The House of Rothschild

by Ferguson, Niall

  The answers arrived at after days of haggling were as follows: subscriptions for 2.6 billion francs worth of 5 per cent rentes were to be opened on June 26 at an issuing price of 82.5, though with the timing of subscription payments such that the net price was around 79.5. The exchange rate for English interest payments was fixed at 25.30 francs to the pound. The two syndicates led by the Rothschilds in London and Paris were formally underwriting only 1,060 million of the total issue, in return for which they received a commission worth 2 per cent of the nominal value (21.2 million francs), so that the effective price of their subscriptions was more like 77.5 (Alphonse calculated the figure as 77.7). There was, admittedly, a catch of sorts. Technically, the syndicates were underwriting not the first billion of the issue (as the Berlin bankers had expected) but the second billion. If the issue went badly, their chances of being left holding large quantities of rentes were therefore higher. On the other hand, if the issue went so well that the public bought the lot, the bankers would have to rest content with their commission. The Berliners thought this “flatly unacceptable.” However, the French government concluded a secret oral agreement with the Rothschild houses to the effect that they would be allowed to hang on to some or all of the rentes they underwrote. The Rothschild share was therefore 410.5 million francs—more than a third of the total amount underwritten or 16 per cent of the total issue.18 It is therefore a matter of straightforward arithmetic to calculate the profits they earned. The commission alone was worth 8 million francs; but that overlooks the large capital gains involved. If the London and Paris houses held on to all the rentes for which they had paid an effective price of 77.7 and sold them all at the market’s next peak in November 1871 (97.1), they would have made a profit of around 80 million francs (c. £3 million).19

  It was typical that Alphonse regarded this as rather less than might have been achieved. It had proved impossible to achieve a complete Rothschild monopoly. Not only had the French joint-stock banks managed to secure a small share, but the markets other than London and Paris had been effectively “free for all,” so that brokers began trading unofficially in Brussels even before the subscriptions were opened. “I confess it’s a veritable muddle,” grumbled Alphonse, whose opinion of the inexperienced Pouyer-Quertier had never been high, “but I assure you that it is not our fault; to prevent it we would have had to become Ministers of Finance ourselves.” Yet within a few days, as the full extent of the loan’s success became apparent, such complaints faded. At first, subscriptions were said to be double the amount issued; by July 20 Alphonse estimated a factor of eight. Not only that, but the French joint-stock banks had been successfully squeezed out, as they were again when the city of Paris issued a loan of its own through the Rothschilds not long after. As Mazerat of the Credit Lyonnais complained:In all the affairs which have been contracted since the war, the house of Rothschild and, under its aegis, the haute banque group, have played an almost exclusive role ... It was Rothschild and his friends, with the support of the Banque de France, which advanced the 200 million francs necessary for the city of Paris to pay its war contribution; it was the same group which reserved for itself the 2 billion loan and it was only as a favour that the credit establishments were able, at the last minute, to obtain for themselves an insignificant share of the commission of 20 millions which the Rothschild syndicate had earned for itself ... Now the next loan for the city of Paris is announced on the same terms ...

  With Alphonse now one of the dominant regents at the Banque de France and the Rothschilds’ “long-standing intimate friend” Say now Prefect of the Seine, the joint-stock banks saw themselves as the victims of political discrimination. On August 5 they therefore signed an agreement which was little short of an anti-Rothschild alliance. As Mazerat put it, deliberately casting aspersions on Alphonse’s patriotic credentials, the joint-stock banks had united “as French establishments” to lay claim to “the place which they must legitimately take in French affairs.”

  The objective of cutting the German banks out of the operation had also been achieved—though how far this was the fault of bad communications, timidity in Berlin or malice aforethought in Paris is hard to say. It is worth noting that this exclusion extended not only to Bleichröder, Hansemann and Oppenheim but to the Rothschild houses in Frankfurt and Vienna as well. Anselm applied for as much as 31 million francs of the new rentes and the Creditanstalt for 47 million, but by the time these applications reached Paris subscriptions were already closed. Mayer Carl only just managed to secure a subscription for 2 million francs. Not for the first time, the fault lines dividing the European capital market were breaking up the traditional co-operation between the Rothschild houses, leaving only an Anglo-French axis intact. That this did not concern Alphonse is plain. “I do not regret,” he wrote with a hard-edged satisfaction, “having been able to demonstrate to these gentlemen, despite all our goodwill, that when we are engaged in a transaction, we can do without them, just as we can do without the Berlin types who have missed the chance to make a pretty nice profit.” Triumph though it was for the English and French houses, the first Thiers rente also marked a further step towards the disintegration of the Rothschilds as a united pan-European force.

  This, of course, was only the first phase: there remained the question of how the money raised by the rentes issue should be transferred to the German government. The obvious way of proceeding was for the government to buy bills on London—the most popular of liquid financial instruments—and hand them over to Berlin. Something like a third of the first 1.8 billion francs was indeed paid in this way; to Alphonse’s annoyance, it proved impossible to establish a monopoly on the French government’s purchases of bills. However, the Germans now began to make difficulties, insisting that they would rather receive gold or German thaler bills than long-dated sterling bills.20 As usual, Bleichröder sought to inflate his own importance by relaying the views of his “friend” on this issue to Paris. But Alphonse was unimpressed. “These gentlemen may be great [military] victors,” he commented acerbically, “but they are certainly pretty bad financiers. They are locking up the money we remit them and do nothing to facilitate the payments.” The transfer difficulties precipitated a mild currency crisis in the last months of 1871, coinciding as they did with a poor harvest (and therefore a need for French grain imports), a speculative surge at the bourse and the first serious arguments about tax policy. To protect its reserve, the Banque de France had to issue new small-denomination notes and pressurised the government to reduce its large floating debt. This burst the bubble on the bourse: the price of rentes peaked in November then fell about five percentage points, in the first half of 1872 (see illustration 6.i). As a consequence of all this, discussions of the next payments due in Berlin by May 1872 had to be deferred until the New Year.

  The French government’s difficulties gave the Rothschilds’ rivals a fresh opportunity to tout for business. It was the Banque de Paris which led the challenge, acting as a front (so Alphonse suspected) for German interests, notably Henckel von Donnersmarck. The “Paribas”21 director Soubeyran had got the better of Alphonse in the scramble for bills in the summer of 1871 and on the question of the 300 million francs due by May Alphonse was forced to give ground: after much wrangling, he and the other private bankers guaranteed half the sum, leaving the other half to the joint-stock banks. This was but a foretaste of the bitter competition for control of the remaining 3 billion still to be paid. Once again Bleichröder kept trying to force the pace, having made contact with Pouyer-Quertier when the latter visited Berlin. He pestered Alphonse with more or less hare-brained schemes, all designed to secure for himself a bigger share of the next big operation: a new Franco-German joint-stock bank should be set up in Paris to handle the next loan; the 3 billion should be guaranteed by French railway shares (in other words, French railway shareholders would exchange these for rentes and hand over control of the French rail network to Berlin). Like Henckel von Donnersmarck’s proposal for a lottery loan
, all these German schemes were ultimately irrelevant: a sudden upsurge of patriotic feeling in France itself—an impatience to end the occupation as soon as possible—made it highly likely that the 1871 rente operation would be repeated. The only question was whether the Paris and London Rothschilds would be able to repeat their earlier coup of controlling the new issue.

  5.i: The weekly closing price of French 3 per cent rentes, 1860-1877.

  At first, Alphonse was sceptical about the possibility of paying the 3 billion ahead of schedule in view of French political instability and the slight deterioration in Franco-German relations which happened in the spring of 1872. By the end of June, however, fear that the Paribas group might steal a march on him galvanised him into action. It was inevitable that the government would be less generous the second time around. In order to secure a repeat of the underwriting system, the bankers had to promise to provide the government with 700 million francs in hard currency. As Alphonse said, this was necessary only “in order to be able to justify a bigger commission.” The price of the issue was also set higher—it was offered to the public at 84.5, though the effective net price to the underwriters was 80.5. It was probably also inevitable that the joint-stock banks would succeed in securing a larger participation. Yet once again Alphonse had the best of the bargaining. As in the previous year, only a billion of the total issue of 3.5 billion francs was guaranteed: of this billion, the Rothschild group (that is, the Paris and London Rothschilds, Barings and the haute banque firms) took 64.3 per cent, leaving slightly less than a third to the joint-stock banks; the same proportions applied to the 700 million franc foreign currency advance. The two Rothschild houses alone accounted for 282 million of the guaranteed billion and 197.5 million of the 700 million advance—28 per cent of the total in each case.

  Despite the fact that most of the transfer in 1872 and 1873 was paid in thaler bills, the German banks continued to play a minor role. Bleichröder even came to Paris in person to combat what he saw as a sinister conspiracy to corner the German market by Hansemann, but neither was really on the inside track: altogether, German subscriptions amounted to just 3 million francs.22 As for Mayer Carl, he could only grumble: “[W]e know nothing and have only the pleasure of seeing empty letters from our Paris friends with long phrases pour tout potage.” For the lucky insiders, the profits involved were once again substantial. The commissions amounted to 1.5 per cent on the guaranteed billion (15 million) and 25 million on the 700 million francs of foreign exchange, implying 11.2 million francs for the two Rothschild houses alone. That excludes the large capital gains made as the rentes rose rapidly above the purchase; it seems reasonable to assume that the Rothschilds themselves invested in the issue as well as underwriting it.

  Mayer Carl evidently would not have been sorry if the loan had flopped; in fact, as Alphonse had foreseen, the guarantee was even more superfluous than in the previous year, though even he was taken aback at the extent of oversubscription: a factor of around eight. This struck him as “ridiculous,” and in the short term that view seemed to be confirmed. Once again, transfer problems depressed the exchanges in late 1872 and rentes sagged to a new post-war low. This time, it was the German government’s objection to being paid in bills on Hamburg which caused the difficulty.23 Yet the oversubscription of July reflected a far from unrealistic market assessment of the rente’s medium-term prospects: in the three and a half years between December 1872 (81.5) and March 1877 (107.88), the 5 per cent rente rose more or less uninterruptedly by more than 25 percentage points, prices last seen on the very eve of the Empire’s fall.

  Nothing could better illustrate the lack of correlation between French financial and political strength in the crisis of 1870-71. We are bound to ask: if France could so swiftly “win the peace” by paying off reparations worth 5 billion francs in the space of just over two years, why had she been so woefully unable to win the war? Why were the French more willing to pay for defeat after the fact than to pay for the chance of victory before war broke out? The only logical conclusion is that the Bonapartist regime should have issued 5 billion francs of rentes to finance rearmament in the late 1860s; could have done so financially, but was unable to do so because of its own political deficiencies.

  Soll und Haben

  Thus were the spoils delivered to the victor. But what would the victor do with them? From an early stage in the indemnity transfer, Alphonse had expressed doubts about the financial competence of the recipients of reparations. “The Berlin market is in a shocking state,” he exclaimed in December 1872. “Where then are the 5 milliards we have paid to these gentlemen? It is said no profit derives from ill-gotten wealth.” The crisis which swept through the Central European financial markets in the summer of 1873 seemed to vindicate him entirely. “Our 5 billions have cost them dear,” he noted with satisfaction that September.

  On the other side of the political divide, Mayer Carl had also had some doubts about the sustainability of the Gründer boom, which resumed with a renewed vigour in the wake of Sedan. In particular, he was disturbed by the proliferation of new joint-stock banks throughout Germany. Of course, his objections to this trend were self interested. “All these banks,” he grumbled in January 1871, “are too glad when they have an opportunity of investing money and showing that they are the only parties who make loans and push us aside.” On the other hand, he was right to recognise symptoms of economic overheating, even if he had no real idea of their cause. “The wild speculation in all the new bank shares,” he reported in October 1871, “continues to be the chief topic of conversation & nobody understands the mania shown in favour of all these new rubbishing schemes which absorb a good deal of money.” “The mania for starting new Banks and Credit Mobiliers is becoming a regular nuisance,” he added a month later, “and will no doubt end by a catastrophe as nobody knows what all these establishments are to do with the money of [their?] subscribers.” By May 1872 Mayer Carl was explicitly predicting “a monetary crisis which is not unlikely to take place in consequence of all the rubbishing shares which have been issued and what are floating about and seen to be perfectly unfal lable [sic].”

  On the other hand, the sheer volume of business in the new Reich more than compensated for the nuisance of increased competition. Even as the new Reich was being proclaimed in January 1871, Mayer Carl was busy with a loan to Württemberg, though on this occasion he was defeated by “Erlanger and all his rubbishing banks.” He was more successful when Baden too turned to the capital market in the same year, and also arranged a small loan for the municipality of Ratisbon. Munich, on the other hand, eluded him. Plainly, the old Rothschild dominance in South Germany was a thing of the past. It was therefore of vital importance to Mayer Carl to develop his links to Hansemann and the Disconto-Gesellschaft, and through him to the burgeoning Berlin market. Hansemann, he reminded his English cousins with Victorian over-emphasis, was:a fine and great friend of the house much more so than Bleichröder who is merely a vain and ambitious fellow hunting after personal advantages & distinctions which may be of service to him but which cannot be of consequence to our personal interests ... Mr Hansemann is so sincerely attached to me that he would never do anything directly or indirectly to injure our interests which you may depend upon ... Unless you keep up a friendly understanding with him you will never be able to do any business here with the Government as he is particularly in favour & his influence is greatly increasing. I can therefore only repeat what I said so often that if we want to act cleverly we ought to be on the best footing with Mr Hansemann & I have every reason to believe that he never does anything without me but that he expects the London & Paris houses to be equally on good terms with him.

  It was through Hansemann that Mayer Carl became involved in a number of profitable railways, including the Cologne-Minden line. “I am sure that you will be more than satisfied,” he reported to New Court, which evidently had a share in this business, “& think that old Charly is not so stupid as he looks”—a nice indication
of the sense of financial inferiority the Frankfurt partners were beginning to feel. His involvement in South German railways also seems to have been linked to Hansemann. It seems that in the early 1870s Mayer Carl was increasingly acting as a satellite of the Disconto-Gesellschaft, the more so with each fresh sign of neglect from London or Paris.

  It would be too much to posit a direct causal link between the French indemnity and the crash which brought German finance to a standstill in 1873. After all, it was in Vienna rather than Berlin that the crisis began on May 8—9. Nevertheless, there is no question that German fiscal and monetary policy in the period the indemnity was paid did nothing to check the post-war “mania.” “I saw the Finance Minister in the [upper] house,” wrote Mayer Carl in March 1872, “& he asked me if I could make use of money as he has so much that he did not know what to do with it.” This was a pardonable exaggeration: still, if we accept that the war had cost Germany 220 million thalers, it had in effect generated a budgetary surplus in the form of reparations worth 1.3 billion thalers (5 billion francs). The German government used this money in a number of ways which tended to fuel the stock market boom. Granted, 120 million thalers were put in a “war chest” in the Julius Tower to await the next war—as effective a sterilisation of the money as could have been achieved. But the Germans spent around 60 million on grandiose building projects in newly imperial Berlin, and much of the rest on reducing the debts of the Reich’s member states and the North German Confederation. This created additional liquidity in an already buoyant economy.

  A related difficulty was the uncertainty about Germany’s monetary arrangements. Within the new Reich in 1871 there were at least seven coin systems, mostly silver-based. However, the Liberal bankers like Ludwig Bamberger who took the lead in the monetary debate after 1870 favoured the adoption of an altogether new German currency based on gold, partly because of the fall in the price of silver relative to gold. The first legislative steps towards this were taken as early as October 1871, but it was not until July 1873 that a Coinage Law was passed, and not until March 1875 that a central bank, the Reichsbank, was created to manage the new currency. By that time, the bubble had long since burst. The available statistics point to an increase in the money supply of around 50 per cent in the period 1871-3 and price inflation of a similar order. The crash of 1873 wiped out those gains and drove thousands of firms into bankruptcy.