The House of Rothschild

by Ferguson, Niall

  Talabot’s aim was now to merge the new Paris-Lyon company with his lines to the south—Avignon—Marseille, Marseille-Toulon and smaller lines in Gard and Herault—creating a grand Compagnie de la Méditerranée along lines very similar to those originally envisaged by the Pereires. James’s decision to take 2,000 shares in this ambitious but financially stretched entity left the Pereires out in the cold. (The fact that Morny was another shareholder must cast doubt on the simplistic notion that the Pereires had the new regime’s backing against the Rothschilds.) The final blow came when James refused to provide similar financial support for the Pereires’ Midi company: although his subscription of 3.3 million francs was far from negligible, Alphonse’s resignation from the board was a vote of no confidence. The Credit Mobilier was therefore founded by the Pereires in response to their exclusion from what looked like a new Talabot-Rothschild axis backed by the regime in the person of Morny.

  The Pereires did not have to look far for models on which to base their alternative source of railway finance: two successful semi-public banks had already been launched before the Credit Mobilier was conceived. The first was the Foulds’ Credit Foncier, a mortgage bank established with governmental backing in March 1852 to provide long-term loans to landowners by selling mortgage bonds—an extremely popular nineteenth-century form of investment—to savers. By the end of 1853 it had increased its capital to 60 million francs and had issued loans totalling 27 million. It is worth pointing out that James was as hostile to the Crédit Foncier as he was to the Credit Mobilier, arguing in October 1853 that the interest at which it lent its money was too high and the obligations it issued were viewed with too much suspicion in rural areas for it to perform its intended purpose. Far from supporting agricultural proprietors, it was being used to finance urban property development, much of it of a speculative nature:From the outset we have seen these problems clearly and it is for that reason that we have refused to become involved in the affair, although overtures have repeatedly been made to us ... The Credit Foncier ... involves itself in risky operations and it is these which up until now have made its profits ... It is not a soundly established enterprise.

  The other new bank was the Caisse des Actions Réunies, an investment trust established with 5 million francs’ capital by Mires, then the editor of the Journal des Chemins de Fer, in 1850. Although Mirès did not transform the Caisse into the more ambitious Caisse Générale des Chemins de Fers until 1853, he subsequently claimed that it had given Benoît Fould the idea for a much bigger venture:I said to myself, if M. Mires, on his own, could create such a society, a society made up of more considerable people would represent a powerful financial organisation, destined to conduct simultaneously major financial operations and industrial enterprises. On my return [from Baden] I looked for suitable men to involve in this project and I found no one more suitable ... than MM. E. and I. Pereire ... And that was how the Credit Mobilier was born.

  Another version has the Interior Minister Persigny more or less forcing the idea of the Credit Mobilier through against the unbending opposition of Achille Fould—though this was probably an attempt by the Foulds to disclaim responsibility after the Credit Mobilier had failed. In fact the Foulds and Pereires were equal partners, with a majority shareholding between them.

  What was new about the Credit Mobilier? It was not, despite the original intentions of the Pereires, permitted by the Banque de France to call itself a bank. Essentially, it was an investment trust, set up by a Pereire-led group with a capital of 20 (later 60) million francs, the prime function of which was to attract the savings of smaller investors into railways. Many investors had burnt their fingers in the 1840s when numerous railway companies had issued a multitude of highly volatile shares. The Crédit Mobilier simplified matters: it offered its investors standardised bonds of varying duration and used their money to invest in stocks and shares as its directors saw fit. In short, it was an intermediary between the bond market and the share market, a deposit bank which issued bonds rather than non-transferable certificates of deposit. The final statutes of the bank published on November 20 were the result of a compromise between the more cautious government ministers and the Pereires: current accounts and money raised from the sale of short-term bonds were not to exceed double the firm’s paid-up capital, twice the level demanded by the Finance Ministry; money from long-term bonds was not to exceed 600 million francs, ten times its capital.

  The Credit Mobilier is usually seen as a direct challenge to the power of de Rothschild Frères. It is true that there soon developed a fierce commercial rivalry between the two firms. James was also irked by the social pretensions of his erstwhile subordinates—especially when they bought the 8,200 acre estate of d‘Armainvilliers next to Ferrières, the Palmer vineyards next to Château Mouton and even the house next door to Nat’s in the rue du Faubourg-Saint-Honoré! Nor had he made any secret of his reservations about the new bank. As he wrote—in a personal letter to Napoleon on November 15—it would at once be excessively powerful and excessively vulnerable to crises, a line of argument which was less contradictory than Persigny later made it sound.

  The first objection James raised was the classic conservative objection to joint-stock companies, that the directors would be “anonymous” and “irresponsible,” and might abuse their power over other people’s money. But James went further in predicting that the new bank would be in a position to establish “a redoubtable domination of commerce and industry.” “By the sheer volume of their investments,” he warned, the directors of this company would “make the law in the market, and a law which will be beyond control and beyond competition ... and concentrate in their hands the greater part of the national wealth ... That would be a calamiry . . . The bank when it is fully active will be stronger than the government itself.” At the same time, its very strength would rest on foundations of sand; and this was precisely what made the prospect of a calamity so real. For whereas the bank would offer investors bonds paying fixed interest, its own investments in shares would be “variable, doubtful, uncertain.” In a moment of crisis, the bank would lead the economy “to the edge of an abyss.” Taking it for granted that the new bank would maintain an inadequate reserve, James predicted that if it got into difficulties the government would have to choose between “a general bankruptcy” or the suspension of gold and silver convertibility. These were exaggerated fears designed to intimidate Louis Napoleon; but they were not entirely without foundation, as we shall see.

  Yet the fact that James was opposed to the Credit Mobilier should not be taken to mean that it was directed against him. It may be that the Pereires were sincere in offering James shares in their new venture; his refusal is not proof of their antagonism towards him. Nor should too much be read into the fact that the bank’s charter was published in the Moniteur Universel while James was away from Paris. The fact that some of the Rothschilds’ closest associates in Italy and Germany— Torlonia, Oppenheim and Heine—were among the shareholders also weakens the anti-Rothschild, thesis: these people had too much to lose from incurring James’s wrath.

  In truth, the Credit Mobilier, with its overt claims to be a financial “centre” acting in the public interest, was more of a challenge to the Banque de France. The new institution had been created, declared Pereire in 1854, “out of the necessity to introduce into circulation a new agent, a new fiduciary money, bearing its own daily interest”—an indication that he saw its bonds as performing a quasi-monetary function. Above all, as the more astute contemporary commentators discerned, it was a response to the Banque de France’s tight lending policy in the wake of the 1848 revolution: prior to 1852, the Banque refused to lend money against railway shares and lent against rentes at the relatively steep rate of 6 per cent. As the yield on rentes had fallen to 3.6 per cent by November 1852, the advent of the Credit Mobilier becomes more intelligible. So does James’s opposition: in 1852 de Rothschild Frères held Banque de France shares valued at 1,131,078 francs, which were depr
essed by the launch of the Crédit Mobilier. We see here the beginning of an alliance between Rothschilds and the Banque which would be consummated when Alphonse became a regent of the Banque in 1855.

  The Credit Mobilier began with a bang. Its 500 franc shares opened at 1,100 and touched 1,600 four days later. At their peak in March 1856 they were trading at 1,982 francs. Those were massive capital gains for the original shareholders which it is hard to believe James did not envy. The dividends too looked healthy, rising from 13 per cent in 1853 to 40 two years later (implying earnings of 4 and 10 per cent). Such results seemed to discredit James’s prophecies of disaster. Nor were they the products of creative accounting. For these were the glory years of French railway building: between 1851 and 1856 gross investment increased by a factor of five; more than twice as much track was opened in the 1850s as in the 1840s. Moreover, the ratio of fares and freight charges to operating costs was at its all-time peak. The Credit Mobilier’s raison d‘être was to enable the Pereires to take a share of this buoyant market; and in this it succeeded.

  Yet the extent of its success should not be exaggerated. It is true that, with the funds they were able to raise through the Credit Mobilier, the Pereires were able to build up shareholdings in a substantial network of railway companies, exerting a dominant influence over the Midi (Bordeaux-Cette), the Paris-Lyon via Bourbon nais line and the Ouest (which merged the Paris-Rouen, Rouen-Havre, Dieppe-Fécamp and Versailles-Rennes lines). But the Rothschilds continued to control the Nord and had the biggest single shareholding in the Paris-Lyon, which later fused with the Grand Central to form the Paris-Lyon-Mediterranean in 1857, not to mention their smaller stakes in the Midi and the Ardennes-et-Oise. Between them the Pereires had eight seats on the boards of various French railway companies; the Rothschilds had fourteen. Besides, there were numerous other new players, notably Morny himself (who launched the Grand Central Company in 1853), not all of whom can be considered Pereire allies. The lines of battle were far less distinct than has often been claimed: Charles Laffitte was the Pereires’ partner in the Ouest, but was also a substantial shareholder in the Nord. The duc de Galliera was a founder of the Crédit Mobilier but also a member of the board of the Nord. The Pereires may have been predominant in the lines which fused to become the Est, but it was N. M. Rothschild & Sons in London which placed bonds worth £2.5 million in London for the company in 1854.

  One thing is sure: Mires’ later claim that by 1855 James had “abdicated” in the face of competition from the “new” bank“ is untenable. In fact, it was the Credit Mobilier which risked overstretching itself. It was an exaggeration to say, as James did, that its capital was ”insignificant,“ but there is a case for saying that the Crédit Mobilier was undercapitalised in relation to the Pereires’ aspirations. As early as 1853, the company sought to issue bonds worth 120 million francs in an attempt to increase the funds at its disposal, but the government exercised its power of veto. When the Pereires tried again in 1855, they were again thwarted by the government. As a result, the Crédit Mobilier increasingly found itself relying on some 60-100 million francs of more conventional deposits, mainly from associated businesses like railway companies. These constraints may explain the marked discrepancy between its founders’ stated intentions and the reality of its investment strategy. In fact, its portfolio was characterised by a relatively high turnover, with its total assets fluctuating between as little as 50 million francs in 1854 and as much as 266 million francs a year later.

  If the Pereires had confined their activities to France then it is doubtful whether the celebrated “war” between them and the Rothschilds would ever have amounted to much more than a skirmish. But they did not. What made the Crédit Mobilier seem genuinely threatening to James was its potential to expand outside France and to become a pan-European phenomenon. On April 2, 1853, the Cologne bankers Abraham Oppenheim and Gustave Mevissen of the Schaffhausenscher Bankverein were granted a licence by the Grand Duke of Hesse-Darmstadt to open a discounting and issuing bank. They called the new bank the Darmstädter Bank fur Handel und Industrie and, with its projected capital set at 25 million gulden (around 54 million francs) and its Pereire-style charter, it obviously aimed to be the German Credit Mobilier. This was effectively a challenge to the Rothschilds in their ancestral home: Darmstadt is less than twenty miles to the south of Frankfurt, and the only reason Oppenheim and Mevissen chose to establish their new bank there was that the authorities in both Frankfurt and Cologne had refused to grant them a licence. Among the nine directors, four were from Frankfurt, including the Rothschilds’ old rival Moritz Bethmann.

  But what was more worrying was the direct involvement of the Pereires and Foulds in the new venture. As we have seen, Abraham Oppenheim himself had been one of the original shareholders in the Credit Mobilier (he had 500 shares), and he sent his brother Simon to Paris to drum up French interest. The agreement he made was generous: of the initial 40,000 shares, the founder-directors retained 4,000; a further 4,000 were issued by Bethmann in Frankfurt, 10,000 were sold at par to Crédit Mobilier shareholders and the remainder were held jointly by Oppenheim, Mevissen, Fould and the Credit Mobilier. But it proved the only way of ensuring the success of the new venture. Had it not been for French purchases of the shares when they were offered to the public in May, the price might very well have fallen below par (a weakness which was inevitably blamed on Rothschild machinations). The effect of these purchases was to give the Crédit Mobilier a majority shareholding. It was not long before there was talk of establishing similar satellites in other countries. As early as July 1853, James felt obliged to warn the Piedmontese banker Bolmida against establishing a Credit Mobilier in Turin, warning him that the “disagreeable possibilities” of such a bank would outweigh the “positive advantages.” The Pereires’ first attempt to establish a Spanish Crédito Mobiliaro was also in 1853, while the idea of a Belgian Credit Mobilier was floated not much later. By 1854 even Austria did not seem immune to Pereire penetration. These moves raised the alarming possibility that the Credit Mobilier might take on the character of a multi national, challenging the hitherto unique position of the Rothschilds in European finance.

  Again, however, the story should not be oversimplified. It was not only the Pereires who realised the possibilities of joint-stock banking in the 1850s. There were a number of imitations in London (for example, the Credit Foncier and Mobilier of England, the International Land Company and the International Financial Society), though they made little headway. In 1855 and 1856 alone, thirteen such banks were established in German states, including David Hansemann’s Disconto-Gesellschaft, the Berliner Handelsgesellschaft, the Vereinsbank and the Norddeutsche Bank (the last two both in Hamburg). Nor should we ignore the equally important newcomers who adopted the more traditional private and merchant banking structure, for in many ways these posed a more enduring threat to the Rothschilds’ pre-eminence. In London, the dominant position of Baring Brothers and N. M. Rothschild (especially in the acceptance market) was being challenged by the growth of existing merchant banks like Schröders and Frühling & Goschen, and the advent of newer firms, notably C. J. Hambro & Son (1839), Overend Gurney and Kleinwort & Cohen (1855). In Frankfurt too, M. A. Rothschild & Söhne was encountering new competition from Erlanger & Söhne, founded by the converted Jew Löb Moses Erlanger, as well as from Jacob S. H. Stern, Lazard Speyer-Ellissen, Moritz B. Goldschmidt (1851) and Gebrüder Sulzbach (1856). In Paris, a new force was the firm of Lazard Frères, founded in 1854.

  Apart from the boom conditions of the early 1850s, one reason for the proliferation of new banks was the revolution in communications brought about by the advent of the telegraph. Though the original discovery can be traced back to the eighteenth century, and successful demonstrations of its application happened in the 1830s, it was not until after 1848 that the telegraph had a real impact on international finance. By 1850 lines were in commercial operation in the United States, England and Prussia, France and Belgium; but it was t
he Dover-Calais submarine link in 1851 which was the real watershed. Even before the cable had been laid, Julius Reuter1 wrote to New Court: “Should you favour our service for the transmission of the Berlin and Viennese exchange rates we would pledge ourselves not to give the service to any other London house and moreover we would refund you for any cable not arriving at the fixed time.” However, any such monopolistic arrangement had long since vanished on the Continent and did not last long in London.

  This explains the somewhat unexpected hostility of James to an innovation he might have been expected to embrace. Throughout the 1850s, he repeatedly complained that “the telegraph is ruining our business.” The fact was that the telegraph made it much easier to do what the Rothschilds had managed so ingeniously before, namely to conduct financial business between affiliated houses over long distances. Many of their rivals now sought to imitate their example with the assistance of “the wires”: by the 1860s, Frankfurt families like the Speyers, Sterns and Erlangers had all established branches in London and Paris and, in the case of the Speyers, in New York as well. “It appears,” James complained in April 1851, “that yesterday a great many German scoundrels sold [French] railway shares in London with the telegraph ... Since the telegraph became available, people work much more. Every day at 12 they send a despatch, even for trivial deals, and realise [their profit] before the bourse closes the same day.” Once, the Rothschilds had been able to steal a march on their rivals with their unrivalled system of couriers and carrier pigeons; but now “anyone can get the news.” James could see that there was no alternative but “to do the same,” but it still struck him as a “crying shame that the telegraph has been established.” It meant that even when he went to take the waters for his summer holiday, there was no respite from business: “One has too much to think about when bathing, which is not good.” Such complaints were still being echoed by James’s son as late as the 1870s: although the Rothschilds had no option but to make use of the new technology, they always regretted the way it tended to broadcast financial news, and continued to write letters to one another in their accustomed fashion right up until the First World War.