The House of Rothschild, Volume 1

by Niall Ferguson

  Finance and Revolution

  It had, of course, been assumed by the founders of the Holy Alliance that the best way of preventing a renewed revolutionary upheaval in Europe would be a policy of “containment” directed against France, the fons et origo of revolution since 1789. While that would prove to be the right strategy later, in 1830 and in 1848, in the 1820s it quickly had to be abandoned as it became evident that the political order established at Vienna could be challenged almost anywhere. When August von Kotzebue—a minor hack reputed to be in the pay of the Tsar—was murdered in Mannheim by a radically inclined student, Karl Sand, it suited Metternich quite well as the pretext for a crackdown on liberal tendencies throughout the German Confederation. Like the assassination of the King’s nephew, the duc de Berry, in Paris in February 1820, one death did not portend a serious revolution. But the Cadiz mutiny by army units destined for South America that January was the real thing, as it led not only to the reimposition of the 1812 Cortes constitution on the Spanish King Ferdinand VIII, but also to the imposition of the same constitution on his uncle, Ferdinand I of Naples, just six months later. The “domino effect” continued in August 1820, with a military revolt in Portugal. In March 1821 there were risings by Italians in Piedmont and by Greeks throughout the Near East. The abortive Decembrist movement in Russia in 1824-5 was part of the same pattern: the unrest was often led by disenchanted soldiers (the victims of post-war cuts in defence spending), or by secret societies like the Italian Carbonari or the Spanish Freemasons. Indeed, so widespread was the political instability that France, the former outcast, had to be co-opted into the counter-revolutionary coalition. The question which came to dominate the congresses of Troppau (October to December 1820), Laibach (January 1821) and Verona (September to December 1822) was how far this coalition should intervene in the affairs of other states to prevent the success of localised revolutions. The financial question this begged, of course, was whether or not they could afford to do so. In so far as they helped to finance Austrian intervention in Italy and French intervention in Spain, the Rothschilds deserve to be thought of as financiers of “reaction.”

  From the Rothschild viewpoint, however, the instability of Restoration Europe was not only a source of potential new business; it was also a threat to the stability of financial markets. Existing loans to regimes which suddenly looked vulnerable slumped as alarmed investors sought to sell their bonds. Even successful armed intervention, by throwing the Austrian and French budgets into deficit, had similar negative side-effects. On the other hand, the emergence of new states in those regions where revolutions actually succeeded created a source of new business too. In particular, the creation of independent states in Brazil, in formerly Spanish America and in Greece led to numerous new bond issues as fledgling regimes rushed to the London and Paris capital markets. For that reason, the role of the Rothschilds’ financial power was ambivalent.

  On the Italian peninsula, matters were relatively straightforward: the Rothschilds supported Metternich’s policy of divide and rule by lending to the various monarchical regimes which had his backing. As early as December 1820 Metternich wrote to Salomon from Troppau alluding suggestively to a transaction involving 25 or 30 million francs “with respect to the future fate of the Kingdom of Naples.” The banker’s initial response was positive. “Even our financiers, led by Parish and Rothschild,” so the Austrian Finance Minister Stadion assured Metternich at Laibach in January 1821, “are only anxious to see our troops across the Po at the earliest possible moment, and marching on Naples.” Nevertheless, Salomon was unenthusiastic when Metternich and Nesselrode invited him to Laibach to discuss possible loans, the purpose of which was evidently to pay for intervention. “My presence there,” he explained to Nesselrode, “might give rise to numerous and probably highly inaccurate newspaper reports. Persons with base motives might unearth the fact that a loan to the most gracious monarchs was being discussed; rumour would be piled upon rumour, and this would not be at all agreeable in the highest quarters.” Firstly, the prospect of a new Austrian loan would depress the Vienna market, already shaken by the Italian crisis. Secondly, the Rothschilds had no desire to make their role in financing the Holy Alliance so public. Instead, Salomon insisted to Stadion that any loan should be raised by Ferdinand I only after his restoration to power, the proceeds to be used to reimburse the Austrian government for the costs of intervention. In the meantime, he offered Stadion short-term advances to finance General Frimont’s advance south. As in the Napoleonic Wars, the Rothschilds used their extensive banking network to make cash available at reasonable rates to an army on the march. And, as before, one of the brothers—this time Carl (“un petit frère Rothschild,” as he seemed to Stadion)—had to be sent to the scene of the action to ensure that all ran smoothly. In March 1821 Carl set off from Vienna to join Metternich and the exiled Neapolitan king at Laibach.

  To Metternich, the Neapolitan campaign was nothing less than a counter-revolutionary crusade: “We have embarked,” he told Stadion,

  on a great undertaking, one that contains the possibilities of greater results than any of our time. It is great, for upon its success or failure the whole future depends; not merely the future of the Austrian monarchy, but that of the whole of Europe . . . It was impossible for us to take any other action, for it is a matter of life or death . . . everything now depends upon success. If not, the result will be the same as if we had ventured nothing; the revolution will engulf first Italy and then the world. I will spare no effort until I am killed myself.

  But financial reality gave the lie to such rhetoric. There were recurrent shortages of supplies at the front, while in Vienna Stadion despairingly foresaw a return to the fiscal and monetary morass of the Napoleonic period. Indeed, Salomon had to intervene to prevent a slump in the price of “metalliques” (Austrian silver-denominated bonds). The crisis deepened when reports reached Laibach of further revolutionary outbreaks in Piedmont. The impact of this news in Vienna appalled the hapless Stadion:

  If the enemy were at the gates there could not be more unreasoning panic. The whole of the population of Vienna is rushing to the Bourse to get rid of our public securities . . . Our credit (which has only just been established) is on the eve of vanishing completely. I shall be forced to suspend the conversion of paper money into cash . . . destroying in one day the labours of the preceding five years . . . This is the first step to our destruction. It is impossible that a loan should be considered, either at home or abroad, at a time when our securities are becoming worthless.

  By March 24, however, Naples had fallen, and Carl hurried south after Ferdinand to organise the now desperately needed loan from which the Austrians were to be reimbursed.

  At this point, a conflict of interests emerged: the Austrian government wished to exact the maximum sum possible, but the Rothschilds had a low opinion of Neapolitan creditworthiness, and were willing to lend to the restored regime only at punitive rates, while the Bourbon regime itself faced the prospect of renewed unrest if it was burdened with onerous new debts. The first Neapolitan loan was a hard-won compromise, with Carl being forced to improve his initial offer to head off competition from a rival Milanese banker: instead of 10 million ducats at a discounted price of 54, he agreed to lend the government 16 million (around £2 million) at 60. To help meet the costs of the continuing Austrian occupation, a second loan was issued in November 1821, of 16.8 million ducats, underwritten at 67.3. Two more loans followed for 22 million ducats in 1822 and £2.5 million in 1824, increasing the state’s debt to around £13 million in all. Nevertheless, the price of Neapolitan securities rose in Paris from 65 to 103, and in London there was considerable enthusiasm for the sterling-denominated bonds. This successful stabilisation partly reflected the good relationship which had developed between Carl and the new Neapolitan Finance Minister, Luigi de’ Medici, whose claim that the Austrians were unnecessarily prolonging the occupation and overcharging for their presence Carl was inclined to support. Ev
en before the Congress of Verona in late 1822, it was obvious that the Austrians intended to recoup the costs of the invasion in full: of 4.65 million gulden which Metternich demanded in August 1821 as payment for the actual invasion, 4 million had been received by the following February, and to this were added occupation costs of 9 million ducats per annum. By 1825 Medici was accusing the Austrian government of deliberately profiting from the occupation and threatened to resign unless more than 1 million ducats were repaid. When the Viennese authorities stalled, Carl advanced the money to Medici—to Metternich’s evident irritation.12

  The Austrian intervention in Naples provided a classic illustration of the difficulty of maintaining good relations with both sides in a bilateral international transfer. Nevertheless, Carl had probably struck the right balance between Austrian and Italian interests. While his establishment in Naples flourished on the strength of his ties with the Bourbon regime (and also did some business with the Grand Duke of Tuscany), Metternich continued to turn to Salomon for financial assistance over other Italian matters—notably the complicated 5 million lire loan organised to provide for the children of the Archduchess Marie-Louise, the Habsburg Princess who had briefly been married to Napoleon, and who had been established after his fall in the duchies of Parma, Piacenza and Guastalla.13 Another such case concerned the finances of Napoleon’s former Governor in Illyria, Marshal de Marmont, the Duke of Ragusa. At the same time, the Austrian government found itself once again having to turn to the Rothschilds to satisfy its own burgeoning financial needs. For no matter how much could be squeezed out of Naples, the costs of the military intervention there far exceeded what Stadion could raise in current revenue. There was no alternative but another loan; and although some officials were minded to reject the initial Rothschild bid, the government ended up bowing to the inevitable, although it managed to secure improved terms.14

  Vienna’s dependence on the Rothschilds was further increased in 1823, when the British government, in an attempt to exert pressure on Vienna to end its occupation of Naples, raised the question of outstanding loans—now notionally totalling £23.5 million including interest—which had been given to Austria in the early stages of the war against France. Once again Austria turned to the Rothschilds, pressing Salomon to use his brother’s influence in London to get the debt scaled down—the first of many occasions when the Rothschilds would act as an unofficial channel for Metternich’s diplomatic communications. When this had finally been achieved, the Rothschilds offered to organise yet another loan, in partnership with Baring and Reid, Irving, to pay the agreed sum of £2.5 million. Thirty million gulden of new metalliques were taken by the banks at an underwriting price of 82.33, and were soon trading at 93, yielding a substantial profit to the banks. Another 15 million gulden loan followed in 1826. Ultimately, the Austrian policy of intervention in Italy had yielded multiple profits for the Rothschilds.

  By contrast, the outbreak of revolution in Spain raised more serious dilemmas. For two years after 1820, the gout-ridden despot Ferdinand VII endured the Cortes constitution, and in that period the liberal government raised a number of loans (which were needed to compensate for the shortfall in revenues caused by the revolution). Although the Rothschilds—as Salomon hastened to reassure Metternich—were not at first involved in these, they were preparing to take a hand when, in July 1822, Ferdinand and his Ultra-royalist supporters unexpectedly attempted to overthrow the Cortes, calling for foreign intervention when their coup failed. At this point James became involved in an attempt by the Spanish financier Bertran de Lys to forestall an invasion by reconstituting the government on less “exalted” (that is, radical) lines.15 It was too late, however; in April 1823, a French expedition analogous to the Austrian invasion of Naples was launched under the leadership of Louis XVIII’s surviving nephew, the duc d’Angoulême, and with the enthusiastic support of revanchist diplomats like the vicomte de Chateaubriand.

  Ever the pragmatist—and anxious not to be out-flanked by that seasoned military paymaster Ouvrard—James now offered his services to the French Prime Minister, the comte de Villèle: just as his brother had supplied the Austrian army in Italy with cash, so he now made himself “useful” to d’Angoulême, even raising the ransom money needed to buy Ferdinand VII’s release.16 And just as military intervention had necessitated a new loan in Vienna, so too in Paris the government was obliged to fund its military adventure by borrowing: in 1823 James was at last able to overcome the suspicion of the Restoration regime and secure a major French loan. Worth 462 million francs (nominal) or £18.5 million, it was the biggest single issue of rentes by a French government between 1815 and 1848 and had been preceded by a smaller issue of 120 million in 6 per cent treasury bills, also handled by James. Given the importance of such issues throughout James’s long career in Paris, it is worth noting how he pulled off this deal. Rather as his father had initially squeezed out his rivals in Kassel, James won his first rentes issue by outbidding Lafitte and three other Paris bankers, offering a price (89.55) which was actually above the current market rate. This was more than enough to beat the rival group’s offer of 87.75, but it did not leave James out of pocket: the success of the operation quickly pushed rentes up above 90 and by the end of 1823 they had reached 100.

  The difference between Naples and Spain was that after the restoration of the Spanish Bourbon (which had been achieved by the end of 1824), the Rothschilds declined—after contemplating a joint operation with Baring and Reid, Irving—to lend to his neo-absolutist regime without guarantees which the French government was unwilling to give.17 There were three reasons for this: the regime’s refusal to recognise and redeem the bonds issued by the Cortes, its refusal to repay France the costs of the invasion and, finally, the bankers’ suspicion that any money lent to Ferdinand might be used in a last and probably vain attempt to recapture his former colonies in South America, which had been fighting successfully for their independence since 1808. After all, had not the 1820 revolution begun with a mutiny by soldiers about to be sent across the Atlantic? And were not Ferdinand’s advisers convinced that recovering the American colonies would solve all his financial problems? It was the South American dimension which particularly concerned the British government. While London had been prepared to put up with the French expedition into Spain, despite its implicit negation of Wellington’s victory in the Peninsular War, the notion that this might be the prelude to some kind of reconquest of Latin America, with whose fledgling republics Britain was rapidly forging close economic ties, was wholly unpalatable. As the Austrian ambassador in Paris reported to Metternich: “Although the House of Rothschild may pretend that their sympathies are purely monarchist, the recognition of the engagements entered into by the Cortes Government, and the independence of the Spanish colonies, would provide a far wider field for his [Nathan’s] financial enterprises and afford political security, the value of which they do not fail to appreciate.” In short, the Rothschild role in Spain had been ambivalent: initially showing signs of interest in the Cortes government, then financing the French invasion, but declining to bankroll the restored regime. James, Salomon and Nathan all came under conflicting pressures from the governments in Paris, Vienna and London; but the final outcome was a united and carefully calculated policy of non-commitment, which was continued throughout the decade. As James put it succinctly in 1826, “Spain’s bankruptcy is uppermost in my mind.”

  The Rothschilds kept a safe distance from the numerous bond issues by the former Spanish colonies which were generating such speculative enthusiasm in London at the time of the French intervention. The years 1822-4 were the time of the great South American “bubble,” as investors rushed to lend to new republics like Chile, Colombia, Buenos Aires and Guatemala. Even as unlikely a figure as Gregor MacGregor, a Scottish adventurer and former general in the Venezuelan army, was able to raise £200,000 by styling himself the “Caique of Poyais” and persuading investors that the malarial swamp in Honduras which he claimed to rule was
ripe for development. With a bravado it is impossible not to admire, MacGregor even wrote to Nathan outlining a project for an independent Hebrew colony in his “kingdom” on an island called Ruatan. From all this the Rothschilds remained aloof, with one exception: Brazil. There were two reasons for this preference. Firstly, Brazil remained closely linked to Portugal and therefore enjoyed close commercial ties with Britain; secondly, it retained a monarchical form of government even after gaining independence in 1825. (Indeed, the fact that the Brazilian Emperor was married to an Austrian princess inclined some contemporaries to regard Brazil as a kind of American representative of the Holy Alliance, though this exaggerated Austrian influence.)18 Nathan’s first step in this direction came in 1823, with a loan of £1.5 million to Portugal, secured on Brazilian revenues. This once again demonstrated his willingness to lend to a constitutional regime, as the Portuguese King had accepted a Spanish-style constitution drafted by the Lisbon Cortes on his return from Brazil in 1822. The water for Brazilian bonds proper was tested in 1824 by a City group led by Thomas Wilson, which sold over a million pounds’ worth of 5 per cent bonds at an issue price of 75. When these rose to 87, Nathan took over, issuing a further £2 million in 1825 at a price of 85. As Heinrich Heine later joked, Nathan was now “the great Rothschild, the great Nathan Rothschild, Nathan the Wise, with whom the Emperor of Brazil has pawned his diamond crown.” Though it fell into disuse during the middle decades of the century, the relationship with Brazil was to prove one of the firm’s most enduring.