the government was sailing into uncharted and potentially dangerous waters. As Nathan’s brother-in-law Abraham Montefiore shrewdly observed in 1821, defending the record of “the poor inoffensive Old Lady, Mr. V[ansittart]”: “The only really effective plan would be a good property tax properly and judiciously levied to reach only the opulent and those that can afford to spare part of their income, but unfortunately it so happens that these very persons are the law-makers themselves and their patriotism does not go so far as to reach their pockets.” The attempt to balance the budget with virtually no direct taxation at a time of monetary deflation would prove a recipe for instability.

  “The Chief Ally of the Holy Alliance”

  There was one obvious response to the difficulties experienced by the Rothschilds in London and Paris between 1815 and 1819: to seek new business elsewhere. The alternative was to assist with the financial stabilisation of the other great powers: Austria, Prussia and Russia, now grouped together, at the Tsar’s suggestion, as a “Holy Alliance,” as well as the various smaller states in Italy and Germany in their respective spheres of influence. Like France and Britain, the Central and East European states emerged from the war with dire financial problems which could be addressed only with the assistance of foreign capital. As Disraeli later put it in his novel Coningsby: “[A]fter the exhaustion of a war of twenty-five years, Europe must require capital to carry on peace . . . France wanted some; Austria more; Prussia a little; Russia a few millions.” Moreover, the policy of the Holy Alliance was bound to create additional financial needs from which the Rothschilds could also profit. For the principal aim of the Alliance was to avert a recurrence of the revolutionary “epidemic” which had caused such upheaval in Europe between 1789 and 1815—if necessary by military intervention. That implied further expenditure.

  The first major post-war loan which the brothers succeeded in making was to Prussia, which had ended the Napoleonic period with a debt burden of around 188 million thaler (£32 million) and continued to run large deficits in 1815, 1816 and 1817. Although the Frankfurt-based Rothschilds had arranged a small Prussian loan of 5 million gulden (£450,000) in early 1817 (much of which they placed with the Elector of Hesse-Kassel), the size of the floating debt reached 20 million thaler by the autumn, and the government began to contemplate raising a loan in London. The idea for such a loan in fact originated with the representative of the Prussian Seehandlung bank in London, a merchant named Barandon, who came close to scuppering the entire project when he rashly published details of Nathan’s proposed terms in January 1818. As these were singularly tough—the issue price was to have been 60, implying an interest rate of 8.33 per cent—they provoked an outcry in Berlin, where the local bankers hastened to put together a better offer. Berating Nathan for having involved Barandon, whose reputation in Paris was that of a bankrupt small-time commodities dealer, Salomon hastened from Paris to Koblenz for fraught talks with the Prussian State Chancellor Hardenberg, and then proceeded to Berlin, where he and Carl managed to undo at least some of the damage. With the connivance of the Prussian minister in London, the great educational and political reformer Wilhelm von Humboldt, Barandon was quietly sidelined—though it was not until after five days of continuous bargaining with the finance official Rother (now Director in the new Prussian Treasury) that an agreement was finally secured in London at the end of March.9

  Historians have long claimed that the Prussian government’s decision to raise a loan in London was intended to avoid the need for political concessions—such as the summoning of an assembly of the estates (Stände) or the creation of an independent judiciary—which the recourse to domestic sources of finance might have necessitated. However, the Rothschild correspondence tells a different story. From the outset of the negotiations, Nathan argued that any loan would have to be secured by a mortgage on Prussian royal domains guaranteed by the Stände of the domains concerned. When Hardenberg demurred, Nathan spelt out his reasons for wishing such a guarantee in a remarkable memorandum:

  [T]o induce British Capitalists to invest their money in a loan to a foreign government upon reasonable terms, it will be of the first importance that the plan of such a loan should as much as possible be assimilated to the established system of borrowing for the public service in England, and above all things that some security, beyond the mere good faith of the government . . . should be held out to the lenders . . . Without some security of this description any attempt to raise a considerable sum in England for a foreign Power would be hopeless[;] the late investments by British subjects in the French Funds have proceeded upon the general belief that in consequence of the representative system now established in that Country, the sanction of the Chamber to the national debt incurred by the Government affords a guarantee to the Public Creditor which could not be found in a Contract with any Sovereign uncontrolled in the exercise of the executive powers.

  In other words, a constitutional monarchy was seen in London as a better credit-risk than a neo-absolutist regime. Was this a subtle form of political pressure—a kind of financial liberalism, lending its weight at a critical time to the efforts of the Prussian reformers who had been pressing Frederick William III to accept some kind of system of representation? Or was Nathan merely justifying the differential between his terms and those obtained by France from Baring? James’s positive allusion to the (notional) ability of French deputies to go to the Treasury and “examine the books” suggests that the Rothschilds really did see some kind of constitutional control over public finances as desirable, if only as a way of reassuring British investors. Admittedly, Nathan was prepared to settle for much less than parliamentary control in the Prussian case: clause 5 of the final contract merely stated that “for the security of the creditors” there would be a special mortgage on the royal domains “which are wholly disposable according to the House[hold] Law of November 6, 1809, passed by H. M. the King of Prussia and the princes of the royal house with the assent of the provincial estates.” The allusion to the estates could hardly have been more oblique. On the other hand, the astonishing tone of some of Nathan’s letters to Rother—especially when Rother attempted to modify the terms after the contract had been signed—reveal his lack of respect for the Prussian regime:

  Dearest friend, I have now done my duty by God, your King and the Finance Minister von Rother, my money has all gone to you in Berlin . . . now it is your turn and duty to do yours, to keep your word and not to come up with new things, and everything must remain as it was agreed between men like us, and that is what I expected, as you can see from my deliveries of money. The cabal there can do nothing against N. M. Rothschild, he has the money, the strength and the power, the cabal has only impotence and the King of Prussia, my Prince Hardenberg and Minister Rother should be well pleased and thank Rothschild, who is sending you so much money [and] raising Prussia’s credit.

  Moreover, Nathan’s insistence on some kind of political guarantee had important political implications. There is an obvious link from Nathan’s negotiations with Rother to the subsequent Clause 2 of the “Decree for the Future Management of the State Debt” of January 17, 1819, which imposed a ceiling on the state debt, earmarked revenues from the royal domains to service it and declared: “If the state should in future for its main
tenance or for the advancement of the common good require to issue a new loan, this can only be done in consultation with, and with the guarantee of, the future imperial estates assembly.” Drafted by Rother himself, this meant that any future loan by the Prussian state would automatically lead to the summoning of the estates; in other words, it conceded the link between public borrowing and constitutional reform. Only by raising loans indirectly through the notionally independent Seehandlung could the Prussian state henceforth borrow money without summoning the estates. This explains why, of all the German states, Prussia borrowed the least in the 1820s and 1830s and why, when the policy of retrenchment broke down in the 1840s, the consequences were revolutionary.

  Whatever its significance for Prussian politics, the 1818 Prussian loan was without question a watershed in the history of the European capital market, as contemporaries came to recognise. For Nathan’s demand for some kind of political security was, in financial terms, probably the least important of the conditions he attached to the loan. Firstly, the loan was to be not in thaler, but in sterling, with the interest payable (half-yearly) not in Berlin but in London. Secondly, there was to be a British-style sinking fund to ensure the amortisation of the loan (though Rother managed to get rid of Nathan’s initial stipulation that it take the form of £150,000 of British consols). This deliberate Anglicisation of a foreign loan was a new departure for the international capital market. The Baring French loans had paid interest in francs in Paris, with attendant inconvenience and exchange rate risks for British investors. Now it was much easier to invest in foreign funds; and the fact that throughout the century all foreign government bonds paid higher yields than British consols meant that people did. The Times did not exaggerate when it later described Nathan as “the first introducer of foreign loans into Britain”:

  for, though such securities did at all times circulate here, the payment of dividends abroad, which was the universal practice before his time, made them too inconvenient an investment for the great majority of persons of property to deal with. He not only formed arrangements for the payment of dividends on his foreign loan in London, but made them still more attractive by fixing the rate in sterling money, and doing away with all the effects of fluctuation in exchanges.

  Moreover, the loan was issued not just in London but also in Frankfurt, Berlin, Hamburg, Amsterdam and Vienna. In other words, it represented a major step towards the creation of a completely international bond market. In his book On The Traffic in State Bonds (1825), the German legal expert Johann Heinrich Bender identified this as one of the Rothschilds’ principal contributions to modern economic development: “Any owner of government bonds . . . can collect the interest at his convenience in several different places without any effort.” Henceforth, an investor could receive the interest on Austrian metalliques, Neapolitan rentes or any other Rothshild-issued bonds from any of the Rothschild houses. In stipulating these conditions, Nathan not only succeeded in making the Prussian loan attractive to British and continental investors; he also established a model for such international bond issues which would swiftly become standard.10

  Although the terms of the loan were heavily criticised in Berlin (not least by the bankers there), Humboldt and Rother were impressed. Nathan, Humboldt reported to Hardenberg, was not only “the most enterprising businessman here”; he was also “dependable . . . fair, very upright and understanding” in his dealings with governments. Rother went further: “The Rothschild in this country . . . has an incredible influence upon all financial affairs here in London. It is widely stated, and is, indeed, close to the truth, that he entirely regulates the rate of exchange in the City. His power as a banker is enormous.” His reputation in Berlin firmly established, Nathan was able to secure a second loan (to the Seehandlung) in 1822 for £3.5 million.

  In one respect, Rothschild activity in Germany was far from innovative. Hesse-Kassel was one of those states which had emerged intact from the Napoleonic period, and Amschel was careful to continue cultivating the special relationship his father had developed with the Elector. Now that he had been restored to his lands, however, William needed the Rothschilds less, and the family’s old rivals in Kassel hastened to reassert their influence at court. The Rothschilds continued to manage some of the Prince’s financial affairs, collecting his reparations from France, selling his English stocks (as we have seen) at a healthy profit, trying to sort out his tangled Danish investments and involving him in their post-war loans to Prussia. Amschel even indulged his old coin-collecting enthusiasm. But there was no doubt that the days of mutual dependence were over, especially when Buderus had ceased to be the dominant force in the Kassel bureaucracy. Although the brothers lent considerable sums to William’s spendthrift son, their hopes that these highly unprofitable transactions would bring more lucrative business after he succeeded his father were disappointed when this finally happened in 1821. Apart from two large loans in 1821 and in 1823 for a total of 4.3 million gulden (£390,000), business in Kassel dried up.

  On the other hand, Hesse-Kassel was only one of thirty-nine German states which had emerged from the Napoleonic upheaval and were now grouped together as members of the loose German Confederation. And because the Confederation’s Diet met in Frankfurt—in a rented hall in the Thurn und Taxis palace—it was easy for Amschel and Carl to establish contact with senior diplomatic representatives of all the member states. This led to a stream of relatively small-scale loans to minor German states and princes—including the neighbouring Grand Duchy of Hesse-Darmstadt, as well as Schaumburg, Homburg, Saxe-Weimar, Anhalt-Coethen and Nassau-Usingen—throughout the 1820s. Though the individual loans only rarely exceeded 500,000 gulden (£45,000), taken together they represented a substantial amount of business. Between 1817 and 1829 total loans of this sort by the Frankfurt house amounted to more than 24.7 million gulden (£2.2 million). While some were little more than personal loans to petty princes, others took more sophisticated forms, like the Hesse-Darmstadt lottery loan of 1825, one of many premium-bond-style loans issued in this period. On occasion, the Rothschilds also acted as bankers to the Confederation itself. Twenty million francs—paid by France under the terms of the Peace of Paris for the construction of fortifications in Germany—were deposited with the Rothschilds in 1820, pending a decision by the Confederation to proceed with building them. Given the slowness with which such decisions were reached in Frankfurt, this turned out to be a long-term deposit; but it was never certain how much notice would be needed for its withdrawal, nor indeed who had the right to request it. The difficulties this created for the Rothschilds may explain why they never did much to attract similar deposits.

  Real power in Germany, however, lay not in Frankfurt, but in Vienna, the capital of the Confederation’s dominant member: and it was the Austrian court more than any other which the Rothschilds sought to cultivate in the 1820s. As we have seen, the Austrians had been reluctant to leave the payment of their British subsidies to the Rothschilds in the later stages of the war against France, preferring to deal with Viennese houses like Arnstein & Eskeles,11 Fries & Co. and Geymüller & Co.; they had driven hard bargains over the French reparations payments too. Only in partnership with the Frankfurt banker Gontard were the brothers able to handle the minor payments Austria had to receive in the wake of the peace from Russia and Naples. But Vienna needed cash just as badly as the other continental states if it was to consolidate its large floating debt and stabilise its heavily depreciated currency. Although its first major post-war loan of 50 million gulden was concluded—to Rothschild chagrin—with the Anglo-Hanseatic Parish brothers in partnership with Baring, Bethmann and Geymüller, it was obvious, with annual expenditure running above 100 million Austrian gulden, that more would soon be needed. The breakthrough came in 1820, when Salomon jointly organised two lottery loans worth 45 million Austrian gulden (c. £4.8 million) in partnership with David Parish—a transaction so profitable that, despite the hostile comment it aroused, Salomon resolved to remain in Vi
enna on a more or less permanent basis.

  The final coup which completed the Rothschilds’ emergence as “bankers to the Holy Alliance” came in 1822, with the loan to Russia. Here, as in Prussia and Austria, the war had generated acute fiscal and monetary problems: public spending had roughly quadrupled between 1803 and 1815 as had the circulation of paper roubles, leading to the inevitable inflation and currency depreciation. And despite having allowed the Rothschilds to handle so much of her wartime subsidy payments and subsequent reparations contributions, Russia too turned first to others for assistance with stabilisation: it was Baring and Reid, Irving who handled the 1820 loan, for example. This, however, was no great disappointment, as the Russians at this stage were still refusing to follow the Prussian example of issuing a loan denominated in sterling and with interest payable in London. Two years later the Russians, like the Austrians before them, had come round. In the summer of 1822 a loan of £6.6 million was issued by Nathan in 5 per cent bonds priced at 77, which he had no difficulty in selling at prices of 80 and more to his network of London brokers, led by his brother-in-law Moses Montefiore.

  Thus by the end of 1822 the Rothschilds could justifiably be regarded as bankers to the Holy Alliance—“la haute Trésorerie de la Sainte Alliance.” Indeed, when the itinerant German Prince Pückler-Muskau first described Nathan in a letter to his wife, he introduced him as “the chief ally of the Holy Alliance.” There is unquestionably a sense in which it was the Rothschilds who gave the alliance substance. When the Austrian Emperor remarked to his envoy in Frankfurt that Amschel was “richer than I am,” he was not being wholly facetious. The Times correspondent reported from St Petersburg that the mere appearance of James Rothschild at the bourse was expected to boost Russian bond prices. Without the financial support which Nathan in particular could provide, it would have been harder to make the Austrian strategy of “policing” Europe effective in the 1820s. Political critics of this strategy recognised this. Nathan was caricatured as the “Hollow Alliance’s” insurance broker, helping to prevent political fire in Europe. In 1821 he even received a death threat because of “his connexion with foreign powers, and particularly the assistance rendered to Austria, on account of the designs of that government against the liberties of Europe.”