The House of Rothschild

by Ferguson, Niall

  In any case, the struggle for mastery in Germany was as much diplomatic as military: money furnished the sinews of war, but the role of money in the diplomacy of the 1860s proved relatively limited, as James found out to his chagrin. Regardless of Austrian weakness, there were a number of occasions when Bismarck’s ambitions could have been thwarted if not wrecked altogether: the element of contingency in the diplomacy of the 1860s should never be forgotten. Had Russian policy been less hostile to Austria, for example, Bismarck would have been vulnerable to the pressure from the East which had forced Prussia to accept the restoration of German dominance in Germany at Olmütz in 1849. Had British policy not been so passive, the crises over Poland and Denmark might have turned out less advantageously to Prussia. Had Napoleon III not replaced Thouvenel with Drouyn de Lhuys, French policy might have been more consequential: instead of acting primarily in the interests of Italy (over Venetia if not over Rome), Napoleon might have anticipated the threat posed to France by an expansionist Prussia. Nor should the Austrian attempts to reform the German Confederation be dismissed as mere pipe-dreams. Each time Austria raised the subject—in February 1862, in January 1863 and, most dangerously for Bismarck, in August of the same year—Prussia’s position looked precarious. Austria had more support among the other German states. And Franz Joseph might conceivably have made up his mind to exchange Venetia or Holstein for cash and a “fig-leaf” of territory rather than face another war and another defeat.

  4.i: The Prussian-Austrian yield gap (Austrian minus Prussian bond yields), 1851-1875.

  Ultimately, it was the mistakes of others which gave Bismarck his opportunities: the Danish decision to annex Schleswig and Holstein in November 1863, the Austrian appeal to the Confederation over the duchies in June 1866 and, later, the superfluous French demand for a permanent renunciation of the Hohenzollern claim to the Spanish throne in 1870. Even the military outcomes were more balanced than is often assumed: when war broke out in 1866, Austria seemed to have secured the support of mighty France as well as the other major German states, while Prussia’s sole allies were, as one Prussian official observed with only slight exaggeration, “the duke of Mecklenburg and Garibaldi.” Well drilled and well armed though the Prussian infantry were, their breech-loading “needle-guns” did not guarantee victory at Königgrätz.

  Dress Rehearsal: Poland

  The crisis precipitated by the Polish revolt against Russian rule in January 1863 provided a sort of dress rehearsal for the wars of 1864 and 1866: in so far as Russia waged war against Poland, she was able to do so swiftly and, despite much fuss abroad, without foreign intervention. The financial implications were less straightforward. From the Rothschild point of view, the rising was singularly unwelcome. For the first time in forty years, the Rothschilds had managed to secure a major Russian loan in April 1862. It seemed a tremendous coup: an issue of 5 per cent bonds worth £15 million, of which £5 million were taken directly by the Paris and London houses at 94 and the rest sold to the public on commission. But the bonds did not do as well as James had hoped and the London, Paris and Naples houses were left holding Russian paper worth at least £2 million on the eve of the Polish rising. James’s hope had been that prices would rise provided Russia did not become embroiled in war; but the crisis in Poland confounded this expectation. What made the crisis so alarming was not so much Bismarck’s somewhat heavy-handed offer of support to the Tsar (which won him no friends anywhere)3 as Napoleon III’s attempts to stick up for Poland, which threatened—as in 1830—to precipitate a Franco-Russian war. Bismarck was lucky: if Britain had supported France more warmly, or if Alexander II had been persuaded to back down, his position would have been exposed. As it was, Drouyn’s attempt to resurrect the Crimean coalition was a disastrous failure, simultaneously alienating both Russia and Britain.

  At the time, Disraeli offered a characteristically imaginative interpretation of events which has often been repeated since as evidence of Rothschild power. On July 21 he warned Mrs Brydges Williams—one of his many middle-aged female admirers—that “a war in the centre of Europe, on the pretext of restoring Poland, is a general war, and a long one,” adding: “The Rothschilds, who have contracted two loans this year, one to Russia and the other to Italy ... are naturally very nervous.” Three months later he was still pessimistic:The Polish question is a diplomatic Frankenstein, created, out of cadaverous remnants, by the mystic blundering of Lord Russell. At present, the peace of the world has been preserved, not by the statesmen, but by the capitalists. For the last three months, it has been a struggle between the secret societies and the European millionaires. Rothschild hitherto has won; but the death of Billault [the President of the French Senate, and one of the Emperor’s close advisers during the crisis] may be as fatal for him as the poignard of a Polish patriot; for, I believe, in that part of the world they are called patriots, though in Naples only brigands.

  This was pure fantasy. In reality, the crisis had been beyond any Rothschild control; all James and Lionel could do was fume as inept French diplomacy drove down the price of Russian and Italian bonds. As James put it after hearing a torrid account from the Russian ambassador of Napoleon’s desire to “turn the whole map of Europe around,” it was “devilishly disagreeable to be issuing a loan right now”; but he did not believe for a moment that there would be a war—only “bad bourses” and “hot water.” This relative optimism reflected the fact that James was better informed than Disraeli: he knew that both the French and the Austrian governments were divided on the issue (in the French case, Walewski for war, Persigny and Fould against), and for this reason calculated that the crisis would blow over. His only real flicker of doubt came on June 17, when a second Anglo-French note to Russia and an interview with Drouyn persuaded him to sell £25,000 of Russian bonds. By the end of July, after long discussions with Prince Altenburg at Wildbad, the “old bourse man” (as James called himself) was sure peace would be preserved. In London, too, Lionel was confident on the basis of “West End” (that is, political) intelligence of “better times.” “Nothing in Poland,” he told his son Leo. “We shall not interfere for the Poles who are not a bit better than the Russians.”4

  The most serious consequence of the Polish crisis was to set back Rothschild plans of establishing a long-term relationship with Russia. The financial costs of suppressing the Polish rising were sufficiently heavy to jeopardise the payment of the interest on the newly issued bonds, forcing James and Lionel to put up around a million pounds on the security of yet more Russian bonds, while at the same time disinclining them to offer any more bonds to the market. This seems to have confirmed Nat’s habitual pessimism about Russian finances, and for the rest of the 1860s he opposed involvement in any other Russian bond issues. There were other reasons for keeping at a safe distance from St Petersburg too: pro-Polish sentiment was strong in Paris and in London, and both Charlotte and Alphonse cited this as an argument for leaving Russian business to others. “I am so glad that the Barings, and not the Rothschilds have taken the Russian loan,” wrote Charlotte in April 1864, following the announcement of a new bond issue by the Rothschilds’ old rivals. “If our house had negotiated it, most assuredly there would have been a great outcry against those horrid jews for helping the cruel Russians to crush the poor Poles.”

  For the rest of the 1860s, Russia reverted to her traditional bankers, Hope and Baring, who also issued a major £6 million loan in 1866. James, however, still itched to be involved. He was “heartily sorry to have lost the country” when there was “pure wine” to be made there. As early as February 1867, he began to contemplate the possibility, which he had previously rejected, of involving himself directly in Russian railways, a subject he discussed at some length when the Tsar and his Prime Minister Gorchakov visited Paris in 1867. However, he remained convinced that the Russian government should act as the borrower by issuing conventional rentes in Paris and London, rather than trying to issue railway bonds, and the discussions came to nothing, as did
another project for a Russian mortgage bank. It was not until after his death that the Rothschilds finally agreed to issue a Russian railway loan.

  Schleswig-Holstein

  As far as James was concerned, Austria’s defeat in Italy in 1859 was a decisive turning point: he would never again regard Austria as a great power in financial terms. In his eyes, the main question thereafter was how to wind up Austria’s presence in Italy rather as a bankrupt enterprise might be wound up: an insolvent empire, he reasoned, needed to liquidate its unsustainable commitments—to rationalise itself. It was mysterious to James that this diagnosis was rejected not only by the Austrian government but also to some extent by his own nephew Anselm, who (like his father before him) increasingly identified himself with the Habsburg regime, especially after his appointment to the Reichsrat Imperial Council Finance Committee in 1861. In many ways, James was right about the extent of Austrian weakness; but because the Austrians themselves resolutely denied the fact, he was inclined to overplay his hand.

  No sooner had hostilities broken out in 1859, as we have seen, than the Austrian government issued a frantic plea for a loan of 200 million gulden; James responded as if Austria were at his mercy, insisting that no other foreign banks be involved. Yet there were too many rival banks eager to lend to Vienna for such a monopoly to be easily achieved. Bischoffsheim and Goldschmidt were able to secure the first tranche of the new loan, which was issued as a lottery loan. James retaliated by selling Austrian securities and refusing to co-operate when Anselm advanced the government 11 million gulden due to it from the loan of 1859. “We have got nothing from the Austrian sterling bonds,” he wrote angrily, “including a price at which we can sell them.” James felt “ill” at the thought of advancing money to Vienna when the government had provided no real security and even spoke darkly of instigating legal proceedings against the Austrian government to protect “our money.” Relations reached a nadir in 1862, with protracted wrangles about the commission still due for the 1859 bonds, and talk of suspending the interest payments due on them. When the possibility of a new Austrian loan of 50 million gulden was raised in 1862, James was indifferent:I don’t think much will come to us, so we should tell Anselm to let us know by telegraph 24 hours in advance how much we are going to take, because in Vienna nothing ever runs entirely according to plan. I must say it’s all one to me, but I am keen that Anselm should not be able to say that we are leaving him in the lurch and not supporting his house.

  Only when Anselm threatened to form a consortium including Erlanger and others did the other Rothschild houses hastily agree to participate in what was effectively a second issue of 1860 premium bonds. This threat was a sign of the growing distance between the Vienna branch and the other Rothschild houses, and irritated Mayer Carl and James. The pattern repeated itself a year later when the Austrian Finance Minister Brentano sought to raise another loan. Again Anselm infuriated James by agreeing to act in partnership with the two rival syndicates formed to bid for the loan, which included the Crédit Mobilier, its London imitator the International Financial Society and the new Anglo-Austrian Bank established earlier in the same year by George Grenfell Glyn. In fact, this loose consortium ended up merely advancing £4 million to Brentano. When the government sought to fund this advance by issuing 70 million gulden of bonds the following year, the Creditanstalt was one of only two bidders, and offered to subscribe just 19 million.

  Primarily, then, Rothschild financial support for the Austrian government was renewed in an effort to preserve family unity contra mundum; James remained pessimistic throughout about Austrian bonds, selling heavily in the summer of 1862 and again the following year. The unexpected resurfacing of the Schleswig-Holstein question in November 1863 merely reinforced his pessimism: he could see no advantage for Austria in siding with Prussia against the Danish annexation of Schleswig and Holstein, especially as their joint invasion was not sanctioned by the German Confederation’s Diet in Frankfurt. True, Denmark was technically in breach of the Treaty of London; but the war which broke out in February 1864 seemed to most members of the family an absurdity: Charlotte called it “a mere freak on the part of Kings and Emperors and royal Dukes!” If anything, she was inclined to sympathise with the Danes, a widespread sentiment in both London and Paris. For his part, James saw only increased expenditures which Austria could ill afford and which therefore made the latest tranche of her bonds even harder to sell—though needless to say he was quick to see the possibility of a loan to Denmark, assuming an indemnity would be imposed on her.5

  What especially alarmed James was the fact that no sooner had the Danes been defeated than the alliance between Austria and Prussia evaporated: united against Denmark (and against foreign arbitration of the sort attempted ineffectually by France and Britain), they still could not agree between themselves what should become of the duchies. Various combinations were discussed when the two monarchs met at Schönbrunn, but William would not agree to give up Prussian land in return for both Schleswig and Holstein, while Franz Joseph still rejected the old Prussian demand for military hegemony in North Germany. Increasingly, the Austrians inclined towards the German liberals’ favourite solution: that the duchies should pass to the Duke of Augustenburg. However, in February 1865 Bismarck intimated that he would agree to this only if the duchies were made wholly dependent on Prussia, a demarche which (coming just months after he had vetoed the Austrian application to join the Zollverein) raised the prospect of another, more serious war—between Austria and Prussia. This anxiety merely made the Austrian position worse. The curious thing is that the Rothschilds chose this moment to take up the £3 million balance of the 1859 sterling loan, including £500,000 à forfait; once again, the only rationale for this foolhardy commitment was the need to thwart the ambitions of another rival, Langrand-Dumonceau, who was touting a scheme for an Austrian Mortgage Bank and a loan secured on crown lands. To all intents and purposes Austria was broke when Belcredi took over from Schmerling as Chancellor in July 1865, with a deficit of 80 million gulden and no apparent means to cover it other than yet more advances from the banks.

  Austria fell into further disrepute in James’s eyes with the decline into insolvency of the Esterházy family, on whose behalf the Frankfurt and Vienna houses had been raising loans since the 1820s. Between 1861 and 1864, no less than 6.3 million gulden had been raised through the issue of bonds secured on Esterházy lands. Then, in June 1865, Paul Esterházy was forced to suspend payments on premium bonds bearing his name, prompting a storm of public criticism directed at the banks which had issued the bonds. At a time when Móric Esterházy increasingly directed Austrian foreign policy as Minister without Portfolio, the collapse of his own family’s finances neatly paralleled the collapse of those of the Empire itself. The embarrassment this fiasco caused the Rothschilds might have served as a warning.

  Privatisation and Diplomacy

  Why then go on doing business with Vienna? The answer to this question is that James believed he had a solution to the Austrian problem. From as early as December 1861 he had begun to contemplate a transaction which, as he saw it, offered not only financial advantages but also diplomatic advantages to the Austrian government, as well as a substantial commission for himself: the sale of Venetia to Italy. The Gastein compromise of August 1865, which temporarily gave Austria Holstein and Prussia Schleswig, did not preclude an analogous deal whereby Austria could sell Holstein to Prussia. Indeed, Bismarck had suggested this at Schönbrunn the year before, and the Gastein agreement seemed to set a precedent by transferring Lauen burg from Austria to Prussia in return for a payment of 2.5 million Danish thalers. The question seemed to be simply whether a price could be found acceptable to all parties. If this could be achieved, the territories disputed between Austria and her enemies to the north and south would be transformed into mere real estate, as marketable as the over-encumbered private estates of the Esterházys.

  To understand what the Rothschilds were attempting to do in the tortuous b
ut decisive negotiations of 1865, it is important to realise that there was in fact a degree of symmetry about the Prussian, Italian and Austrian positions. Each state was strapped for cash. The prospective buyers of disputed territory would therefore be able to raise it only by borrowing. But neither was in a position to do so easily, Prussia because of the constitutional conflict, Italy because of her increasingly low credit-rating. To the Rothschilds, the answer seemed to be obvious: both should privatise state assets—preferably railways—using the receipts to buy Holstein and Venetia respectively. At the same time, Austria’s financial position was so precarious that even selling one or both of these territories was unlikely to balance the budget. Austria had already sold off most of her state railways, so privatisation was not the answer here; instead, James reasoned, the already private railway lines should seek tax breaks from the government as part of the price of financial assistance. This was the essence of James’s vision in 1865: a complex of interdependent transactions designed to liquidate Austria’s unsustainable empire without the need for an economically disruptive war.

  The Prussian case is the best known. Prussia was financially stronger than Austria; but in the short term the constitutional crisis and the Danish war created a cash-flow crisis. Once it was apparent that the Landtag would not sanction any kind of loan to the government, Bismarck had to fulfil his threat to resort to other sources. One option which had immediately presented itself in early 1864 was a loan of 15 million thalers from a consortium of bankers led by Raphael Erlanger. To Bleichröder this was alarming: he knew the hostility James felt towards upstarts like Erlanger, and hastened to reassure him that this offer had been “totally rejected,” though in fact the Seehandlung did some sort of deal with Erlanger shortly after this. The trouble was that the Rothschilds wanted Bleichröder to stop Erlanger without being willing to lend to Berlin themselves. When Bleichröder suggested that the government raise money by mortgaging some 20 million thalers of 4.5 per cent bonds already authorised by the Diet to pay for Silesian railways (but as yet unsold), James referred him to Mayer Carl; but the latter passed the buck back, replying that the Paris house would “remain completely aloof” from such a deal—a refusal which Bleichröder felt it wise to conceal from Bismarck: “On the contrary, I tried to make him believe that your esteemed Houses would cheerfully lend their support to Prussian finance operations.” The government was by now deeply divided on the finance question, the Finance Minister Bodelschwingh opposing the diversion of the railway bonds to military ends, and pressing Bismarck to recall the Diet in the hope of securing an authorised loan. But any hope that the victory over Denmark would relax the mood of the Liberals in the Landtag was dashed in 1865, when the government’s conduct was denounced as illegal and all its requests for funds firmly rejected.