The House of Rothschild

by Ferguson, Niall

  Alphonse was, of course, right to anticipate a German demand for territory as well as money. As early as August 15, Mayer Carl relayed to London the mood on the Frankfurt bourse: “I dare say France will lose her old German provinces, a large portion of her fleet & besides she will have to pay a very large amount of money: this is generally thought.” A few days later he added more in the same vein: “The struggle is a national one and the great victories of the German arms claim everything that can possibly be expected. You have no conception of the enthusiasm which exists here & all over Germany and the humiliation of France must be exemplary to satisfy public opinion. Everything is getting up & the German loan is [at a] 7% premium and will no doubt go higher still as the French must pay for everything.” “The Germans,” he predicted darkly, “will take good care to impose conditions which will assure the peace for a long time.” By August 26 he was able to offer more detail:The French must be humiliated which is the only way for us to be preserved from further wars & I have no doubt that the French must give up Alsatia, the Lorraine, a good part of their fleet & at least one hundred Million Sterling as war contribution. Strasbourg & Metz must become Federal fortresses this is the general opinion & old B is sure to make the best of it.

  Mayer Carl also justified the annexation of Alsace-Lorraine on nationalist as well as strategic grounds: “[I]t is foolish to think that the German nation will give up the struggle without keeping those old German provinces which had been conquered ...”

  But the new French government’s hope that England would intervene to moderate the German demands was, for reasons described above, unrealistic. “We have received your letters,” Alphonse wrote dolefully to New Court on September 6, “and we see with great regret that England is not disposed to intervene.” Not that he immediately abandoned hope of swaying British policy: he was in regular contact with the British ambassador Lord Lyons and was evidently involved in the diplomatic efforts of Thiers, who set off in search of support in London and St Petersburg. Nor was it wholly unrealistic to hope for more sympathy from Gladstone, who strongly disapproved of the unilateral annexation of French territory and privately considered the transfer of Luxembourg to Prussia “an ingenious idea.” However, he was riled by a Rothschild letter on this subject which seemed to assume his support on this point and (fatally) to make “very cool assumptions ... about the interests of Belgium.” Indeed, by the end of September Gladstone had begun to suspect the Rothschilds of “twisting the words” of some of the intelligence they were relaying to him.

  Any possibility of effective intervention was buried when the Russians seized the opportunity presented by the crisis to reopen the question of the Black Sea’s neutralisation. 7 At this point Alphonse ceased to discount rentes for the government, instead converting his remaining cash into drafts on the Banque de France which were sent to London for safety. With the Prussian army closing in on Paris and no sign of an imminent armistice, it was a moment for understatement in the great Rothschild tradition. “There is no need for me to say,” he concluded, “that this extremity is most disagreeable for us, but the government has informed us in a proclamation that we are ready to be buried beneath the walls of Paris, and the prospect is not an alluring one.” On September 17, the day before Favre secured an interview with Bismarck at Ferrières, Lyons gave Gustave advance warning of the German position. Bismarck had told him “that he had no need of money, that they had more of that than they wanted, and that what really was required was to have Metz and Strasbourg ... If that is refused, which is probable, he [Bismarck] will enter Paris, cut off our business communications and put the city to fire and sword without respite.” “That will be agreeable,” was Gustave’s parting comment in what he plainly expected to be his last letter to London for some time. “Goodbye my dear cousins, the ambassadors, including Lord Lyons, are leaving this evening after which we are going to be living without knowing what will become of us—a very pretty prospect.” Favre’s interviews on the 18th thus merely confirmed what the Rothschilds already fully expected. Although Favre went so far as to offer Bismarck 5 billion francs if France could retain Strasbourg and Alsace, “old B” responded memorably: “We will talk about the money later, first we want to determine and secure the German frontier.”

  Communications were not wholly severed. Occasional letters were sent across the lines by balloon and were relayed by telegraph to London but it proved extremely difficult to send letters into Paris during the siege. On December 10, for example, Alphonse received a letter from his cousins dated October 21; and it was not until February 3, 1871, when a New Court courier arrived with a large hamper, that regular correspondence resumed. To all intents and purposes, then, the Parisians were on their own for four harrowing months, and even after the armistice of January 28 communications remained erratic until June. Because they ceased to write letters in the period of the Prussian siege, we know little about their experiences; but it seems safe to assume that they endured at least a measure of the cold, hunger and terror which everyone did who remained in the besieged city. When the food package arrived from London in February, Alphonse and his relatives “fell like children on all the excellent things you sent us.” Once again, Bismarck’s mood was vindictive, relishing the thought of the Rothschilds brought low. On January 30, two days after an armistice had at long last been signed, he indulged in more anti-Rothschild jokes. On hearing that a Rothschild was intending to leave Paris, Bismarck suggested he should be arrested as a franc-tireur (sniper). “Then Bleichröder will come running and prostrate himself on behalf of the whole Rothschild family,” exclaimed Bismarck’s cousin. “Then we will send both to Paris,” jeered Bismarck, “where they can join the dog hunt”—a reference to the wretched diet of those who had been trapped in the city.

  “Le Pivot d‘une Combinaison”: Reparations

  A fundamental question arises, and it is the question historians have much more often asked about the peace terms which were formulated in the same place nearly half a century later, when the tables were turned and Germany was the defeated power. Were the peace terms excessively harsh? Another question—also more often asked about the peace of 1919—is whether or not it was right to try to resist them by continuing to fight, even at the risk of precipitating internal revolution and civil war. The paradox is that the territorial demands—the cession of Alsace and Lorraine—were not unreasonable: Austria after all had surrendered territory following both her defeats in 1859—60 and 1866. Yet these were the demands the French found intolerable. The monetary demands, by contrast, were remarkably harsh. Yet from the outset the French were more willing to countenance these. It was in many ways futile for Gambetta to balloon out of Paris and drum up his levée en masse: although the new armies raised did inflict unforeseen casualties on the Prussian occupiers, they never stood a chance of winning a real victory over them. The price of thus postponing peace was also high from the point of view of internal stability and did nothing to modify the Prussian terms.

  Yet the parallel with the experience of the Weimar Republic after 1919 is a suggestive one in four ways. Firstly, a futile attempt at military resistance may have served to scotch or at least weaken the nascent “stab in the back” theory advanced by the far left in Paris after Sedan. No one could doubt by 1871 that France had been defeated “in the field”; without a myth of republican pusillanimity it was difficult for the diverse factions of the Right to unite. Secondly, the descent of Paris into anarchy and the subsequent repression of the Commune in the summer of 1871 may have had a salutary effect in banishing for generations the spectres of Jacobinism, Blanquism, Proudhonism and Marxism: moderate republicans were united by their common aversion to the extreme left in a way which never happened in Weimar Germany. Thirdly, the continuing occupation of large parts of France by Prussian troops after 1870 gave the moderate republicans an incentive to pay reparations which was lacking for Germany in the 1920s; France tried to occupy German territory after default, instead of occupying in advanc
e of payment.

  Finally, and crucially, a determined and sincere attempt to pay reparations could count after 1870 on the wholehearted support of the European capital market, led by the Rothschild houses. During the early 1870s the French paid substantial sums for their defeat—ironically, a good deal more than they had been willing to pay for adequate military preparation before the war. The financial markets rewarded them by advancing the money needed to make the fastest possible transfer of reparations at a relatively low cost: it was, quite simply, the biggest financial operation of the century, and arguably the Rothschilds’ crowning achievement. By contrast, Germany in the early 1920s set out to avoid paying reparations and in the process inflicted not only hyperinflation on herself but massive currency depreciation on foreign lenders; the markets reacted by never trusting the German government again, and the subsequent attempt to pay reparations in a long series of small instalments failed miserably. The Third Republic survived for seventy years; the Weimar Republic for less than fourteen. The key to that difference may lie in the peace of 1871.

  Of course, one should not lose sight of the differences between the two cases. The war of 1870 was short and cost far less in life and treasure than the war of 1914-18. Consequently, France embarked on paying reparations with a lower level of national debt and far less serious fiscal and monetary problems. Even so, the payment of the German indemnity remains one of the great financial feats of modern times.8 Between June 1871 and September 1873, France paid Germany 4,993 million francs, around 8 per cent of gross domestic product in the first year, and 13 per cent in the second. These figures need to be seen in the context of the existing level of national debt (which was a good deal higher than in 1815). As a percentage of GDP, French public debt was already 44 per cent in 1869, before the war, and 59 per cent in 1871, before most of the indemnity had been paid. So the total internal and external debt burden in 1871 was in the vicinity of 80 per cent of GDP. This was approximately half the size of the total debt burden Germany laboured under in 1921 (when the reparations total was belatedly fixed). On the other hand, the German reparations schedule in the 1920s was intended to stretch over decades, so that the annual burden of debt service and amortisation averaged less than 3 per cent of GDP during the 1920s. For France to pay an average of more than 10 per cent of GDP in two successive years was an astonishing achievement. Even more astonishing, the transfer was made with the minimum of exchange rate depreciation and domestic inflation. The history of how this was achieved deserves to be better understood.

  The Rothschilds first began to consider the question of the French indemnity as early as August 1870. As we have seen, Mayer Carl cited a figure of £100 million—2.5 billion francs—as a possible total. As early as November, Anselm was trying to work out how such a large sum could be paid. He suggested to Lionel that, following the precedent of 1815, new 5 per cent rentes would have to be issued, and envisaged the Rothschilds playing the role Barings had played then, as intermediaries for the transfer of money from Paris to Berlin. This, as Lionel objected, was premature, though it proved quite prescient. According to Bismarck, Favre mentioned a sum of 5 billion francs when the two met in September, though this was intended to be conditional on the retention of Alsace-Lorraine. When the Germans insisted on territorial cessions, negotiations were once again suspended and war went on. It was not until February 1871 that work on the indemnity question could be resumed.

  From the beginning, German bankers assumed that the spoils of their government’s victory would include their control of the collection of reparations. Bleichröder believed he had stolen a march on his rivals when he was summoned (along with the industrialist Henckel von Donnersmarck) to advise Bismarck at Versailles; and in the wake of this trip he badgered the Paris Rothschilds with proposals for floating a French loan on the Berlin market. Needless to say, Mayer Carl was against involving Bleichröder, arguing that any transaction should be handled in tandem with Hansemann and the Seehandlung. However, Alphonse seems to have determined from an early stage to exclude as far as possible all the German bankers—including even his own cousins in Frankfurt and Vienna.9 His plan was to create two allied and Rothschild-led syndicates in Paris and London, the former including all the older private banks (the so-called haute banque) but not the joint-stock banks; the latter to be composed solely of N. M. Rothschild and Barings. This strategy had a dual significance: it was designed to punish the German banks on what may be interpreted as patriotic grounds; but it was also designed to strike a blow for the “old” banks against their joint-stock rivals in France and England. To this end, earlier rivalries among the private banks were forgotten—in particular the rivalry between Rothschilds and Barings which dated back to the financing and transfer of the last French indemnity.

  The first round of the struggle for control of the operation was fought over the payment of 200 million francs demanded by the German occupiers from the city of Paris in February. At this early stage, needless to say, tension between the French and German sides was high. If the Germans had been willing to accept French banknotes, the matter would have been straightforward: it was easy for the Banque de France to advance 210 million francs to the provisional city commissioners (one of whom, it should be said, was Léon Say). But, anxious that the French currency might depreciate, the Germans insisted on being paid in coin. This seemed so unreasonable to Alphonse that he assumed they were merely looking for a pretext to break off negotiations, end the armistice and march into Paris itself. In the end, despite the continuing difficulties of regular communication with London, Alphonse managed to hammer out a compromise: 50 million was to be paid at once in French banknotes; 50 million in gold or silver coin as soon as possible; and the remainder in commercial bills on London and Berlin. The operation was guaranteed by a Rothschild-led syndicate of French private banks and carried out with the assistance of the London house.10 Most of the bills bought and handed over to the Germans (63 million out of 100) were in fact short-dated (one- or two-week) bills on London; the two bills for 2 million thalers which Alphonse gave to a dazzled Bleichröder were exceptional. This was the first sign that Alphonse intended London rather than Berlin to be the nodal point of the reparations process. Indeed, Alphonse made a hurried visit to New Court on February 21-2 to discuss how the same operation could be repeated on a larger scale for the impending national indemnity. As he had expected, the action of buying so much “London” weakened the franc slightly against sterling, though the Germans were protected against this depreciation under the terms of the agreement (as were the bankers: the Paris authorities had agreed to a fixed rate). At the same time, he foresaw the problems the Germans could create in London if they sought to convert their sterling bills into gold at one fell swoop.

  The Paris contribution was merely an appetiser; the final total of the indemnity to be imposed had still to be decided. This proved less than easy. Figures bandied around at Versailles ranged from 3 to 8 billion francs; a “peevish” Bismarck himself initially proposed to Thiers a sum of 6 billion, which Thiers—leaping to his feet “as if he had been bitten by a mad dog”—denounced as “une indignité.” Even when he reduced this to 5 billion, the French continued to dismiss the figure as “exorbitant.” Still more galling to the French negotiators was Bismarck’s assurance that Bleichröder and Henckel had “devised a procedure by which this tribute, so burdensome in appearance, will be paid by you without your being aware of it.” As Favre remarked bitterly, the two German financiers “did their best to prove to us how much they wanted to carry out a colossal operation with our billions.” It was in order to head this off that Thiers requested the return of Alphonse from London to represent the views of both the Paris and London Rothschild houses. On February 25, with the two sides apparently deadlocked, Alphonse was summoned to Versailles. He was given an ominously frosty reception by the German Chancellor when he arrived that evening.

  If Bismarck hoped that, as the son of a Frankfurt Jew, “Rothschild” would somehow be
able to arbitrate, then he was disappointed. To be sure, Alphonse dissuaded the “exasperated” Thiers and Favre from “breaking off the negotiations and throwing themselves into the arms of Europe.” But when the German representatives proposed to him an initial annual payment of 1.5 billion francs, half in specie, half in bills, he “declared that he had no brief to discuss these [technical] questions as the French negotiators were not in agreement even on the first principles” of the peace. After an hour of inconclusive discussion, Bismarck appeared: “He was pale with anger and demanded what proposals we had agreed on. I replied that I had not been able to examine the questions since the two governments were not in agreement on basic principles. I thought Bismarck was going to devour me; he shouted, ‘But in that case peace is impossible!’ ”