The House of Rothschild

by Ferguson, Niall

  The more encouraging aspect of the 1867 crisis was the apparent revival of the old Rothschild system of informal diplomacy. James and Alphonse saw the Emperor and Rouher repeatedly during April; Bleichröder and Mayer Carl relayed (admittedly contradictory) information from Bismarck; and Lionel passed it on to Disraeli, who sent it to Lord Stanley, who in turn passed it on to the Queen. Any British response was then transmitted back through the Rothschilds to Bleichröder’s “friend.” It was still apparently the case, as Stanley informed the Queen, that New Court’s “information as to what is passing on the Continent is generally quite as early and quite as accurate as that which can be obtained through diplomatic channels.” The decision to refer the matter to a conference in London was partly mapped out through these unofficial channels, with crudely coded telegrams between Berlin and London establishing the basic framework for negotiation. In many ways, Alphonse’s wish for effective English mediation had therefore been granted. Yet subsequent events prevented this process being repeated in 1870. Firstly, the Conservative government fell in London. Although Leo was friendly with the Foreign Secretary Clarendon’s son, and although Lionel and Charlotte saw Gladstone occasionally, relations were far less intimate than when Disraeli was in office. Secondly, James’s death and Alphonse’s increasing identification with the opposition meant, as Alfred observed in April 1868, that “the rue Laffitte [seldom] hears any news from the French Ministers.” Thirdly, the French government further antagonised British opinion in 1869 by embroiling itself in a scheme to acquire control of some crucial Belgian railways.

  Once, this would have been a deal which would have greatly interested the Rothschilds. But their influence in Brussels had been waning for some years. This was partly because of the death in 1865 of their old friend and client Leopold I; relations were never so close with his son. More important, the Belgian banks (especially the Banque Nationale and the Société Générale) were now sufficiently strong to dispense with the Rothschild assistance they had relied on since the 1820s. When the Belgian government raised a 60 million franc loan in 1865, the Paris house was offered only 4 million francs. Two years later, when a further 60 million was issued, the Rothschilds’ share was only slightly more (6 million)—a figure Alphonse regarded as “almost derisory.” There was no Rothschild involvement in the French government’s abortive railway purchase, which was widely interpreted as having a strategic objective: to allow the swift movement of French troops into Belgium in the event of a war with Prussia. In London this was regarded as the diplomatic equivalent of sacrilege: preserving the neutrality of Belgium was becoming the holy of holies of British continental policy.

  Nowhere was the incompatibility of French finance and diplomacy more obvious than in Spain. It was over the political future of Spain that France ultimately went to war with Prussia in 1870; historians rarely trouble to explain why this was. The answer lies in the sustained penetration of the Spanish economy by French capital in the 1860s, and the growing assumption of Bonapartist politicians that this entitled France to an informal imperial influence over the country. Far from disrupting the plans of the various French banks interested in Spanish finances, mines and railways, the revolution of September 1868 seemed to invite increased French involvement. Indeed, it was only after the revolution that it proved possible to reach an agreement on a loan to Madrid along the lines envisaged by James since 1866: not for the first time, the shift to a parliamentary regime seemed to encourage the Rothschilds, even if it was forcibly achieved. Though he died just days before it was concluded, the Spanish loan of 1868 was James’s last great coup, as Say wrote at the time in the Journal des Economistes. The Paris house took 3 per cent bonds worth 100 million francs (nominal) at a price of 33, reopening the Paris market to Spanish paper; in return, the Spanish government paid subsidies worth 30 million francs to the Zaragoza company. This was the first Rothschild bond issue for Spain in decades, and was intended to be the beginning of a sustained effort to put the country “back on its feet.”

  Enthusiasm for the new parliamentary regime was short-lived, however, in Paris as in Spain. Apart from the usual post-revolutionary centrifugal tendencies, the new regime had to fight a long and costly war to retain control of Cuba: this precluded financial stabilisation. The classic Rothschild solution—the sale of the island to the United States—proved politically impossible, though Alphonse found the Prime Minister Prim personally sympathetic to the idea. This meant a return to the old pattern of declining bond prices, ad hoc advances on mercury or tobacco, continuing losses on “that devil of a railway”: in short, business as usual. Yet, as in the 1860s, other banks were eager to challenge the Rothschilds’ traditional dominance in Madrid. In particular, there was a vigorous campaign by the Banque de Paris, whose director Delahante envisaged “capitalising the revenue of the mines of Almadén, of [the copper mines of] Rio Tinto and a lot of other state properties and, in a word, more or less substituting himself for the state administration.” Although he presented this as a venture which he and the Rothschilds might undertake together, Alphonse had little doubt that Delahante dreamt of substituting himself for the Rothschilds too; in any case, a fresh outbreak of political instability and a further deterioration of the monetary situation put paid to the scheme. The culmination of this struggle came in 1870, when the Rothschilds narrowly managed to defeat an attempt by Delahante to gain control of the Almadén mines. Symbolically and financially, that would have been a heavy blow.4

  Even after this victory, rival French banks continued to vie with the Rothschilds for influence in Madrid. But they had only partial sucess. In 1871 a consortium led once again by the Banque de Paris successfully issued a new Spanish loan, allowing the Rothschilds only “a very small slice.”5 Something similar happened the following year, prompting over-confident talk at the Credit Lyonnais of “Rothschild” having “lost Spain.” On the other hand, long-term lending to Spanish governments remained as risky a business as ever. The years 1866 to 1882 saw a Spanish debt explosion: the public debt rose from 4.6 billion pesetas to 12.9 billion pesetas. The bulk of the new debt was taken by foreign lenders: the percentage of total debt held abroad rose from just 18 per cent in 1867 to 44 per cent in 1873. This was an unsustainable increase: as a percentage of GNP, total debt rose from around 70 per cent to a peak of 180 per cent in 1879. The collapse of the constitutional monarchy in 1873 knocked down Spanish bonds to below 18, compared with prices of above 30 in 1868, and the position deteriorated still further in the succeeding years. While their rivals retreated to lick burnt fingers, the Rothschilds were more than content to continue the traditional system of advances against the output of the Almadén mines, the value of which was as dependable as the value of Spanish paper was not. This continued to be a reliable source of income until the 1920s. The early 1870s—when political uncertainty was at its height and bond prices were slumping—saw a dramatic leap in the price of mercury from a norm of £6-8 per bottle to a peak of £22 in 1873. Fearing that such prices would encourage other producers to open uneconomic mines, the Rothschilds hastily stepped up the output of the mines: between 1873 and 1887 production very nearly doubled.

  So well did the Almadén system seem to be working—Alphonse described it as a “milch cow”—that the possibility was raised in 1872 of extending it to the Spanish government’s copper mines at Rio Tinto. The republican interlude of 1873 put this plan on hold; but the Bourbon restoration at the end of the following year led to the sale of the mines to a British company for £3.7 million (rather more than the Rothschilds thought they were worth). It was only later that the Rothschilds became interested in Rio Tinto as major shareholders—an involvement which proved exceedingly profitable as world demand for copper soared. The same, however, cannot be said of the French house’s continued involvement with the Zaragoza railway. Despite steadily swallowing up smaller lines like the Córdoba—Seville, the “MZA” (Madrid-Zaragoza-Alicante) never paid a dividend to its shareholders. The prolonged rivalry between i
t and the Pereires’ Norte network, which lasted into the 1920s, must rank as one of the least profitable of Rothschild campaigns—despite state subsidies totalling £24 million, compared with a total French investment of £70 million.

  More than anything else, this sustained economic interest in Spain explains the French government’s political interest in the country in the wake of the 1868 revolution. No sooner had Queen Isabella been ousted than speculation began about a possible successor from one of the other European royal houses. Shrewdly, the Rothschilds took care not to drop the Bourbons: indeed, the Paris house’s direct involvement in the finances of the royal family seems to date from the weeks immediately before the revolution which overthrew them. But a Bourbon candidate was out of the question in the short term, despite Napoleon III’s preference for Isabella’s son, Alfonso, the Prince of Asturia. As usual on such occasions, there was a Saxe-Coburg candidate, Ferdinand. But several other names were discussed in the long interregnum between the revolution and the final acceptance of the throne by Amadeo of Savoy (the son of the Italian King Victor Emmanuel) in October 1870.6 One of them was Leopold of Hohenzollern-Sigmaringen, a relative of the Prussian King. It was, of course, the French effort to prohibit his candidature, implying as it seemed a new Prussian threat from the south, which precipitated the fateful war of 1870.

  If Belgium and Spain were non-powers, Italy was at least a contender. James had sought with little success to exert financial pressure on the Italian government during the 1866 crisis: in the end his plan that Italy should buy Venetia from Austria was realised, but only after the war he had hoped to avert. In the period after the Peace of Prague, the possibility of an anti-Prussian alliance between France and Italy was raised more than once, with Austria as a possible third. Bismarck called such a combination “conjectural rubbish”; nevertheless, it should not be dismissed out of hand. In February 1869 Nat heard it alleged that “his Majesty will determine upon war, in order to divert public attention from internal affairs” and that the Italian ambassador in Paris was returning to Italy “with a political motive, viz that of inducing his Government to make an offensive [and] defensive treaty with this country.” Two months before, the Italians had in fact secretly offered their neutrality in the event of a war, proposing the Tyrol as the price. And when war broke out in 1870, Victor Emmanuel seriously considered joining France against Prussia; it was unusual for him to be overruled, as he was on this occasion, by his ministers.

  From a financial point of view, Italy was biddable. The costs of war—both external and internal—had pushed up spending from 916 million lire in 1862 to 1,371 million in 1866; but revenue lagged drastically behind, rising from just 480 million to 600 million, so that by 1866 more than half of all expenditure was being financed by borrowing. In the four years after 1861, the national debt more than doubled to around 5,000 million lire (approximately 55 per cent of GNP). Not only did the price of Italian rentes slump from around 66 to just above 50 in 1867; in 1866 the convertibility of the lira had to be suspended, leading to a marked currency depreciation. Against sterling, for example, the Italian currency fell some 12 per cent between 1862 and 1867. Italian politics continued to perplex foreign observers (Cavour’s “disciple” Quintino Sella was about the only post-risorgimento figure the Rothschilds had a good word for; the arch-intriguer Urbano Rattazzi was their bête noire). As in Spain, there was nevertheless considerable competition between French bankers for a share of whatever financial operation the Italians chose to make to extricate themselves from their financial difficulties. The beginning of 1867 saw the latest steps in this direction by the maverick prophet of Catholic finance, Langrand-Dumonceau, with the Rothschilds hard on his heels.

  Yet bedevilling any possible alliance between Italy and France was the question of the relationship between the Italian Kingdom and the Roman Catholic Church. The diplomatic key to this was the status of the city of Rome itself which, despite the agreement struck with France in 1864, Italian politicians continued to covet. But the ramifications of the enmity between the Italian state and the Pope also extended to the realm of finance. When the Italian government proposed to raise money through the sale of ecclesiastical properties, there was considerable interest from foreign banks. In the course of several months of negotiations, a syndicate emerged—made up of the Rothschilds, the Société Générale and the Credit Foncier, with Langrand tagging along—to advance the government money ahead of the sale: the talk was of a loan of 600 million lire in return for a 10 per cent commission and Church lands supposedly worth over 1,000 million. But as it emerged that the sale of Church lands was vehemently opposed by the Pope and, more important, that the Italian government wished to transfer at least some of the repon sibility for the act of expropriation to the bankers, the Rothschilds began to draw back.

  This withdrawal was partly for business reasons, it is true: there were various aspects of the proposed deal which James disliked, not least the need to share it with “swindlers” like Langrand. But the principal reason, as the private letters to London show, was that James was loath to incur the wrath of the increasingly influential Ultramontane party in France. This sensitivity to Catholic opinion was an intriguing feature of James’s later years. He had already shown signs of it in 1865, when he argued against selling Spanish bonds on the ground that “to act against the government and minister [of] a Catholic country like Spain, where Jews are not even allowed to have synagogues, could do no good in the long run.” Now he used the same argument again:As a Jew, I don’t like to go against the clergy as that could hurt Jews everywhere ... It [was] not just because of the small share [we had], but because the deal was impossible, impossible to do. I, a Jew, should force the clergy to sell their property? ... I remain a financier and [do] not [want to get involved with] politics which will turn the clergy against us.

  Even the pragmatic Alphonse agreed that “to associate oneself with a political act, which might well be convenient, but which is neither just nor equitable, would, I believe, be to sacrifice one’s good reputation to the love of gain, and to stir up against the Jews of Italy all the passions of the Middle Ages.”

  The Roman obstacle proved insuperable. Renewed negotiations with the Credit Foncier and the Rattazzi government about a more straightforward advance of 100-120 million lire in July 1867 were blown off course by the renewed crisis over Rome that autumn. In a piece of sheer opéra buffe, Rattazzi encouraged Garibaldi to make a second attack on Rome, then had him arrested, and then resigned when the French despatched new troops to Rome. Garibaldi then escaped from his island retreat at Caprera, only to find the population of Rome apathetic and the Italian regular army siding with the French: his volunteers were duly defeated at Mentana, just as they had been at Aspromonte five years before.

  In the wake of this fiasco, which momentarily raised the spectre of a war between France and Italy, the Church lands issue resurfaced, but once again James and Alphonse declined to become involved, despite the obvious frustration of the London partners. As usual, there were business reasons for this reserve: talk of a tax on Italian rentes annoyed James, as did the Credit Foncier’s increasingly independent style of negotiation. But fundamentally it was the religious problem which was decisive. “We are in a Catholic country,” declared Alphonse regretfully, “and one cannot go against the religious prejudices of the country where one lives, especially when one belongs to another faith oneself.” Nat agreed: it would be “a very difficult matter for our Paris house to go into the Ecclesiastical business.” “The Church people,” he argued, “would tear us to pieces if they could and nothing in the world would make us so unpopular. For my part let the profit be what it may I most sincerely hope we may have nothing to do with it.”7 Pointedly, Alphonse reminded his London cousins that “in almost analogous circumstances” they had “refused to make the Russian loan, because of liberal sentiment in England, which in those days sincerely pronounced itself in favour of Poland and against Russia.” Moreover, there was also now
the added political complication of the French presence in Rome. In February and March 1868 Alphonse and James were in close consultation with Napoleon and Rouher, who saw an understanding over Rome as the precondition for a loan of any sort to Italy. Such an understanding was never achieved.

  Even more than the closure of the Naples house in 1863, the abortive negotiations of 1867-9 were the turning point in the history of the Rothschilds in Italy. Mayer Carl was right when he complained that it was “a great pity that all our enemies & those who constantly oppose us everywhere should get hold of such a prof itable business.” True, the sales of Church land raised less money than had been intended; their main effect was to depress Italian land prices. And the Rothschilds continued to be the dominant force in the management of the Italian external debt until the 1880s: between 1861 and 1882 over 70 per cent of interest payments on foreign held rentes went through the Rothschild houses. It was also to the London house that the Italian government turned for a 644 million lire stabilisation loan when it was decided to resume specie payments in 1880-81. Yet Alphonse would never wield the influence over Italian governments which James had enjoyed in the 1850s and 1860s.