The House of Rothschild

by Ferguson, Niall

  In August he sent a similar signal to Turin, where a new loan of 150 million lire was issued in August 1860. Although he took some 17.5 million lire of the new 4.5 per cent rentes (at a price of 80.5), James felt that he should have been given more. It was, he declared, “a land where there is money to be made and they have work for us”:I am far from saying that we should propose a new business or say that we would be willing to make their rentes rise. No, for if Garibaldi carries on, I will certainly not be for a rise, and if he remains quiet, I will still feel like selling a bit... If we now .. , have to sell 1 million rentes in order to show our strength, I have nothing against that.

  As we shall see, the Rothschilds were able to use the aftermath of the Italian war to reassert their influence in France too, though such veiled threats proved unnecessary there.

  James even sought to resuscitate his long-standing relationship with the Papacy, the interest on whose bonds he had rather hastily ceased to advance in December 1860. If this was done on the assumption that Cavour and Garibaldi would soon be establishing a new Italian capital in Rome, James soon realised his mistake: despite Napoleon’s willingness to leave the Papal states to Cavour, it proved politically impossible for him to withdraw French troops from Rome itself. On this question, the Emperor remained the prisoner of his own Ultramontane supporters. When the chronically insolvent Vatican was forced to turn back to the rue Laffitte in 1863, the Rothschilds were therefore ready to oblige, albeit on a small scale. From its very inception in the 1830s, this relationship had always seemed implausible. Given the aggressively reactionary stance of Pius IX in this period, it now seemed quite bizarre, and it is no wonder the Papal nuncio in Paris was mocked: “The thesis is to burn M. de Rothschild: the hypothesis is to dine with him.” But the reality was that those like Langrand-Dumonceau who dreamt of replacing “Juda” with “a Catholic financial power” did not have the Rothschilds’ financial strength; and that strength was sorely needed as the Vatican’s credit steadily sank during the 1860s. Moreover, at least some members of the family were notably respectful of Catholic sensibilities. Charlotte, as we have seen, was favourably impressed by the forms of worship and charitable institutions of the English Catholics; while in 1867 James showed himself sensitive to Catholic sentiment when he refused to ratify a major Italian loan which was to be secured on the temporal possessions of the clergy.

  The decision to withdraw from the 1867 loan also needs to be seen in the context of growing Rothschild disenchantment with the financial policy of the new Italian state. As early as December 1861, James began to have doubts about the stability of the new state’s finances. The Finance Minister, he complained, seemed intent on “ruining” his own credit, attaching more importance to new military expenditures (in the anticipation of further battles to complete the unification process) than to the government’s existing liabilities. Throughout the 1860s, James never wholly abandoned his earlier optimism about the new state’s long-term economic prospects: Italy, as he put it, was “our hobby horse.” The problem was that, as long as the new government aspired to get its hands on Rome and Venetia, its military expenditures were likely to be inflated. The fact that there was serious resistance in southern Italy to the imposition of what was essentially Piedmontese rule further widened the gap between the new state’s expenditure and its revenue. Between 1859 and 1865 the new government borrowed no less than 1,875 million lire: current revenues from tax and other sources covered only half its expenditures. Inevitably, this had an impact on both Italian bonds and the new currency. The Italian rente, which James predicted in 1862 would rise to “75 ... if not 80,” declined to a nadir of 54.08 in 1866—below the price of Roman bonds. On May 1, 1866, a year after joining the bimetallic Latin Monetary Union with France, Belgium and Switzerland, and on the eve of renewed war with Austria, Italy had to suspend the convertibility of the lira.

  The new Italian state was thus something of a financial disappointment. The Rothschild letters of the 1860s abound with abuse of the new Kingdom: the Italians were “rabble,” successive ministers were “asses” and “imbeciles,” Italy itself was no more than a “would-be great power.” In September 1864 Alphonse struck his cousin (and mother-in-law) Charlotte as “preoccupied because the house is overburdened with Italian stock. He says that the Kingdom of Italy cannot last”; he also anticipated growing “hatred between Naples, Sicily, Tuscany and Piedmont.” James had confidently anticipated something like a greater Piedmont; instead, as Alphonse commented sourly in 1866, Italy’s credit was approaching that of Spain or Mexico. “These Italians really are rogues,” he wrote angrily on hearing of a new tax on foreign capital, “and I at least can give myself the credit for having always considered them as such despite the lyricism of the discourses in their favour pronounced in England and France.”

  On the other hand, a weak government could still be a source of good business. Despite James’s grumblings, the Rothschilds had helped to replenish the National Bank’s dwindling reserves of precious metal on a number of occasions beginning in September 1862. Six months later the London and Paris houses arranged a major rente issue worth some 500 million francs (nominal).3 It was not long before more was needed, however, and 1864 saw prolonged wrangling between the government and its bankers over the price at which it was prepared to sell its treasury bills. Having more or less committed themselves to a further issue of 150 million rentes, the Rothschilds were dismayed to see the Italian government selling short-term paper at prices which could only weaken the market for its bonds. Only in order to prevent a further slide did James and Lionel agree to an advance of 17-18 million lire in gold.

  Although the inability of the Italian government to balance its budget and the resulting decline in the price of its bonds was somewhat embarrassing to its principal foreign bankers, all these transactions were far from unprofitable. Yet James and Lionel were not content with the resulting commissions. In addition, they sought to use the government’s recurrent cash-flow difficulties to force it to make concessions to their railway company. True, their hopes of a “fusion” of the Lombard line and all the incomplete lines south to Livorno, Rome and Naples were frustrated by political opposition in the new Italian parliament to foreign control of the national railway network; the deputies were naturally keen that Italy should have her own railways as well as her own state. But by 1865 the government’s financial needs overrode such economic nationalism: for 200 million lire it was agreed to sell the existing state-owned lines to the Lombard company. This put the company’s own finances under considerable pressure, necessitating short-term advances from both the Rothschilds and Talabot’s Société Générale while it sought to raise the necessary funds by issuing new bonds. However, in conjunction with similar acquisitions in Austria and Switzerland, it represented a strategic investment.

  The year 1865 also saw renewed debate about the construction of railway lines through the Alps. While others debated the relative political merits of the Fréjus (France), Lukmanier/St Gotthard (Switzerland) and Brenner (Austria) passes, James could look on with equanimity, as he had almost all the options covered. For, while others unified nations, the Rothschilds were quietly unifying Europe. As James put it to Landau in December: “All these questions are connected.” “It is effectively beyond doubt,” he enthused in a letter to the banker d‘Eichthal, “that the Brenner line... will be the premier route through the Alps, at the very centre of Europe, and that it will divert to its profit the greater part of the general traffic of the Orient, the Mediterranean and the Adriatic towards the West of Europe ...” This was James’s map of Europe: a railway map.

  The parallel Alphonse drew with Spain is a useful one, for there was indeed a superficial similarity between the Rothschilds’ dealings with Spain in this period and their dealings with Italy. Here too railways were the key, with the Zaragoza line playing the same role in James’s Spanish calculations as the Lombard line in Italy. Like the Italian government, the government in Madrid continued to run b
udget deficits—as it had done more or less without interruption since the 1820s. In both cases, Rothschild financial assistance tended to be made conditional on railway concessions. There were three differences between Spain and Italy, however. First, political instability was worse in the former: a military coup against the absolutist pretensions of the crown in 1854 had been followed by a full-blown revolution, but the old differences between Moderados and Progresistas—each with their own general—had led to a constitutional crisis in 1856. The Moderado regime of General Leopoldo O‘Donnell was overthrown in 1863 by another royal coup. Three years later there was an abortive pronunciamento by yet another general. Sometimes, this political chaos could be made light of. As James put it in December 1864: “Nothing new here. Just a change of government in Spain.” But by February 1867 he was pre sciently warning his sons to expect “a 1792” in Spain. ”In general,“ reflected Alphonse later the same year, ”Spain marches in the opposite direction to other countries. Spain is calm when the rest of the world is in trouble, and makes revolutions when the rest of the world is in repose.“ Spain was ”the country of surprises, where one cannot even count on tomorrow coming.“

  The second difference between Spain and Italy was, as Nat never ceased to remind his brothers, that Spain had a much longer history of insolvency: each time the Spanish government approached the bond market, it encountered the disgruntled holders of old “passive” debts on which previous governments had defaulted. The acute deflationary crisis which gripped Spain in the mid-1860s hardly helped to increase Spanish creditworthiness. Finally, the Spanish railways were much less profitable than those of Italy. By the mid-1860s, when government subsidies dried up, the Zaragoza line had debts to the Paris house of as much as 40 million francs and was running an annual deficit of 1.5 million. The letters of the Paris house are full of laments about this financial “nightmare.”

  All this helps to explain the relatively cautious attitude of James and his nephews when approached by successive Spanish governments for loans in the 1860s. A small advance was agreed in 1861-2; but a larger operation foundered in 1864, prompting attempts by rivals like the Pereires and Barings to step into the breach. Two years later James was prepared to countenance a new advance of 8 million francs only in return for tax breaks or subsidies for his railway company (an objective which temporarily seemed to bring Rothschild and Pereire interests into harmony). However, a rival group of French banks led by Fould and Hottinguer stole a march by offering the Madrid government a new bond-issue worth some 79 million francs. This was followed in 1867 by a further loan arranged by the Société Générale (with Barings in a supporting role) which was intended to convert the so-called “passive” debt on which interest payments had been suspended. Although the competition annoyed James, history was merely repeating itself: the English Rothschilds were as reluctant as ever to encumber themselves with new Spanish bonds, preferring to continue the system of modest advances against the output of the Almadén mines. Other forms of guarantee offered—the salt monopoly, the tobacco monopoly or colonial revenues from Cuba—did not have the appeal of mercury: the English Rothschilds always preferred metals, and the more precious the better.

  The French Rothschilds, by contrast, were mainly concerned to secure concessions for the ailing Zaragoza line, and were willing to flirt with the possibility of further advances and even a new loan to this end: as Anthony rightly said, “railroads are always at the bottom of the Baron’s business.” The tortuous negotiations of 1867 revolved around the ban on Spanish bonds at the French bourse which had been imposed in 1861 in an attempt to combat capital export. The French premier Eugène Rouher intimated that he was willing to end this suspension—thus allowing a new Spanish loan to go ahead—provided the Spanish government set its financial house in order. The question was whether this reordering would include the kind of perks for the Zaragoza line sought by James; though quite why the Spanish government should borrow between 10 and 100 million francs purely in order to hand it over to French-controlled railway companies was never entirely clear. The negotiations, which were initiated on behalf of the Narváez government by the banker Salamanca, were still dragging on inconclusively when the revolution broke out—by which time Narváez was dead and Salamanca bankrupt. “A little security and stability in the political system,” grumbled Alphonse, “would be more efficacious than any subsidy.” It was not to be: in September a coalition of generals led by Juan Prim launched a successful revolution which overthrew Queen Isabella. Indeed, one reason for the failure of the various loan negotiations prior to this was probably the various bankers’ sense of impending upheaval. As Alphonse acknowledged, Weisweiller had “long anticipated the Catastrophe.”

  Napoleon at Ferrières

  That Alphonse was able to count on strong support from the French government in his negotiations with Spain is in itself noteworthy. For perhaps the most unexpected consequence of the Italian war was its impact on relations between the Rothschilds and Bonapartist France. Superficially, the French role in Italian unification was one of the high points of Napoleon III’s reign, and the Second Empire never looked more outwardly impressive than it did in the early 1860s. When Lionel visited Paris in April 1861, he was dazzled by the transformation of the city being wrought by Georges Haussmann. “I must say,” he commented half-seriously on seeing some of the wide, new boulevards which had replaced the cluttered alleys of the old town, “I wish we had a man like the Emperor for three months just to make a few alterations in old London.” Yet behind this veneer the Empire was developing serious weaknesses. In part, these were diplomatic. Nothing did more to alienate English Liberal opinion than Napoleon’s acquisition of Savoy and Nice in March 1860; this intimation of “vast conceptions” akin to those of his uncle undid all the diplomatic good done by the Anglo-French trade treaty signed in the same month. To James, Anglo-French antagonism could only imply trouble for France; that had been the lesson, as he saw it, of Louis Philippe’s demise. “The most revolutionary developments of French internal policy,” he told the new Austrian ambassador, Richard Metternich in October 1859, “would not affect the financial world here as profoundly as a breach with England.” “It is a great pity,” remarked Mayer Carl in March the following year, “that the favorable impression of the treaty should suffer by all these unfortunate speeches [about Italy] which lead to nothing good [and] are at liberty to spoil the good understanding which ought to exist between England and France for the general security of Europe.” “The great financiers of Paris and especially the Rothschilds” were, according to one diplomatic observer the following month, “engineering a panic and are shrieking from the housetops that war between the two great sea powers is inevitable.”

  This diplomatic estrangement had an economic dimension too. The approach of civil war in America led to a drain of gold from Europe across the Atlantic, beginning in 1860. This affected both London and Paris; but, while the Bank of England relied principally on increases in Bank rate to defend its reserves, the Banque de France was not quite converted to strict imitation of Threadneedle Street practice. Partly in order to avoid further increases in its discount rate—which some of the regents opposed—the Governor of the Banque therefore authorised purchases of gold in London in November 1860. Unfortunately, his agent made the mistake of withdrawing over £300,000 directly from the Bank of England itself, a confrontational step which Alphonse deplored. An agreement to swap 50 million francs of Bank of England gold for the equivalent in Banque de France silver provided only a temporary respite for the Banque, which was coming under additional pressure from the abnormally large French trade deficit and the financing needs of the government.

  These difficulties forced the government to turn to the Rothschilds. In October 1861 an elaborate transaction was agreed whereby de Rothschild Frères and five other Paris banks (Hottinguer, Fould, Pillet-Will, Mallet and Durand) drew three-month bills on the London house and on Barings to the value of £2 million, with the aim of reducin
g the premium on sterling bills and halting the gold flow across the Channel. At the same time, the Banque sold rentes (though it appears to have partly negated the deflationary effect of these open market operations by issuing 50 million francs’ worth of small denomination notes). None of these devices really resolved the Banque’s difficulties, however, which continued into 1862-4 as gold and silver were diverted to Egypt and India, the principal suppliers of cotton to the European textile industry in the absence of the blockaded American South.

  For the Paris Rothschilds, tight money meant a revival of influence; or rather, it meant a decline in the influence of a number of rivals. In 1861 Jules Mirès was arrested for fraud, a downfall James relished: “Rothschild is triumphant,” observed Mérimée, “and says that he is the sole baron of industry.” The early 1860s also saw the first intimations of the Credit Mobilier’s mortality. Having invested heavily in real estate through their subsidiary the Compagnie Immobilière, by 1864 the Pereires found themselves struggling to balance their books. As these stars of the 1850s waned, Alphonse waxed as the voice of economic orthodoxy at the Banque de France. The Credit Mobilier, argued Alphonse in October 1864, was the “principal author” of the monetary crisis and the “sole remedy lay in the energetic resistance of the Banque.” “The suspension of convertibility,” he feared, was the Pereires’ last hope of survival. “This situation is really quite critical, for it is a struggle to the death between the old system and the new system of business, between the Credit Mob. and the banks of state.” The testimony he and his father gave to the monetary Enquête of 1865 was therefore an advance obituary for the earlier ambitions of the Pereires to supplant the Banque with a more expansionist system of credit. “You wish to establish a dozen banks?” James asked the commission, alluding to Pereires’ requests for monetary relaxation:You wish to give them the right to issue notes? Where will the confidence be then? Suppose I am at the head of a small bank which has a little money, but needs a lot. I would not take precautions, I would say: Let come what may! Some other bank is going to have to come to the rescue. That is what all the little banks will do which will be established and which will look towards the Banque de France, as if towards a mother bank which is obliged to pay for the follies of others.