The House of Rothschild, Volume 1

by Niall Ferguson

  For reasons which are unclear, this proposal was abandoned or rejected, possibly because of the opposition of Anthony’s mother. However, a month later—and a week and a half after Belmont had reached New York—James tried again. “Don’t you think,” he asked his nephews somewhat disingenuously, “that Belmont should go from America to Havana, for our interests in America are no longer so substantial? I don’t have anyone here and if you so want then I will go to America and Belmont can then go to Havana for the trip to America is no great deal. It is child’s play.” If this was intended to throw down the gauntlet to his nephews, it very nearly worked, to judge by James’s next letter:

  Well my dear Nat, you ask me what I meant when I said that had I been younger I would have gone to Havana and whether I was trying to give you a subtle hint. I must therefore tell you quite frankly what my thoughts regarding this matter are. I would most certainly have gone to Havana in person . . . For me personally this would have been a trip which I would gladly have undertaken. However, if one of my nephews wanted to go there I would then oppose such a plan with all my strength and my love and would not permit it for [Havana] is too far away and too dangerous because of the heat and, moreover, it is not important enough for our business to justify one’s exposure to such dangers.

  This, of course, was mere soft soap. James now came to the point.

  However, America is a different matter altogether, as the voyage there is no less safe than a voyage from Calais to Dover where one can calculate in advance how many days the trip will take. I would, however, like to put a question to you. Do we or don’t we want to get involved in the American government’s business schemes? If the answer is “no” then I too will say that there is no need for anyone to go there for we are unable to make good the losses suffered by Joseph and Phillips and no one there can do anything. If, however, [it is “yes”] in that case then I would say that it is necessary to take a close look at the place to see whether and how one can go about doing business there . . . [Q]uite frankly, why should Anthony not go there, and maybe he should be joined by Anselm if it is thought that such a trip would be useful and beneficial for us? If, God forbid, the good and upright Hannah does not approve, then we mustn’t even think of it, but to place our trust entirely in the hands of strangers is difficult . . . I am not at all opposed to the idea of establishing a company for the American business but can such a project be realised, that is, to set up a business house with associates who are in fact not responsible? Won’t the established Houses there be given preference and won’t those people who agree to join us perhaps simply skim the cream off for themselves although we could do the same and get the best morsels?

  The Rothschilds never satisfactorily answered these questions. Despite James’s reassurances that they would only be expected to stay for “three to six months,” neither Nat, Anthony or Mayer went to New York; and, although James’s sons Alphonse and Salomon visited the US some years later, they did not stay. The fundamental problem was that while it was James who had the enthusiasm for America, his nephews conducted most of the family’s business with the US, because Britain was always a bigger customer for American cotton and tobacco than France. James therefore had to defer to his nephews’ greater familiarity with the American market, even when he felt that they were passing up a crucial opportunity. As he frequently admitted: “America is more suited to England than it is to France.” (This imbalance between the London and Paris houses also gave rise to persistent friction as to the distribution of profits—and losses.)

  As a result, the decisions which determined the nature of their representation in America for the rest of the century were taken by the man on the spot. Despite James’s repeated orders, Belmont did not go to Cuba. Instead, and to the intense but impotent irritation of his masters, he acquired an office at 78 Wall Street and announced the establishment of August Belmont & Co., with the plan of acting as the Rothschild agent there. “We received a letter from Belmont,” reported a furious James, “but I didn’t have the patience to read it”:

  He is a stupid young man . . . and we are not so desperate for new business and would rather sort the old business matters out so that there is no need for anyone to go to America. That is, and remains, our opinion as far as our dependence on a scoundrel such as Belmont is concerned. Instead of going to Philadelphia to collect the 300,000 francs from Cohen he says, “I shall remain in New York.” Such an ass needs to be kept on a short leash.

  Nevertheless, James found he had little option but to reply, and a regular corre pondence commenced in September. When Belmont requested the right to discount bills (presumably in the Rothschild name), James was unable to refuse: “He writes every day that he wants to get the authority to discount which I well understand and the man is quite right. If one says ‘A’ then one must also say ‘B’ [a favourite James turn of phrase], though it is always dangerous to do so.” The following month it was agreed to increase his salary to £500, paid jointly by the London and Paris houses. By the 1840s he had a credit facility with the London house of £10,000. When Belmont wished to increase that limit, he threatened to start doing business for other houses.

  The Rothschilds never quite forgave Belmont for taking such a profoundly important initiative, and never ceased to regard him as unreliable (feelings not alleviated by his involvement in a duel in 1841 and his conversion, evidently for the sake of social advancement, to Christianity). “We received letters today from Belmont,” wrote Anthony in August 1838, “which frighten us tremendously. How can the man be so mad as to think of doing the things that he is doing . . . I should not mind going out myself . . . if you think my presence there can be of use I will go for I then can write to Anselm to come here . . . I don’t think that any person is justified in doing what he has been without asking.” Two months later James accused Belmont of playing the London and Paris houses off against one another, giving his favour “today . . . to the English House and tomorrow to the Parisian House.” “I think Belmont is a great ass,” declared Nat in 1840. “He treats business so lightly that I do not like him at all as an agent.” He was “too great a cripple to leave New York & we have been so uniformly unlucky in everything he has had the management of.” James agreed: “I don’t have too much confidence in that man Belmont,” he commented, “because . . . he deals only for himself.” There were fitful efforts to replace him, or at least to control him better by sending an additional agent, as Anselm suggested (following reports that Belmont was evincing suicidal tendencies). In 1839 Lionel Davidson was despatched to New York, presumably for this purpose. “He seems a clever intelligent fellow,” commented Nat, implying a favourable comparison with Belmont, “and will do very well if you can manage to keep him down”—a phrase which tells us much about the Rothschilds’ attitude towards their agents. However, it made more sense to send him on to Mexico and the American West, while Hanau, who was sent in 1843, went to New Orleans. Belmont remained ensconced in New York, and was soon embarked on a political career which would take him to the commanding heights of the Democrat Party.

  The debate over the American agency thus exposed a fundamental conflict of interests between the London and Paris houses, and revealed the limits of James’s power over his nephews. There is little doubt as to who was right: in refusing to establish a Rothschild house in New York, the English Rothschilds made what must have been the single greatest strategic error in the bank’s history. On the other hand, it is easy to see why they hesitated. For even the limited involvement in the American market symbolised by Belmont’s grudgingly conceded role as agent very soon cost the Rothschilds dear. And it is doubtful whether Anthony or Nat, in Belmont’s place, would have been able to avoid the disaster which lay ahead.

  Even before Belmont arrived in New York, an irresistibly tempting opportunity had arisen for the Rothschilds to step into another niche vacated by Alexander Baring. The Bank of the United States had employed Barings as its European agent; but the relationship broke down in
1836-7, and the Rothschilds hurried to offer their services. Biddle had ambitious-sounding plans, including “a business with a guarantee of two million pounds sterling to provide advances for goods and stocks,” and a scheme for a quasi-monopoly on cotton exports. It seemed to James like a financial marriage made in heaven: these were, he enthused, “the wealthiest people in America” and “no less solid” than the Banque de France. At once, he began to imagine “flooding the American market” with his Spanish mercury “so that in six months time we will be masters of the market.”

  At first the partnership with the BUS went well. The Rothschilds found themselves on the receiving end of large quantities of American state bonds from not only New York but also newer states like Indiana, Alabama, Missouri and even Michigan, which had only just been admitted into the Union, as well as shares in a number of new banks and a canal company. However, by September 1839 James and his nephews were beginning to discern why Barings had parted company with BUS when they had. Without its charter and its government business, the BUS was vulnerable; when the American cotton crop proved poor, it began to look seriously over-extended, its capital tied up in all kinds of long-term ventures, its managers reliant on the sale of high-yield obligations, post notes (promissory notes due in six months time) and foreign drafts. In order to secure money from the Rothschilds, the BUS’s agent in Europe, Samuel Jaudon, warned that he might be unable to meet his acceptances. Uncomfortably aware that their advances to him now totalled some £300,000—“upon stock which it would be most difficult to dispose of”—James and his nephews had little option but to bail Jaudon out. Reluctantly, they agreed to take over BUS drafts on Hottinguer worth 5.5 million francs (£220,000), though it was hoped to pass the buck to other investors by selling BUS debentures. James raised objections to this, arguing that the Rothschilds’ reputation would suffer if the BUS were to collapse “You make yourselves uneasy about nothing at all,” Lionel assured him:

  Every person knows upon what security these Debentures are issued and if they are not paid, it is not our fault.—I think it the greatest madness in the world to give a sort of moral guarantee, that a stock which pays 10 to 20 per cent Int[erest] will be punctually paid, the purchaser must take his chance and must know that he is running some risk . . . [Even] if we take the very blackest side . . . I am still of the same opinion in thinking that we have got very well out of a nasty affair and that we ought to be delighted to get our money back so easily.

  This revealed a streak of ruthlessness of which, one suspects, his father would have approved. Moreover, as Nat pointed out, it had been James who had originally urged their involvement with the BUS:

  You appear to forget that it was the Paris house that accepted the 5,500,000 francs [from Jaudon] in direct opposition to our letters & wishes, you also forget that it was the Paris house and not us who encouraged Belmont to do business to such an extent and now after we try [moving] heaven & earth to get our money back by issuing a marketable security . . . you write to us as if by your issuing a similar lot of debentures you run the risk of losing your good name in the event of their not being reimbursed.

  Nothing could better illustrate the conflict of interests and attitudes exposed by the American question—a conflict which continued throughout the next year.

  Yet James’s pessimism was justified; for in October 1839 the BUS suspended payments and in 1841 finally collapsed. Its failure coincided with a rash of defaults by states, including a number whose bonds Jaudon had handed over as securities. In the wake of this fiasco, which saddled the London and Paris houses with a large quantity of thoroughly bad debts, the Rothschilds were content to hand back to Barings the position of bankers to the federal government: “You may tell your government,” James was reported as telling representatives of the US Treasury, “that you have seen the man who is at the head of the finances of Europe, and that he has told you that you cannot borrow a dollar, not a dollar.” The experience with the BUS had made James wish he had had “never become involved with [America].” In future, he concluded, unless the federal government were “prepared to guarantee all the States and make the payments with us” and to set up an officially backed central bank, he would keep his distance. This was a view which his nephews more than endorsed. In 1842 Anthony wrote to his brothers, urging them to sell “New Yorks & all the [American] stocks which pay an interest”:

  You may be certain it will be the same with all the states . . . none will pay any Interest & therefore follow my advice—let us get out of them that we can—with them that we cannot get out [of] we must make up our mind, but follow my advice & let us get rid of that blasted country—as much as we profitably can. It is the most blasted & the most stinking country in the world—& we must get rid of it, & that stinking Belmont in the Bargain.

  Of course, such drastic disengagement did not occur: even as they were winding up the sorry remains of the BUS loan, the Rothschilds were resuming their dealings in American cotton and tobacco (hence the need to send Hanau to New Orleans). And the project of sending a Rothschild in person to the United States was revived, as we shall see, in 1848. Nevertheless, the scars left by the BUS affair are the best explanation we have for the lingering suspicion of the American economy which characterised subsequent Rothschild policy.

  Trouble in Threadneedle Street

  The negative repercussions of the American crisis did not end there, however. For the financial crisis of 1836-9 also strained to breaking point relations between the Rothschilds and the Bank of England. This was, to say the least, a difficult time for the Bank of England. In Britain, the deflationary tendency which had been manifest since the 1825 crash continued more or less unabated: the Bank’s note circulation declined almost without interruption between 1825 and 1840, reflecting in part the restrictive effect of the bullionist system in the absence of major gold discoveries. At the same time, the American financial crisis played havoc with the international payments system, drawing both gold and silver across the Atlantic. The Rothschilds found themselves torn between the need to sustain their new American commitments and intense pressure from both the Bank of England and the Banque de France to maintain liquidity in Europe.

  The trouble began at the time of the brothers’ fateful Frankfurt summit in 1836. From the outset of the American crisis, James and the ailing Nathan urged Nat “not to let the people drive you round the bend and convince you not to send any gold [just] because this might meet with the disapproval of the Governor. You should always take into consideration that whatever you don’t do, others will not hesitate to do. Was Baring too timid to take some gold out for America?” “Send Gold as long as it answers,” echoed Lionel, “and [do] not bother yourself with the Governor of the Bank but pay him off.” This was an allusion to the fact that the London house owed the Bank at least £300,000, money borrowed in December 1835 and not due for repayment until October, as well as a short-term advance of £120,000 negotiated on June 1 “in consequence of a pressure on the Money Market.” On returning to Paris, James promptly committed himself to supplying the Banque de France with silver, while expressing scathing criticism of the Governor in London for allowing his own gold reserve to sink so low. It was not until the end of November that he acted to send gold to London. Not long after that he was alarmed by a rumour to the effect that

  your Government wants to try to introduce a silver standard as is the case with gold. I would consider this a great misfortune for Europe . . . If England were to do the same [gold would flow] from here over there and this will bring about a crisis everywhere. I think we have to do everything in our power to prevent such a move.

  What he meant, of course, was that it would be a great misfortune for France if England began to compete with her for silver as a reserve metal: when the Bank did start buying silver in the summer of 1837, James immediately threatened to stop sending gold to London. On the other hand, he, James, accused the Bank of indecision when his offers of gold (at a price) were not immediately accepted:
the Governor, he complained, “changed his mind from day to day and tomorrow he may think differently again.” Worse, he seemed to be ignoring James’s advice “that under no circumstances should he allow any American House to collapse.” Timothy Curtis, the former Governor of the Bank, wrote an emollient letter, assuring James of his “sincere wish to co-operate with your nephews in everything relating to the foreign exchange” and “to act as nearly we can in union with your House,” but firmly insisting that “it is your interest as well as ours that the Bank should possess a good portion of silver.” The damage was done: by March the following year James was convinced that “your English Bank is out to destroy our business.” Nor was the fence mended by a loan by the Bank to the London house of £200,000 in silver dollars the following December.