The House of Rothschild

by Ferguson, Niall

  It has been suggested that the Rothschilds were opposed to the Mexican adventure. The reverse is true. The Rothschilds had interests in Mexico, as we have seen. Indeed, Nathaniel Davidson was concerned that he stood to lose at least $10,000 as a result of the Juarez government’s refusal to recognise legal agreements made by its conservative predecessor, particularly with regard to Church lands, on the security of which Davidson had lent some $700,000. The San Rafael ironworks he had acquired were also under threat. Davidson therefore welcomed the arrival of European forces at Vera Cruz, and only regretted that they did not move more swiftly to overthrow Juarez. He hastened to assist the French expedition’s paymaster by discounting bills and providing him with several million dollars of gold from California. There was an indirect interest in Maximilian too: his wife was the daughter of King Leopold of the Belgians, a long-standing Rothschild friend who had entrusted her legacy to the Paris house as long ago as 1848. As soon as the French government brought up the question of a Mexican loan, the Rothschilds therefore made no secret of their interest.

  To be sure, James was always sceptical about the likely success of such a loan. “I don’t quite understand,” he mused in August 1863, “how an Austrian Prince can go under the title of Emperor with French troops, and if they don’t stay, who can guarantee that taxes will continue to be collected and [interest paid on] the loan.” He correctly foresaw too that the ending of the American Civil War would weaken the French position. Even if the loan were taken in commission, James had no desire to be associated with bonds which might easily be rendered worthless if the whole adventure ended in a débâcle. But these doubts should not be taken to mean that he was against the loan; it merely explains his uncharacteristic eagerness to act in tandem with Barings, thus spreading the risk, and the pains he and Alphonse took to secure the agreement of the London bondholders to their terms. Ultimately, he was sorry to lose the Mexican loan to rivals like the Credit Mobilier and Glyn’s and made an energetic effort to hang on to it. He regarded the idea of a new Mexican bank as potentially “a golden deal” and was disappointed when that too had to be abandoned. Even without the loan, the Rothschilds found themselves exposed, thanks to Davidson’s over-enthusiastic discounting of bills not only for the French army but for Maximilian himself. When the French withdrawal was announced—to Davidson’s horror—they were left with bills on Maximilian’s doomed regime worth some 6 million francs.

  There had therefore been legitimate, if ultimately disappointed, commercial reasons for supporting the Mexican adventure. However, there was a more subtle and perhaps more important subsidiary argument in favour: squandering money and men in distant Mexico distracted France from Central Europe. The private correspondence makes this manifest: as James put it bluntly in June 1863, sending money and troops to Mexico was “not good for the Treasury, but it avoids war over Poland” (see next chapter). The ramifications of this weakening of France, however, would prove far greater than he would ever know. Alphonse’s assessment, following the news of Maximilian’s death was not overdone:One should not deceive oneself: the tragic death of poor Maximilian is an event which could have very serious consequences. In the country [France] there reigns a general discontent stemming from the frivolity with which questions of internal as well as external policy are treated. From this there comes a general malaise, an uncertainty about the future which influences all transactions.

  This malaise was the “baisse” against which James had all along warned.

  FOUR

  Blood and Silver (1863-1867)

  We aren’t working for the King of Prussia.

  JAMES DE ROTHSCHILD, 1865.1

  When Otto von Bismarck accepted Amschel’s invitation to lunch with him in Frankfurt in June 1851, he can hardly have been aware whose example he was following. Thirty years before, Metternich too had “taken soup” with Amschel; it had been the beginning of a long and mutually beneficial friendship between the Austrian Chancellor and the house of Rothschild. They attended to his private finances (often on preferential terms) and acted as a swift and secret channel of diplomatic communication; he in turn provided them with sensitive political news and gave them a privileged position not only in Habsburg finances but in Austrian society. It was evidently Amschel’s hope that Rothschild relations with Bismarck would follow the same pattern; and for a time that seemed a not unrealistic expectation.

  Although Bismarck’s anti-Austrian policy had briefly brought him into conflict with the Rothschilds during his time as Prussian envoy in Frankfurt, neither side had taken this personally, and Bismarck had subsequently entrusted his private financial affairs to the Frankfurt house, which also acted as the Prussian delegation’s official banker. M. A. Rothschild & Söhne remained his bankers until 1867. Like Metternich, Bismarck was not a rich man before 1866; unlike him, however, he never sought to borrow on a large scale from the Rothschilds, though he ran up a modest overdraft in 1866, when his expenditures (27,000 thalers) exceeded his salary as Minister President (15,000 thalers) and the income from his estates (around 4,000 thalers)—a debt easily cleared when he was awarded a gift of 400,000 thalers by the Prussian Landtag as a reward for his victory over Austria. Before that time, Bismarck relied on the Rothschilds primarily to provide him with current account facilities, using the Paris house to pay his substantial expenses (10,550 francs) when he visited Biarritz in 1865, for example. Bismarck expected an annual statement of his account at the beginning of each year “so that I can make my calculations as [I set my clock] by the sundial.” In addition, because his account was often in surplus—as in June 1863, when he was in credit to 82,247 gulden—the Rothschilds paid him interest (at 4 per cent) and occasionally made investments on his behalf At some point before 1861 they bought shares for him in the Berlin Tivoli brewery, a firm in which the Frankfurt house had a major stake (other major shareholders were the Oppenheims of Cologne).

  As Fritz Stern has shown, after 1859 Bismarck delegated an increasing amount of his private financial affairs to Gerson Bleichröder, who had taken over his father Samuel’s Berlin banking business on his death four years before. But this did not necessarily signify a breaking of the Rothschild connection. Bleichröder had for some time been one of the principal bankers in Berlin with whom the Rothschilds did business, and it was apparently Mayer Carl who first recommended him to Bismarck. Moreover, Bleichröder was at pains to make available to the Rothschilds whatever scraps of political information he could pick up in Berlin. In March 1861, for example, he more or less accurately forecast that further Liberal election successes would lead to a complete breakdown in relations between crown and Landtag “on the army question” followed “in three months” by “another dissolution and at the end a change in the electoral law, with a reactionary minister or the entire abolition of the chamber.” His information steadily improved after Bismarck returned from St Petersburg to Berlin, after which the phrase “according to personal information from Herr von Bismarck” began to feature in his correspondence. At first, Bleichröder assumed that the “reactionary” and “unpopular” Bismarck would not last long. Gradually, however, he established a closer relationship with the beleaguered premier, not least because Bismarck wished to use him as a channel of communication to James in Paris. As Bismarck’s aide Robert von Keudell put it, James “always had free access to the Emperor Napoleon, who allowed him to speak openly not only on financial but on political questions as well. This made it possible to send information to the Emperor through Bleichröder and Rothschilds for which the official route seemed inappropriate.” Meetings with Keudell and Bismarck himself became increasingly regular; soon Bleichröder’s letters were full of allusions to his “good source.”

  Nor did Mayer Carl in Frankfurt neglect his increasingly influential client. We have already seen how by 1860 he had secured, partly thanks to Bismarck, the title of Prussian court banker and a minor decoration. In the hope of obtaining a rather better mark of honour, Mayer Carl wrote to Bismarck in 1863 i
n the kind of elaborately sycophantic language which his English and French cousins had long since been able to disdain:Your Excellency knows my old, proven and unbounded devotion to your person and knows how attached I have always been to Prussian interests, even though my great and protracted services have not... been noticed in any prominent fashion... I now turn to you, full of confidence in Your Excellency as a noble, magnanimous and all-powerful representative and do not doubt that Your Excellency in just appreciation of the facts known to Yourself will kindly think of me and grant me a dignified token of the all-highest recognition... May heavenly Providence always watch over Your Excellency and may you experience only days of brightest joy and of boundless good fortune in the circle of your family, may it be my lot always to enjoy Your Excellency’s high favour and gracious protection and to be able to count myself among your most faithful admirers and servants.2

  Yet it was not to be. Where the financial relationship between the Rothschilds and Metternich had flourished, their links to Bismarck withered. Despite his position of semi-dependence on the Rothschilds, whose disfavour would have been injurious to what was still a small firm, it seems that Bleichröder was able to poach Bismarck’s account from the Frankfurt house. To begin with; he did no more than collect Bismarck’s official salary in Berlin and disburse some of his domestic expenditures. Even before Bismarck returned to Berlin in 1862, however, Bleichröder began to offer his services as an investment adviser, complaining on his putative client’s behalf when the Tivoli company failed to pay a dividend. Soon he was offering Bismarck a succession of Prussian railway and bank share options, as well as providing him with regular reports from the Berlin bourse. By the end of 1866, he had achieved his objective: it was Bleichröder not Rothschild who handled the investment of Bismarck’s 400,000 thaler gift, and at some point after July 1867 Bismarck closed his account in Frankfurt and remitted the balance (57,000 thalers) to Bleichröder. “It is not necessary to let the Jews get the upper hand,” Bismarck later declared, “or to come to depend on them financially to such an extent as is regrettably the case in several countries. My relations as a minister with Jewish high finance have always been such that the obligation has been on their side and not on mine.” This was true: Bleichröder was always deferential to Bismarck in a way that (for all Mayer Carl’s florid avowals) the Rothschilds would never have been if Bismarck had continued to bank with them. The path Bismarck led Prussia down after 1862 was simply too uncongenial to Rothschild interests in Austria, in Italy and in France.

  For their part, as we shall see, the Rothschilds soon came to regard Bismarck with a mixture of antipathy and admiration. He was a “madcap,” declared James in March 1866. At around the same time, Anselm memorably likened him to “a wild boar foaming with rage.” Bismarck, wrote James a month later, was “a fellow who just wants war.” “The terrible Bismarck,” exclaimed Charlotte, “is inexorable; he is the great highway robber of the second half of the nineteenth century.” Yet perhaps even more telling than these denunciations are the expressions of admiration which the Rothschilds also evidently felt for “the white revolutionary.” As early as 1868, Charlotte could regard “a Bismarck intelligence” as a desideratum in a son-in-law. Alphonse, who of all the Rothschilds had most reason to hate Bismarck, could refer to him with only a hint of bitterness as “the great master of the world” and “the man behind the curtain... wire-pulling the puppets of the whole European political show.” When Bismarck finally fell from power in 1890, Alphonse’s comment was a singular tribute to an old adversary: with Bismarck gone, he wrote, “the European countries certainly cannot be said to dwell on solid fundamental principles.” Bismarck never really felt the same respect for the Rothschilds, alluding to them on a number of occasions in more or less anti-Semitic terms. But nor did he underestimate their financial acumen. Perhaps he also recognised in them something of his own hard-nosed “realism.” In later life he defined his own view of political principles as similar to Amschel’s who, he recalled jokingly, had been in the habit of asking his chief clerk: “Mr Meier [sic], if you please, what are my principles today with regard to American hides?”

  German Unification: The Financial Background

  In one sense, it is easy to see why Bismarck was able to avoid “depending” on the Rothschilds or any other bankers in a way that no Austrian politician of the period could. Financially, Prussia was in a different league. Table 4a gives some bald figures for the nominal increases in expenditure for three of the principal combatants in the period. The figures for France and Prussia are in fact quite similar; but the Austrian figures—which show expenditure nearly trebling between 1857 and 1867—testify unambiguously to the Habsburg monarchy’s unsustainable military commitments. It was the army and the defence budget which caused this growth, not (as might be imagined) inflation, which was comparatively restrained (prices rose by just 5 per cent, surprisingly little in view of the substantial monetary expansion of those years).

  Table 4a: Public expenditure in the era of unifications, 1857-1870.

  Sources: Mitchell, European historical statistics, pp. 370-85; Schremmer, “Public finance,” pp. 458f

  The attitudes of bankers, however, were more directly determined by the way military spending was financed. Here Prussia’s advantage over both her principal rivals was more pronounced. Between 1847 and 1859 the total Austrian debt increased by a factor of 2.8; for Prussia the equivalent figure was just 1.8. More important, Prussia started the period with an exceptionally low debt burden: in the 1850s public debt as a proportion of national income was around 15 per cent and as late as 1869 was still less than 17 per cent; the equivalent figure for France rose from 29 per cent in 1851 to 42 per cent in 1869. Figures for the cost of debt service make the difference equally apparent: in 1857 the Austrian state was spending 26 per cent of its ordinary revenue on debt service, compared with a figure of just 11 per cent for Prussia. For the Bonapartist era as a whole, the equivalent figure for France averaged 30 per cent; even at its peak in 1867 the Prussian debt service burden was less (27 per cent). This meant that, from the point of view of a prospective lender, Prussia was a good credit risk; France slightly less so; Austria a downright bad one. Again, these differentials can be illustrated with reference to bond prices. The price of Austrian 5 per cent metalliques touched twin troughs of around 42 (a price not seen since the Napoleonic period) in 1859 and 1866. Prussian 3.5 per cents, by contrast, never fell below 78 (see table 4b).

  To make the difference clear, throughout the period between 1851 and 1868 the yield spread between Prussian and Austrian bonds ranged between 2.7 and 8.6 percentage points, averaging almost exactly 5 per cent (see illustration 4.i). The gap is less pronounced for Prussia and France, but it is still there: on average between 1860 and 1871, it was just over one percentage point. As Talleyrand observed (with par-donable exaggeration) in January 1865, “Prussia stood above par in politics as on the bourse.” Thus while it is still possible to explain the outcomes of the various conflicts of the period 1858-71 in terms of the shrewd diplomacy of statesmen or the bold strategy of generals, a financial explanation is necessary too, if not sufficient. Another way of putting this is that Austrian policy failed precisely because it was financially unsustainable: unable to afford the military effort necessary to achieve victory in both Italy and Germany, the Austrians should have accepted the option of selling their territory in one, to enable them to afford to defend the other. This was essentially the strategy advocated by James and his nephews. By seeking to defy financial reality, Austria ended up losing on both fronts.

  Table 4b: The financial impact of German unification.

  Sources: House of Commons, Accounts and papers, vol. XXVII and XXXI; Economist·, Heyn, “Private Banking and Industrialisation,” pp. 358-72.

  Nevertheless, it would be wrong to suggest that Bismarck’s victory was financially predetermined. Bismarck’s access to state revenues in the crucial years 1862-6 was technically illegal in the absence of parliam
entary approval, and even his own “gap theory” (Lückentheorie) could not easily justify increases in expenditure much above the last approved budget. On average, expenditure in the years 1863-6 exceeded the sanctioned ordinary expenditure of 1861 by some 38 million thalers per annum. Bismarck risked being held personally liable for raising funds without parliamentary sanction, and in January 1864 the Liberal-dominated Landtag rejected his request for a loan of just 12 million thalers. From this point, he had no option but (as he put it) to “take [funds] wherever he could find them.” But that, as we shall see, was easier said than done, and Bismarck was bluffing when he assured the Austrian charge d‘af faires in the summer of 1864 that he had reserves of 75 million thalers. Indeed, it is arguable that the market’s confidence in Prussian finance in this period was to some extent overdone. In the immediate aftermath of the war against Denmark, Bismarck advocated cuts in defence spending as a way of raising money; if this could be achieved, he reasoned, “Nobody would be able to form an opinion about the financial strength of Prussia.” That puts the high quotation of Prussian bonds in a rather different light.