The House of Rothschild

by Ferguson, Niall

  This raises an important question: how, if Austria had accepted the idea of selling Holstein to Prussia, would Prussia have paid for it? As early as November 1864, Bismarck was promising “magnificent money equivalents”; if the equivalents “were high,” Esterházy told the Prussian ambassador Werther, “he would not reject the offer.” It was here that the Rothschilds sought for the first time to act as brokers, with Bleichröder and Moritz Goldschmidt of the Vienna house corresponding back and forth in search of a price which both sides would accept. As Goldschmidt said, the sum in question “would have to be fat to overcome the immense reluctance against a cash settlement, which would not be very honourable,” a view echoed by the Austrian Finance Minister Plener. It soon emerged that the figure the Prussians had in mind was 40 million gulden (around 23 million thalers). But where was this to come from? Bleichröder might claim that Prussia’s “coffers were full,” but Bodelschwingh had told the Diet that the war against Denmark had already cost 25 million thalers, half of which had been met from the state “treasure” (meaning reserve funds); according to Bleichröder, that left around 37 million thalers in the reserve. Not much would have remained of that if Prussia had bought Holstein.

  The other possibility was that Prussia might sell state property of her own to raise the requisite funds. There were in fact two options, both of which Bleichröder had already suggested before 1864. The first related to the railway between Cologne and Minden (near Hanover), “the backbone of rail transport in north-western Germany”; the second, more ambitious scheme related to the crown lands in the middle Saar, and in particular to the coal mines there. The Prussian state had originally put up around a seventh of the Cologne-Minden line’s 13 million thalers capital, but under a deal struck with the Prussian Commerce Minister Baron August von der Heydt it had guaranteed the interest on the entirety and, in return, had the right to buy out all the other stockholders in 1870. In December 1862 Bleichröder proposed to von der Heydt’s successor von Itzenplitz that the government sell what amounted to its “share options” back to the company for 14 million thalers. The other possibility, raised by Bleichröder in November 1863, was that the government should sell the crown lands in the Saar to a specially created joint-stock company, retaining a majority shareholding, but receiving cash for the company for the rest. Such a sale had in fact been rumoured as early as 1861, though reports that the French Rothschilds had offered 20 million thalers for the mines were unfounded. Apart from the obvious advantages of giving the government the cash it required, privatisation had the additional rationale that if, as Bismarck thought probable, France demanded the Saarland as “compensation” for Prussian territorial expansion elsewhere, the mines would remain in Prussian hands. From the point of view of Bleichröder, privatisation would extend the already substantial industrial empire in the Rhineland of the Oppenheims, with whom he also had close business links.

  It would indeed have been a coup if, by these means, the Rothschilds and their associates in Prussia had been able to resolve the quarrel between Austria and Prussia. But there was a catch. If money were made available to Prussia, Bismarck might well be tempted to use it not to pay for Holstein but to wage war on Austria. In fact, the Prussian government was thinking along precisely these lines even before the Gastein treaty. When an agreement was reached on the Cologne—Minden deal on July 18, 1865, whereby the government relinquished its share options for 13 million thaler, Bismarck at once informed the Crown Prince: “The financial means for complete mobilisation and for a one-year military campaign are available; the amount is circa 60 million thalers.” “We have money,” crowed the War Minister Roon, “enough to give us a free hand in foreign policy, enough, if need be, to mobilise the whole army and to pay for an entire campaign ... Whence the money? Without violating a law, primarily through an arrangement with the Cologne-Minden Railroad, which I and even Bodelschwingh consider very advantageous.” It did not take long for the Austrian charge Chotek to report that Prussia had “such an important supply of money as one usually keeps in readiness in anticipation of war.”6 On the other hand, the Cologne-Minden sale was still not enough to guarantee victory; Roon was still thinking in terms of the diplomatic leverage Prussia would gain from her apparent readiness for war, rather than of actually fighting. In August, Bismarck too advised Bleichröder against selling securities on his account “because of some premature fear of war.” “The conditions of our financial and military preparations,” he commented after Gastein, “made it desirable not to force the break prematurely.” In particular, Bismarck had cause to fear that if Austria also succeeded in raising money any conflict would be, at least in financial terms, too evenly matched for comfort. His objective in the summer of 1865 was therefore plain: to prevent by any means at his disposal the Austrian government from successfully floating a loan.

  Austria manifestly did need a loan in 1865; and it was probably to encourage the government to come to him that James bought £300,000 of Anglo-Austrian bonds at the relatively generous price of 78.9 in mid-August. At first, it is true, he was reluctant to make a major new loan. On September 9 he actually told the Finance Ministry official Baron Becke, sent to negotiate with him in Paris, that it was “impossible for us to make a loan.” But Becke’s reaction impressed him: “The man was completely thrown and said, ‘That means the government must go bankrupt.’” This was a shocking threat, recalling the collapse of Austrian finances in the Napoleonic Wars, and it did not fail to move one who remembered those days. James hastily proposed a compromise: a year’s advance of 1 or 2 million pounds, to be made by the London and Paris houses in partnership with Barings (whom he knew the Austrians had also approached), with a possible loan to follow.

  This uncharacteristic willingness to work in tandem with Barings—as well as with the Société Générale and the Credit Foncier, who were also approached—shows that James did not underestimate the risks involved in lending to Vienna. Nevertheless, he wished to show Becke “that we are not against Austria” by “doing something.” The reasons are not hard to divine. Apart from anything else, the Rothschilds continued to hold substantial amounts of Austrian bonds: as James put it, “we have too much money [invested] in this government.” If Austria really did declare bankruptcy, those bonds would depreciate drastically: “The good man just wants money to pay the interest payments and I can see the necessity of doing this. Baring is also very committed to Austria, so that he has an interest in it too.” Moreover, the terms of such an advance in extremis could only be profitable: “Clearly the man will allow one to make as much money from him as one could wish, and Austria is after all always a great state.”

  Initially, James toyed with the earlier Langrand-Dumonceau idea of a loan secured on crown lands. But the financial difficulties of the Lombard line—which had just necessitated a cash injection of 63 million francs from the Paris house and the Société Générale—suggested another possibility to his fertile business imagination. According to the terms of the company’s charter, it would have to begin paying a levy to the Austrian state in 1868. Now James saw a way of boosting the company’s ailing stock market quotation: an exemption from the levy which, as Alphonse put it, “weighs so heavily on the future of our Lombards.” Finally, the loan negotiations offered a way to exert pressure on Austria to come to the kind of accommodation with Prussia and Italy which would avert war. Alphonse discussed with the Italian ambassador the possibility of an exchange of Venetia—for cash or for the Danubian principalities (Rumania)—on September 16; three days later, James expressed the hope that the “Italian question” could be “decided,” and suggested inserting the familiar Rothschild clause that the loan should be conditional on peace being maintained. By September 23 he was thinking even more radically:One could tack on a trade treaty with England and perhaps France ... Really, one could do a golden deal. The[se] people want us to make money out of them. Conditions we prescribe: a Chamber which approves [the loan] and reduction of the army. I think that with a cons
titution the people have to enjoy better credit than hitherto.

  Just three days later, he and Alphonse seemed to have secured “all that we want” after “a long conversation” with Becke:As for the trade treaty, there will be no difficulty about linking it to the loan ... An understanding seems equally likely on the question of the tax on the Lombard line. In the end one would obtain the most favourable conditions [if we agreed to a loan] today, as the government has elbow-room. It needs money to consolidate its political position and wants to succeed at all costs.

  We know from the reports of the Austrian diplomat Mühlinen how desperate Becke was to secure James’s co-operation at this stage. In Becke’s view, Austria’s “financial fate” was “in his [James‘s] hands,” and he did not hesitate to offer inducements of a more personal nature:[I]f we don’t succeed with him, we won’t accomplish anything of consequence with the others. We must then, make the sparks fly, and especially flatter old man James. Anything pleasing to his conceit is worth 1 or 2 per cent . . . How would it be if we gave him a “grand cordon?” It was the cross of Stanislaus that made the Russian loan. Has he the iron crown of the first class? If not can we let him hope for it?

  By October 3, the deal seemed only to lack signatures.

  A Meeting at Biarritz

  Then, suddenly, there were delays. Of course, there had always been arguments against the deal. In part these were financial: the tightening of the Paris money market in the summer of 1865 had at first inclined Alphonse to think that the issue of a new Austrian loan was “an impossible thing at the present time.” When Anselm had unexpectedly revised Austria’s needs upwards to 150 million gulden, his French cousin had been irate. He found itdifficult to understand how a man who has as much experience of business ... versed as he is in Austrian finance [as] a member of the Reichsrat finance commission, could fail to warn us that Austria is on the edge of the abyss; that he should permit us to keep all our [Austrian] securities, that he should even constantly encourage us to buy more, and then all of a sudden he comes along and tells us calmly that if Austria is unable to make a loan of 150 million gulden, she will have no option but to declare bankruptcy.

  According to Alphonse’s calculations, the government in fact needed 49 million gulden (£6.9 million) just to meet its impending debt repayments. Nat had no doubts: any new Austrian bonds would be nothing more than “rubbish.” At the crucial moment in early October, Mayer Carl added his doubts:.I only regret that as far as the continent is concerned & particularly Germany the prospect for such [is] all but very encouraging—Money is very dear and likely to become more still & our public has lost so much by the Anglo Austrian that you cannot rely upon a market ... I must confess that I have not the least confidence in the Austrian government which has always taken us in & ... [is] not to be relied upon ... I have written so often & so fully to Paris on the subject that I really do not know what to do but I am afraid that this time if you come to an arrangement you will be just as much taken in as our friend & cousins. Our public sells daily large quantities of Austrian stock.

  There was also, as Mayer Carl pointed out, a political counter-argument. The constitutional wrangling between Austria and Hungary, which resulted in the prorogation of the Reichsrat in September 1865, seemed to raise exactly the same problem in Austria as already existed in Prussia: was the government legally entitled to raise a new loan? This was an argument which worried the London banks more than the French.

  The question which historians have hitherto been unable to answer is whether or not the ultimate failure of the Austrian loan talks was—as the Austrians themselves claimed—the result of a secret agreement between Bismarck and James intended to deny the Austrians Rothschild support. Bismarck undoubtedly set out to stop the loan. As early as June 19—referring to “the opportunities which a complication of the foreign situation could yield”—Bismarck had “noted that it might be advisable by proper financial operations to weaken the present inclination of the money market towards an Austrian loan.” Indeed, he underlined the passage in a diplomatic report which quoted an Austrian official saying that “because of its lack of credit the Austrian government would temporarily have to give up its great power position.” “Through our money operations,” he told Roon, Prussia needed “to paralyse those intended by Austria.” It may have been partly with this object in mind that he suggested to Bleichröder an operation whereby the Rothschilds might buy Prussian bonds from the Seehandlung which could then advance the proceeds to the government, thus notionally circumventing the parliamentary prohibition on unauthorised loans.

  Does this ulterior motive explain why the deal fell through? Perhaps: it seems unlikely that Mayer Carl’s refusal to take 9 million thalers of 1859 Prussian bonds, offered him in July by the Seehandlung at par, was uninfluenced by political considerations, given that he was prepared to go as high as 99.5, and that within a week they were being sold at par to Berlin bankers and were trading at 101. James and Alphonse were undoubtedly becoming suspicious of Prussian intentions. On August 4, before the Gastein compromise, James echoed his son’s “dissatisfaction with German politics.” He refused to believe that war would break out “as Austria is weak enough to give in,” but accused Bismarck of contemplating “a wild coup” and expressed growing “distrust” of Bleichröder. Accordingly, he gave instructions to sell 400,000 thalers of Prussian securities. This worried Bleichröder so much that, at the suggestion of a friend, he rushed to see James at Ostend “to tell me,” as James put it drily, “how well everything was going.” James’s assessment of the Prussian situation reveals how little he thought of both Bismarck and Bleichröder at this juncture: “Bismarck is absolutely not to be trusted, as his domestic position is very bad. Bleichröder thinks it could come to a revolution. That is sheer nonsense. I don’t believe a word of it, as a man does not risk his own country for the sake of holding onto office.” And when Bismarck tried again, James understood perfectly what he was aiming to do. Even before the two met in Baden-Baden on September 2, James had already concluded that the decision to increase the Seehandlung’s discount rate was “a political move, designed to prevent Austria from getting a loan and to force her to sell the duchies [Schleswig and Holstein].”

  Yet this meeting saw a change in James’s tone. “Bismarck told me yesterday,” he informed his nephews after their meeting, “that the Austrians are at present not all willing to sell them. But in the end they will give in.” For the first time, Bismarck advanced the argument that, if James did lend money to Austria, it would reduce rather than increase the pressure on the Emperor to accept the sale of Holstein. This did not stop the negotiations between the Rothschilds and Becke from nearing a successful conclusion; but when Bismarck visited Napoleon III at Biarritz a month later, he redoubled his efforts to sabotage the loan—and this time he seemed to succeed. On October 6 James reported to his nephews that he had put off further discussions with Becke “as it is not possible at the present moment to think of a major transaction. It is said here that Bismarck spoke in a very bellicose and proud way to Drouyn de Lhuys.” The next day, after hunting at Ferrières, James spent two hours closeted with Bismarck (who complimented him on the quality of his wine). An uneasy Mühlinen reported back to Vienna:I do not know what passed between them, but I do know that the evening before at Ferrières, the old baron was very well disposed and drank to the success of all our wishes ... while after the visit in question the negotiations took a turn for the worse. The rumour spread that Monsieur de Bismarck has offered 80 million thalers for Holstein. One of Rothschild’s sons, Alphonse, went so far as to tell one of my colleagues that we ought to accept the proposition and then we wouldn’t need the loan.

  Once again, it soon emerged, Bismarck was telling James that to lend to Austria would undermine the chances of a peaceful sale of contested territory; Mühlinen was wrong only about the price Bismarck had in mind for Holstein (Bleichröder had proposed a mere 21 million thalers, two-thirds of the proceeds of the Cologne-M
inden deal). A few days later (on or before October 15), as Mühlinen reported to the Austrian Foreign Minister Mensdorff, James repeated the Bismarckian message, though he was careful to deny its source. He also threw in for good measure the Italian proposal, secretly advanced at around the same time, that Venetia also be sold:Towards the close of our conversation James Rothschild said to me suddenly: “Why do you not accept the offer that is said to have been made to you? Let them buy Holstein.” ... I replied to the baron in the presence of his two sons that I could not countenance his insinuation. Although I had no instructions on the subject, I believed that I must state to him my personal opinion that the Imperial Government was not contemplating that contingency. The baron interrupted me to state that it was just a stock exchange rumour like that about the sale of Venetia and that it had not come from any minister or diplomat. I replied that I had but too much reason to infer the source of these fine projects [namely, Bismarck] which had been reaching me for some time on all sides. Since he had just mentioned Venetia, I felt an additional obligation to act with vigour against those who were attempting to mislead the public as to the intentions of my government. Never could it attempt even a discussion on the basis that people were trying to establish, by bringing forward Holstein, in order to arrive at the famous scheme for the purchase of Venetia ... I was convinced that rather than permit the integrity of the empire to be meddled with, Austria would stake her last man and her last florin ... [I]f foreign capital was going to put itself at the service of our enemies, it would be the first to suffer; it would not prevent us from finding at home the means to ward off the blows that they wanted to deal us.