Table 9d: Geographical distribution of all British capital called up, 1865-1914.
Source: Davis and Huttenback, Mammon, p. 46.
There were some exceptions to this rule of abstention, admittedly. Perhaps seeking to emulate Barings’ success with Guinness, Natty undertook four successive share and debenture issues for the Manchester Ship Canal between 1886 and 1891, worth a total of £13 million. But, as Edward Hamilton commented, the failure of the first of these issues led to “an invidious comparison” being drawn in the City between “Rothschild’s water” and “Baring’s beer.” Even in partnership with Barings it proved impossible to make the second issue a success. Similarly, having been pioneers of rapid communication in the early part of the century, the Rothschilds might have been expected to grasp the significance of an innovation like the telephone. Indeed, they themselves began to experiment with the telephone as a way of communicating between Paris and London as early as 1891. But a share issue of £488,000 the following year for the New Telephone Company was a trifling affair, and it is remarkable that the London and Paris partners continued to communicate with one another by handwritten letter just as their fathers, grandfathers and great-grandfather had done.
All this helps explain why historians have often characterised the Rothschilds of this generation as “conservative” in their approach to finance. (The obvious contrast is with the French house, which remained a major shareholder in railway lines like the Nord.) Yet this critique rests on a misunderstanding of the Rothschilds’ modus operandi and their role in the process of late-nineteenth-century globalisation. There was, for example, one domestic industrial sector in which the Rothschilds did enjoy some success: predictably, perhaps, it was the sector most closely linked to government—derence. And of far greater importance than any involvement in domestic industry and transport were the Rothschilds’ interests in foreign mining and the international market for metals and precious stones (which are discussed in the next chapter).
The Rothschilds’ role in the economics and politics of imperialism should not therefore be caricatured as part of a wider teleology of decline. In many ways, imperialism did not represent a dramatic break with their past success. Foreign public sector investment remained their principal interest, with “home” government borrowing in second place, in so far as France, Austria-Hungary and to a lesser extent Britain were all forced to continue to issue new bonds to finance the rising costs of defending their empires. Here, in the international bond market, the Rothschilds had few if any real equals. Their role in foreign private sector finance (especially railways) was more modest, as was their acceptance business. But their international mining interests, as we shall see, were vast.
As in the past, the Rothschilds continued to have an interest in the continuation and expansion of a global economic system in which capital, goods and indeed people could move as freely and as securely as possible. However, if this could be achieved without political intervention, they were content: thus the long history of Rothschild involvement in Brazil shows that they did not regard formal imperial control as a precondition of profitable capital export. Only where important bonds appeared to be in jeopardy as a result of political instability in the borrowing territory did the Rothschilds support direct political intervention. Their mining interests in Spain and Mexico did not require foreign intervention, despite the recurrent instability of politics in those countries; whereas it is hard to imagine their investments in Burmese ruby mines or New Caledonian nickel mines in the absence of direct European control. The South African case illustrates the ambivalence of Rothschild attitudes to imperialism as personified by Cecil Rhodes: though strongly attracted to gold and diamond mining, they were suspicious of Rhodes’s wilder schemes to extend British political influence north of the Cape colony. Nor is there any sign of a preference for railways in imperial territory.
Generally, the Rothschilds backed British empire-building only when they felt confident that this could be achieved without precipitating conflict with other European powers, or (less often) when they felt that a rival power would impose a more economically restrictive colonial rule if Britain did not act (it was usually assumed that a French or German regime would be more protectionist than a British one, though in reality French and German tariffs were not vastly higher). The desire to avoid international conflict explains the Rothschild preference for what might be called multinational imperialism, where economic interests were guaranteed by more than one European power. The classic illustration is the case of Egypt, where the Rothschilds sought to reconcile conflicting British and French political interests in the shared interests of bondholders of both nationalities. (The Rothschilds were less interested in Greece and Turkey, where such multi-national financial guarantees were also used.) In China too they favoured co-operation between the European powers.
There was, it should be stressed, a certain instinctiveness about all this: while critics like Hobson had theories of imperialism, the imperialists themselves did not. “[I]t is a curious thing,” wrote Natty to Paris in May 1906, “how investors & capitalists dread the stocks of their own countries particularly if they live in Europe.” He had a hazy notion that investors were attracted to “exotics” by their higher yields, and that these reflected the higher risks of investing overseas; but his own preferences for particular regions or sectors appear to have been based in large part on unspoken assumptions. Yet his assumptions about the politics of imperialism were far from unspoken: no member of the family before or since has been more politically active. Here there was an important discontinuity. In the past, the Rothschilds had tended to view politics through the prism of their own financial interests: nearly all James’s interventions in the realm of diplomacy had been based on business calculations. This cannot be said of the members of the fourth generation. Economic self-interest was still paramount; but sometimes Natty and Alfred took positions for “purely” ideological or party political reasons which were unrelated to the portfolio of N. M. Rothschild & Sons, just as they had private interests in areas where imperial control was never a serious possibility. Natty in particular thought of himself as “wearing different hats”: there was one for New Court and one for Westminster (or, as he would have said, one for the East End and one for the West End). The full-time politicians tended to think the same way, though in neither case was the distinction between private and public interest perfectly maintained.
In fact, the politics of imperialism took precedence over economic considerations more often than the Rothschilds themselves may have realised. Although it is undeniably true that they profited from high levels of capital export, in particular cases the fourth generation often allowed national political considerations to take precedence over the collective economic interest of the Rothschild houses. The fact was that the reorientation of British finance away from continental Europe made the Rothschilds’ network linking London, Paris, Frankfurt and Vienna somewhat obsolescent. At the same time, colonial conflicts of interest between France and Britain presented the Rothschild houses with difficult choices. It was in this period that the various houses began to operate more and more independently of one another: these Anglo-French disagreements, and the Austrian indifference to the world outside Europe, help to explain why.
The Financial Politics of Empire: Egypt
The best-known example of Rothschild involvement in British imperialism is the case of Egypt. Famously, it was the London house which advanced £4 million to Disraeli’s government in 1875, allowing the British crown to acquire a substantial shareholding in the Suez Canal Company. Quite apart from the romantic penumbra which surrounds this transaction, this is often seen as the first step down the road towards the British military occupation and financial control of the country after 1882, a process which the Rothschilds also helped to facilitate. Yet the roads to and from the Suez share purchase were far from straight; in many ways the Rothschilds’ role in Egypt illustrates the ambiguities and contingencies which li
e behind a historical construct like “imperialism.”
To understand the significance of the hectic events of 1875, it is necessary to know something of Middle Eastern finance. In the aftermath of the Crimean War, both the Sultan in Constantinople and his vassal the Viceroy or “Khedive”5 in Cairo had begun to accumulate huge and ultimately unsustainable domestic and foreign debts. Between 1855 and 1875, the Ottoman debt increased from around 9 million Turkish lire to around 251 million. In relation to the financial resources of the Ottoman government, this was wholly unsustainable: as a percentage of current revenue, the burden rose from 130 per cent to around 1,500 per cent; as a percentage of expenditure, interest payments and amortisation rose from 15 per cent in 1860 to a peak of 50 per cent in 1875. The Egyptian case was similar: between 1862, the date of the first Egyptian foreign loan, and 1876, the total public debt rose from 3.3 million Egyptian pounds to 76 million, roughly ten times total tax revenue; in addition, the Khedive Ismail owed around 11 million pounds on his own private account. The 1876 budget showed debt charges at more than half (55.5 per cent) of all expenditure.
It is worth setting these figures into some sort of comparative perspective, if only to establish an approximate notion of what constituted sustainable borrowing in the nineteenth century. For most of the century (until 1873), the British national debt had been more than ten times total public tax revenue; while debt charges accounted for around 50 per cent of gross expenditure from 1818 until 1855. However, the trend for Britain from the 1840s until 1914 was more or less uninterruptedly downwards, so that by the eve of the First World War, total debt was just over three times total revenue and debt charges accounted for a mere 10 per cent of total expenditure. Moreover, the British economy grew at historically unprecedented rates. In the Turkish and Egyptian cases, debt ballooned in the two decades to 1875 relative to the state budgets, yet economic activity stagnated. Compared with other major borrowers on the international market (such as Brazil or Russia), Turkey and Egypt were out of control. Brazilian and Russian debts were never much more than three times greater than total tax revenue, while debt service typically accounted for less than 15 per cent of total spending. In fact, the closest parallel to the Middle Eastern experience was that of Spain, which also defaulted in the 1870s (see tables 9e and 9f). In the context of the general financial crisis which afflicted all the European markets after 1873, a Middle Eastern debt crisis was thus inevitable.
Table 9e: National debt as a percentage of tax revenues, selected years and countries, 1869-1913.
Sources: Mitchell, British historical statistics pp. 396-9, 402f.; Crouchley, Economic development, pp. 274ff.: Shaw, “Ottoman expenditures and budgets,” pp. 374ff.; Issawi, Economic history of the Middle East, pp. 100f., 104ff.; Levy, “Brazilian public debt,” pp. 248-52; Mitchell, European historical statistics, pp. 370-85, 789; Martin, Rothschild ; Carreras, Industrializacion Espanola, pp. 185-7; Gatrell, Government, industry and rearmament, pp. 140, 150; Apostol, Bernatzky and Michelson, Russian public finances, pp. 234, 239; Hobson, “Wary Titan,” pp. 505f.
Strategic considerations had served to start the ball of indebtedness rolling. It was to support the Ottoman military position during the Crimean War that the first British loans to the Porte were made in 1854 and 1855 (the second of these through the London Rothschilds) and the Banque Ottomaine (later the Imperial Ottoman Bank) was set up in 1856. Both these loans were formally secured on all the Ottoman government’s tax revenues from Egypt. However, European loans to the Middle East after 1860 were principally based on economic calculations. In the case of Turkey, European railway promoters (led by Hirsch) envisaged an expansion of the Austrian railway network through the Balkans to the Bosphorus, thus opening up Turkish markets to new kinds of European commerce; while the French entrepreneur-cum-visionary Ferdinand de Lesseps saw that to realise the ancient dream of a canal between the Mediterranean and the Red Sea would create a vital artery of international trade, shortening the sea route between London and Bombay by more than 40 per cent. The artificial stimulus to Egyptian cotton exports provided by the American Civil War also played a part. Despite the obvious importance of the Suez Canal to British trade with India and the traditional importance attached by British diplomacy to strengthening the Ottoman Empire, it was not primarily British investors who financed the Turkish and Egyptian deficits. In Turkey the lead before 1875 was taken by French banks (notably the Société Générale); in Egypt by the Frankfurt-born financiers Hermann and Henry Oppenheim and the French brothers Edouard and André Dervieu. In the short run, this was presumably profitable business for the issuing houses: by 1877 the Turkish debt had reached 251 million lire, of which, after commissions and discounts, the Treasury in Constantinople had received just 135 million. Far from promoting Middle Eastern economic development, however, the hapless bondholders were merely bankrolling chronically profligate governments. Millions were squandered by the Sultan Abdul Aziz on his luxurious European tour of 1867; still more by his successor Abdul Mejid on the new Dolmabahçe palace, a cross between a seraglio and a Victorian railway station. And even the private undertakings like Hirsch’s railways and Lesseps’s canal proved less profitable than had been anticipated. Indeed, the concessions granted to Hirsch and Lesseps cost the two governments substantially more money than they received.6
Table 9f: Debt service as a percentage of expenditure, selected years and countries, 1860- 1910.
Source: as table 9e.
The Rothschilds’ abstention from involvement in the Middle East between 1855 and 1875 therefore looks prudent with hindsight. We know, for example, that Lesseps approached James seeking support for his canal project as early as June 1854—five months before he secured the necessary concession from the Khedive— but was rebuffed. Landau, the Rothschild agent in Turin, had a brother in Alexandria who worked in tandem with the Oppenheims and sought to lure the Rothschilds into lending to the Egyptian government in the mid-1860s, but in vain. Though the ageing James was tempted, this was one of the rare occasions when his nephew Nat’s risk-aversion prevailed—and with good reason. Although Lionel was directly approached by an Egyptian representative who came bearing gifts in 1867, he politely demurred. By 1869, even as the canal was formally opened, Alphonse was predicting the collapse of the Suez Canal Company and the assumption in London was that the Egyptian government would not be far behind it. The London and Paris Rothschilds took an equally dim view of Turkish financial prospects: Anselm’s interest in extending the Südbahn through the Balkans was evidently not shared by his cousins. When the Egyptian Finance Minister Ismail Sadyk Pasha sought financial assistance from the Rothschilds in 1874, the request was firmly turned down. The most they were willing to do was to make sure Verdi got his fee for conducting the world premiere of Aïda at the Cairo Opera House in 1871.
By the beginning of 1875, there was still no obvious reason for the Rothschilds to alter their view. Lesseps, on the verge of bankruptcy, had been touting around the idea of selling the canal to one or more of the European powers since 1871, but the Ottoman government vetoed all the schemes mooted, the Gladstone ministry had shown no interest and the future of the canal had become entangled in complex legal wrangles about its tolls. Disraeli’s return to power in February 1874 was the first crucial change which brought the Rothschilds into play. Always a romantic on Oriental matters—but also realistic in discerning the approach of a new “Eastern crisis” and the future strategic importance of Egypt—Disraeli asked Lionel to reopen the question of a British purchase of the canal, and Natty was duly despatched to Paris. For their part, the Rothschilds were keen, seeing the chance to repeat for the Egyptian canal what they had previously managed for European railways, namely the financing of a major asset sale. Yet, as Gustave reported, French political opposition to the idea of a British purchase seemed insuperable. When Disraeli proposed instead a direct offer through the Rothshilds to buy the Khedive’s canal shares, this opposition took on a financial dimension, reflecting the close l
inks between the Credit Foncier, the Société Générale and the Anglo-Egyptian Bank.
It was the declaration of Turkey’s bankruptcy by the Ottoman prime minister Mahmud Nedim Pasha on October 7 which transformed the situation by suddenly weakening the position of both the Khedive and his French bankers.7 With Turkey bankrupt, it would be no easy matter for Egypt to borrow more money; yet Ismail needed—so he said—between three and four million pounds to meet payments due by the end of November. Schemes were devised by both the French banks and Dervieu to advance the Khedive money on the security of his canal shares, but the rival syndicates soon became deadlocked. This gave Disraeli his chance. A request for assistance from the British Treasury to “reorganise and control” Egyptian finances on November 10 had already signalled the readiness of the Khedive to turn to London as a last resort. Four days later, Frederick Greenwood, the editor of the Pall Mall Gazette, heard from Henry Oppenheim—recently settled in London—about the negotiations with the Anglo-Egyptian Bank and Dervieu, and suggested (not quite correctly) to the Foreign Secretary Lord Derby that the Suez Canal shares were about to pass into French hands. In fact, the Credit Foncier did now propose to buy the shares for 50 million francs (£2 million) and indeed acquired an option to do so, but the French Foreign Minister, the duc de Decazes, chose not to proceed without Derby’s blessing and this was flatly denied. The Khedive therefore had little option but to sell to Britain, and on November 23 offered to relinquish his shares for £4 million, pledging to pay an additional 5 per cent on the purchase money until the pawned coupons were restored and dividend payments resumed. Derby and the Chancellor Sir Stafford Northcote were against accepting the offer, arguing that the canal should be controlled by an International Commission; but, when the matter was discussed in the five Cabinet meetings held between November 18 and 24, Disraeli eventually prevailed.
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