The House of Rothschild

by Ferguson, Niall

  “To do Rothschild justice,” Cavour remarked with wonderful understatement in January 1855, “it must be said that he never asks for money. That is his better side.” What Cavour had demonstrated was that the state which shopped around in the more competitive financial markets of the 1850s was more likely to see that better side. That James was once again in favour at Turin was revealed when, to the dismay of the Pereires, he emerged as the main foreign shareholder in the new Piedmontese investment bank. “Pereire is simply furious,” wrote Cavour in February 1856, whereas “Rothschild seemed delighted. He says that he wants to make an Italian credit, ‘Because, do you see, you must have Italy. Hurry up, for if peace is concluded [between Russia and the Western powers], it is necessary to be in a position to act immediately.’ ” The new bank, he and Cavour agreed, should be “an Italian affair instead of a Piedmontese affair.” With astonishing prescience, James was already preparing to finance the next European war—the war he foresaw between Austria and Piedmont. It was the second time he had hinted to Cavour that he would back him in such a conflict.

  The Counter-Attack

  The Rothschilds had faced competition during economic upswings before; it was when the downturns came that they tended to see off their rivals. The 1850s were no exception. At a certain point, the demands on the international capital markets from new banks and railway companies, combined with the borrowings of states involved in the Crimean War, could no longer be sustained; and definitely could no longer be reconciled with monetary stability. A slowing-down was detectable even before the war ended; the crash came in August 1857 when the Ohio Life and Trust Co. stopped payments, triggering a domino-like succession of American bank failures. The crisis spread swiftly across the Atlantic to Glasgow and Liverpool, where at least four banks failed, as well as to Hamburg, and might have claimed the Anglo-American house of Peabody & Co. in London had it not been for an £800,000 loan from the Bank of England. As far as can be established, none of the Rothschild houses was badly affected by this crisis. The profits of the London house for 1857 were well down (to a negligible £8,000), but they were still profits; the Naples house did rather better, though it had a bad year in 1858.

  French monetary policy in this difficult period was in many ways the key to the Rothschild counter-attack against the pretensions of the Pereires; this has seldom been understood. A vital turning point in their rivalry was the election of Alphonse de Rothschild as a regent of the Banque de France in 1855. Viewed strictly in terms of the Rothschilds’ importance as shareholders in the Banque, it was natural for a member of the family to become, in effect, one of its directors. The Paris house held over.1,000 Banque shares in 1852; Plessis has shown that this number tended to rise, reaching peaks of 1,499 in 1857 and 1,616 in 1864. Moreover, individual family members held up to 200 shares in their own private portfolios. Even allowing for the high level of concentration of share ownership, this made the Rothschilds probably the Banque’s biggest shareholders.

  Nevertheless, Alphonse’s election was controversial for a number of reasons. First, despite their large stake, the Rothschilds had not been admitted to the Banque’s Assemblée Générale prior to 1855 (presumably because James remained technically a foreigner). Second, although the convert d‘Eichthal had been a regent before him, Alphonse was the first Jew to become a regent. Third, and most important, his appointment coincided with a potentially crucial debate about the future of the Banque itself. This explains why the meeting of January 22, 1855, at which Alphonse’s name was put forward as a prospective regent, was the best attended in the period: Mires and the Pereires were among the 138 members who voted and—quite exceptionally—the election had to go to a second round before Alphonse obtained an undisputed majority over the other two candidates. Although the regents were not quite the haute banque caste of French political legend, Alphonse’s election was an important watershed, finally putting the Rothschilds on a par with the Mallets, Davilliers and Hottinguers. More to the point, it gave the Rothschilds a representative in the Banque at a critical juncture. Alphonse may have made more formal contributions to the Banque’s deliberations in the 1860s. But a Rothschild influence over French monetary policy in the 1850s is unmistakable, and proved crucial in the Rothschild-Pereire conflict.

  The question, in essence, was how far the Banque should become more like the Bank of England in the way that it influenced the French money market. It had done much to strengthen its own position during the 1848 crisis, killing off the regional banks of issue; but it remained a relatively small entity—its capital of around 70 million francs in 1852 was rather less than that of de Rothschild Frères—and the Credit Mobilier’s pretensions posed a serious threat. The climax of the banking and railway boom in 1855, combined with the fiscal demands of the Crimean War and a bad harvest, placed the Banque under a severe strain. In August 1855, to replenish its depleted reserves, the Governor was forced secretly to buy 30 million francs of gold and 25 million francs of silver from de Rothschild Frères. A year later, the situation deteriorated so much that the Governor had to request permission to suspend the convertibility of the currency. A substantial number of the regents favoured this move, but Alphonse was not one of them. Supported by the Finance Minister Magne, he and his father successfully argued for an increase in the discount rate and larger purchases of gold and silver—including a further 83 million francs from the Rothschilds themselves—in order to maintain cash payments. Between 1855 and 1857 the Paris house provided the Banque with gold worth 751 million francs, purchased through New Court at a premium of around 11 per cent.

  The debate on the renewal of the Banque’s charter thus took place at a time when the Governor was increasingly dependent on the Rothschilds to replenish his reserves. Though Alphonse was absent from the Banque during the first half of the year, it seems likely that his father played some part in these debates, arguing against the Pereires’ schemes for a radical restructuring of the Banque designed to make it more accommodating to the new investment banks with their large portfolios of shares. The final outcome of the debate was essentially a victory for the conservatives: in return for accepting 100 million francs of rentes from the government, the Banque was allowed to double its capital and was freed to raise its discount rate above 6 per cent when monetary tightening seemed necessary. Priority, in other words, was given to maintaining exchange rate stability rather than the liquidity of the domestic financial markets; and this was to prove a real constraint on the Credit Mobilier.

  It was while this institutional battle was being fought (in 1856) that James launched the Réunion Financière—essentially a loose confederation of private banks and allied railway financiers like Bartholony, Pillet-Will, Blount and Talabot—with the intention of challenging the Pereires at their own game. In fact, his plan of using the Réunion as the basis for a new joint-stock bank similar to the Credit Mobilier11 was thwarted by Magne, who imposed a temporary ban on new company formations in early 1856 as part of his effort to cool down the economy and free capital for the government’s own pressing financial needs. This seemed to Mires (whose plans were also affected by the ban) like a victory for the Pereires, and there is no denying that the Réunion group controlled a smaller amount of railway capital than the Pereires and their allies (49 million francs to 94). But the signal had been given: from now on, the French Rothschilds at least were prepared to contemplate the adoption of Pereire-style investment banking.

  In fact, it soon became apparent that the restrictions imposed on the domestic capital market, combined with the more restrictive discount policy of the Banque de France, imposed a bigger constraint on the Pereires than on the Rothschilds. Nothing illustrated this more starkly than the Pereires’ failure to prevent the fusion of the Grand Central line with the Rothschild-controlled Paris-Orléans line in June 1857, a setback which prompted anguished allegations from the Pereires about a conspiracy against them and their undertakings. “To reduce us to impotence,” they complained to Napoleon, “they sa
y we are all-powerful.” The reality was that, as the financial crisis of 1857 intensified, it was the Pereires who suffered more. Of all the railway lines, it was the Nord which proved most resilient in the crisis; the Banque de France’s advances to the other railway companies and the Franqueville conventions (whereby the government guaranteed dividends and subsidised the building of unprofitable branch lines) were responses to the weakness of the “new” bank, not the “old.”

  This explains why the Pereires tended to come off second best in the great pan-European race for railway concessions after 1856-7. That the railway business became genuinely international in this period is often underestimated as a factor in international relations. It is a myth that railways favoured nationalism by creating integrated national markets: the railway map of Europe very quickly spilled over state borders to become a transnational network, and much of the capital invested in railways in Spain, northern Italy, the Habsburg Empire and Russia was either English or French. This internationalisation of the railways coincided with a dawning awareness among military planners that they could play a vital strategic role in transporting armies as well as goods and travellers. The control of the railways thus became a political as well as a financial question, and one of considerable significance in the events leading up to the “unifications” of Italy and Germany.

  The pattern repeated itself with variations in Belgium, Spain, Piedmont, Naples, Austria, the Danubian principalities, Russia and even Turkey. First there were competing attempts to establish Credit Mobilier-style banks in these economies; then, or simultaneously, there was scramble involving much the same people to grab railway concessions. In Belgium the Rothschilds’ old friend King Leopold positively encouraged James to establish a Credit Mobilier-style bank, but James dropped the idea as soon as he was sure that the Pereires had no intention of doing so themselves; he acted only when it was necessary to thwart his rivals. In truth, existing Belgian finan cial institutions like the Société Générale rendered the Pereires more or less superfluous. James was therefore free to extend the influence of the Nord company over important sections of the Belgian rail network, acquiring control of the Namur-Liège line and forming a consortium with the Société Générale for the Mons-Hautmont line. He was also indirectly involved as a director of the Est line in its acquisition of the Luxembourg railways—a vital link between the Belgian ports of Ostend and Antwerp and the Rhineland. In Switzerland there was more of a contest: the Pereires built up a large shareholding in the Western line along Lake Geneva, but the more important Central and North-East lines remained in Swiss hands until the Réunion Financière bought a stake in the latter and merged it with other lines to the south to create the United Swiss Railway Company. In Naples there was a momentary alarm when it seemed that the King might be about to grant the Pereires a bank charter, but this soon passed; the Bourbon regime had an intense suspicion of economic innovation and made even the construction of railways in Sicily well-nigh impossible.

  Elsewhere the Pereire threat was more serious, and elicited a succession of decisive Rothschild responses. In Spain, they succeeded in establishing the Crédito Mobiliaro Español following the legalisation of joint-stock banking in December 1855. They were not the only French bankers to do so: Adolphe Prost (of the Compagnie Générale des Caisses d‘Escompte) set up a Compañia General de Crédito and the Rothschilds responded by setting up the Sociedad Española Mercantil e Industrial. The banks were broadly similar in their size and objectives. The Pereires dreamt of financing a railway connection from their own Midi line’s Bayonne terminus, across the Pyrenees and through Madrid to Cadiz in the south-west. The Rothschild response was swift: in partnership with the ubiquitous Morny, James secured the Madrid-Almansa concession from the marqués de Salamanca in 1855 and two years later created the Madrid, Zaragoza and Alicante Railway Company, the first stretch of which (Madrid-Alicante) was opened in May 1858. Morny simultaneously snapped up the concessions to link Madrid to Portugal via Ciudad Real and Badajoz, as well as the routes to Málaga and Granada via Córdoba. This left the Pereires with only the head and the tail of their original design: the Bayonne-Madrid link, which was constituted as the Norte de España in December 1858; and the Córdoba—Seville link, which they built in partnership with Charles Laffitte. Although this meant that the Rothschild group failed to secure the connection between Spain and France, the point here is the slowness with which the Pereires moved; plainly their difficulties in 1857 put a brake on their schemes outside France. It is also striking that James was now collaborating with Morny and even Mires (who secured the Pamplona-Zaragoza line), and perhaps equally striking that they were collaborating with him.12

  The Rothschild victory in Piedmont was even more clearcut, though in some ways it was a Pyrrhic victory. There was a moment in December 1855 when it seemed that Cavour and the Pereires (whom he thought “astonishingly able”) were going to strike up an alliance, which would have been a serious blow for James. But the Pereires evidently wanted too much—“a monopoly,” as Cavour complained. James was more subtle, and it was he who gained the main foreign shareholding (33 per cent) in the new Cassa del Commercio e delle Industrie in Turin, established in February 1856 as the sole chartered joint-stock bank in Piedmont. In fact, James’s plans for “an Italian bank” in Turin proved to be premature; the coincidence of the 1857 financial crisis and the death of the bank’s director Luigi Bolmida plunged it into difficulties and by 1858 it was all but defunct. Nevertheless, we can infer what Bolmida and James had been trying to achieve from an Italian account of a visit by James to Turin in April 1857, shortly after Bolmida’s death. “He wanted,” according to this, “to resume Bolmida’s projects which consisted essentially of obtaining from M. de Cavour the granting to the Piedmontese Credit Mobilier [that is, the Cassa del Commercio] of all the state railways in order to create in turn a Grand Central [line] and to secure for himself the concession for the grand railway of the two Riv ieras.” As in Spain, in other words, a new bank was a means to the end of expanding the Rothschild railway empire: James was evidently hoping not only to gain control of the Victor Emmanuel Railway Company, formed by Charles Laffitte and Alexandre Bixio in 1853 to link Turin to France and Switzerland, but also to secure the concession to link Marseille to Nice and Genoa. Though he managed only the latter (in partnership with the French financier Gustave Delahante), the extent of James’s victory in Piedmont should not be understated. Moreover, we can see that, as in northern France and Belgium, James was building up a railway network which crossed borders in what were soon to become strategically vital areas: Savoy and Nice, which Napoleon III coveted, and the Piedmont-Lombardy border. Significantly, the natural railway routes from northern Italy across the Alps ran not from Turin but from Austrian-controlled Milan or Venice.

  This explains a good deal of the Rothschild strategy in Austrian territory. The Pereires had stolen a march on the Rothschilds in January 1855, when they persuaded the financially pressed Austrian government to sell them a section of the state railway network (the Prague-Brünn line in Bohemia and the line running east from Marchfeld into Hungary), another early privatisation.13 Though the Rothschilds still controlled Salomon’s Nordbahn, they had shown little interest in Austrian railways since 1848, which had increasingly been built and controlled by the state; but the Pereires’ coup galvanised Anselm. The Pereires had managed to create a formidable consortium: the board of their new Imperial and Royal Chartered Austrian State Railway Company (Staatsbahn for short) included Morny, Fould, Ludwig Pereira and the Vienna bankers Sina and Eskeles (who already controlled the Vienna-Raab line).14 Moreover, they appeared to have secured a bargain: the lines which they acquired for just 77 million gulden had cost 94 million gulden to build. They had also done Napoleon III’s foreign policy a favour: the purchase was widely seen as cementing the Austro-French alliance of December 1854, and was actively encouraged by Hübner in Paris. It was, complained Anselm, a “disgraceful business”—so disgraceful, indeed, that h
e immediately set about trying to imitate it. When the Pereires proposed to the government the creation of a Credit Mobilier in Vienna—with the obvious intention of buying up the remaining state lines—he and James agreed to organise a rival bid. Given that the lines in question were those which would link Vienna to Trieste (the Südbahn) and Milan to Venice (the Lombard), it is easy to see their concern.

  The Rothschilds had four decisive advantages. Firstly, the entente between Austria and France proved to be short-lived. Secondly, as the financial position in France deteriorated, the government ruled that foreign securities could not be issued on the bourse; for the Pereires this was a lethal blow—James, by contrast, could still count on New Court and the London market. Thirdly, the Rothschilds were able to assemble a group of grand names (notably Count Chotek and the princes Schwarzenberg, Fürstenberg and Auersperg) to act as their partners, as well as the banker Leopold Lämel, an influential figure in Prague. Finally, they very probably had sight of the Pereires’ bid thanks to the Minister of Commerce Baron Bruck, which enabled them to draw up a similar but more attractive alternative, with nearly double the capital (100 million gulden to the Pereires’ 56.6 million) and a more overtly Austrian orientation. By the end of October 1855, the issue was settled. On November 6 the Imperial and Royal Austrian Credit Institute for Commerce and Industry (Creditanstalt) was formally chartered; a month later the first shares were issued, of which the Rothschilds and their partners retained at least 40 per cent.

  With its branches in Prague, Budapest, Brünn, Kronstadt and later Trieste and Lemberg, the Creditanstalt swiftly established itself as the dominant financial institution of the Habsburg Empire, a position of unrivalled pre-eminence it retained until the eve of the First World War. Nothing did more to re-establish the Rothschilds’ economic influence in Central Europe. Yet the extent to which the Creditanstalt represented a moral victory for the Pereires’ methods can hardly be overstated. In order to beat them, James—after all his earlier criticisms of the investment bank as a concept—had been obliged to join them, as he admitted to Count Orlov, the new President of the Russian Council of State:Every time we have been consulted by government, we have indicated with the utmost force the dangers posed by these credit institutions, but when our views have not prevailed... we have had no option but to participate in these enterprises, which after all are excellent for those who undertake them ... It was impossible for us to abstain completely...