It may be that Huret misquoted Alphonse, but his letters to London suggest that this was more or less what he thought: an uncompromising, not to say crass, laissez-faire view of the labour market of the sort routinely expressed by many industrialists of the period. Equally run-of-the-mill was Alphonse’s defence of economic inequality:I have never understood what is meant by “haute banque.” What does it mean the “haute banque”? There are richer men and poorer men and that’s all there is to it! Some are richer today and will be poorer tomorrow ... Everyone is subject to such variations—everyone without exception! And no one can boast of being able to escape them. As for these agglomerations of capital, it is money which circulates ... [and] bears fruit. It’s the wealth of nations! If you frighten it away, or threaten it, it will disappear. And, on that day, all will be lost. That will be the end of the prosperity of the country. Capital is labour! Apart from some unfortunate exceptions ... each man . . . has that share of the available capital that his intelligence, energy and industry merit.
This complacent apologia spoke volumes for the social and political isolation of the Rothschilds as the new century approached—and with it a new era in which political power would no longer be so easily confined to the dining rooms of clubs and country houses.
ELEVEN
The Risks and Returns of Empire (1885-1902)
[T]ake Constitution Jesuits if obtainable and insert English Empire for Roman Catholic Religion.
CECIL RHODES TO LORD ROTHSCHILD, 1888.
In 1889 the Chancellor of the Exchequer George Goschen undertook to convert £500 million of 3 per cent consols into 2.5 per cents—an operation involving nearly half the national debt. The conversion seemed to symbolise the extraordinary virtuous circle which had been established in Britain whereby imperial expansion was combined with fiscal retrenchment. With the national debt falling steadily towards its lowest absolute level since the Napoleonic Wars, the Victorians appeared to have achieved empire without overstretch.
Goschen’s conversion also testified to the continuing dominance of N. M. Rothschild & Sons in the London bond market. Loyal though he was to his old master Gladstone, Edward Hamilton (now at the Treasury) had no hesitation in recommending that Goschen “take Rothschilds ... into his confidence” as well as Barings. Hamilton was surprised when Natty refused to “look at” the Treasury’s offer of 20-25 million 2.5 per cents at a price of just over 99, dismissing “the possible margin of profit” as “wholly out of proportion to the risk run” and persuading the more accommodating Revelstoke to insist on a price no higher than 97.5. To Hamilton, this seemed bizarrely tight-fisted at a time of steadily falling interest rates. It was only a year later that Natty’s prudence would become all too intelligible.
The Risks of Informal Empire: The Barings Crisis
Historians have long debated how far “trade followed the flag” in imperialism, or vice versa. In Egypt the flag had followed debt (though debt had followed trade); but the transition from investment to invasion was not an inevitable one. In other overseas markets, the interests of European investors were never the pretext or justification for the imposition of external political control. The classic illustration of this point is the case of Latin America where, after the promulgation of the Monroe doctrine, European imperial influence was more or less bound to be “informal” and therefore largely economic rather than “formal” and political. (The exceptions to the rule were the British, French and Dutch colonies of Guyana.) The events of 1890—which saw Baring Brothers brought to the verge of bankruptcy by bad loans to Argentina—illustrate the disadvantage of the informal approach to empire. Had Argentina been a Middle Eastern or Asian state, her political instability might well have prompted political intervention in the interests of a major bondholder like Barings. The peculiarly neutralised status of Latin America precluded such a solution.
The story of the Barings crisis has been told often enough; in the context of a history of the Rothschilds, three questions need to be addressed. First, is there any truth in the contemporary claim that “the finger of the Jew”—meaning the Rothschilds—in some way triggered the downfall of their oldest rival? Second, what calculations ultimately prompted Natty to participate in the rescue of Barings? And third, why was it that no similar disaster befell the Rothschilds themselves? For their commitments to the neighbouring and no less politically unstable state of Brazil were comparable in scale to Barings’ Argentinian commitments.
Barings’ involvement in Argentina grew steadily in the decades after 1850, and was on the whole so successful—profits averaged 13 per cent of capital between 1880 and 1889—that by the late 1880s a fatal overconfidence had set in. Others saw the clouds gathering. As early as 1888, the Bankers Magazine was expressing doubts about the stability of the Argentine Confederation; the Statist was warning of an “inevitable” crash by mid-1889. Though Randolph Churchill later claimed that Natty had told him (probably in 1889) that Barings were “all right and nothing the matter with them,” this was mere discretion on a delicate subject; in truth, the Rothschilds anticipated the Barings crisis at least two years before it broke. As Alphonse remarked in October 1888, Argentina “would have to grow rapidly very rich indeed” to be able to service her accumulating debt burden. Gustave predicted an imminent “crash in Argentine funds with a bad reaction on all the other markets,” and hoped—vainly as it proved—that the prospect of this might “calm down the zeal of Messrs. Barings, the Banque de Paris and others with regard to all of this Argentine business.” (In fact, they themselves were not wholly uninvolved in Argentina: in 1889 Wilhelm Carl was appointed the government’s financial agent in Frankfurt.) The rise in the Bank of England discount rate from 4 to 6 per cent in the second half of 1889 was seen as a sign of “nerves” on the part of the Governor, William Lidderdale, about the Latin American situation. Indeed, the fear of a gold drain in the event of a crisis there prompted Goschen to propose the issue of one-pound notes.
There were numerous different Argentine securities in the Baring portfolio by 1890, including many cedulas, bonds issued by Argentine banks against mortgage loans to landowners. The fatal deal was the huge £2 million share issue which Barings floated for the Buenos Aires Water and Drainage Company, set up to modernise the city’s water and sewerage system. Not only did the bank fail to place more than £150,000 of these with the public—despite resorting to “market devices” which were subsequently the subject of much criticism—but when John Baring visited Buenos Aires at the end of 1889, he was alarmed to find work on the new water system progressing slowly, the company the object of fierce political criticism, and householders avoiding paying the hard currency rates which were supposed to guarantee shareholders a respectable dividend. Even if political conditions had remained stable Barings would have got into trouble; but the crisis was precipitated in July 1890 when the Finance Minister resigned over President Miguel Celman’s inflationary policies. The exchange rate slumped and a revolution supported by naval officers forced Celman to flee. “Anarchy” loomed, and with it default.
Yet the scale of the problem remained hidden until the eleventh hour. When Edward Hamilton dined with Natty on October 8—the day after Bank rate was raised once again to 6 per cent—the latter “confessed to being very uneasy about the present state of things in the City”; but Hamilton added that “nobody knows exactly why an uneasy feeling should prevail: beyond that there is a sort of general apprehension that certain big houses are not in a very comfortable or easy position, mainly due to the Argentine crisis & the general fall in securities ...” The initial estimate by Bertram Currie of Glyn, Mills when he was approached by Revelstoke for an immediate loan on October 13 was that there was a gap between Barings’ acceptances and the bills in its portfolio of £1 million, which could easily have been filled: Currie immediately advanced three-quarters of the sum. As late as November 2, the mood of the handful of bankers who knew about this loan—including Natty—was relatively sanguine. It was only later that th
e size of the hole was revealed. When the books were scrutinised by Currie and the former Bank of England Governor Benjamin Buck Greene, they found the difference between bills payable (£15.8 million) and bills receivable (£7 million) to be far larger than had previously been indicated. And that was only part of the problem. Barings’ total liabilities were close to £21 million (including large Russian government deposits which had begun to be withdrawn in late 1889), whereas the bank’s assets included £4 million of Argentine securities held jointly with the Buenos Aires firm of Samuel Hale & Co.
Considering that the capital of Baring Brothers in 1890 was just £2.9 million, these were disastrous figures: a ratio of capital to liabilities of just 14 per cent should be compared with an average figure for N. M. Rothschild of 39 per cent for the 1880-89 period. To have accumulated a portfolio of Argentine securities larger than the firm’s entire capital was folly on a grand scale. It was, as Lidderdale put it, “haphazard management, certain to bring any firm to grief.” The Times agreed, when the crisis finally became public: Barings had “gone far beyond the bounds of prudence.” Under the circumstances, it is not therefore surprising that Natty initially argued for letting Barings go under when he was approached by Everard Hambro on the morning of November 8; dismissed Lidderdale’s suggestion that Rothschilds could somehow influence the Argentine government to support “the enormous mass of discredited South American securities which were weighing on the Stock Market”; and opposed Currie’s suggestion that they and “three or four others should lend the Barings four millions to tide over their difficulties.” It was not a matter of enmity—though there was undoubtedly some personal and professional rivalry between Rothschild and Revelstoke—so much as genuine dismay at the extent of the bank’s insolvency.1
It was also nonsense to suggest (as Revelstoke’s brother Colonel Robert Baring did) that the Rothschilds were in any way responsible for the Russian government’s massive cash withdrawals from Barings which brought the crisis to a head. There is no question—as the letters from Paris to New Court show—that the Rothschilds intended to make “the greatest efforts to forestall a catastrophe,” provided these did not jeopardise the position of any other bank. As this suggests, Natty was unwilling to make any commitments until he was sure that not only the Bank of England but also the Treasury were willing to give their support to a rescue operation. The fact was, as Natty explained to Reginald Brett on November 29, that some of the Russian deposits withdrawn from Barings had ended up at New Court. “They now have a large sum belonging to the Russian Government,” Brett reported:No doubt they are alarmed at the Barings’ speculations in Argentine, as the Barings formerly held all the securities of the Russian Government. The moment there was a suspicion of the Barings’ house, Staal received a telegram ordering him to withdraw the Russian deposits. Had Natty supported B. Currie’s original proposals, that order would have extended to the Rothschilds—it might have commenced a run upon them—a debacle.
There was thus an element of self-interest in Natty’s calculations.
Credit is usually given to the “the Sinbad of Threadneedle Street”—as Goschen’s successor Harcourt called the Governor of the Bank—for saving Barings from oblivion and the City from “a panic of unparalleled dimensions.” This, as Lidderdale himself acknowledged, is to understate Natty’s role in persuading the government to act. Goschen’s initial reaction—seconded by the First Lord of Treasury, W. H. Smith—was to refuse Lidderdale’s request for £1 million, arguing that “la haute finance” would have “to find its own solution.” The most he was prepared to offer, he told Lidderdale on November 11, was authorisation to suspend the Bank Act if the drain on the Bank’s reserve grew too great (an offer which was refused). But, as Goschen warned Salisbury, “the Rothschilds [were] sure to put the screws on”; and when the Prime Minister sent for Natty on November 12 they were put on with a vengeance. The Barings, Natty told Salisbury contemptuously, were finished; at most the partners would be left with £10,000 a year apiece and might “prefer to cut up their remaining capital and retire into the country on 4 per cent a year ... each.” The danger was that their losses were so great as to threaten “a catastrophe [which] would put an end to the commercial habit of transacting all business of the world by bills on London.” Natty subsequently made a similar point to Brett: if Barings had “been allowed to collapse, most of the great London houses would have fallen with them.” His conclusion was that nothing but government intervention could avert a crisis greater even than that of 1866. As would happen again in 1914, a crisis on the London acceptance market was presented as a crisis for the City as a whole, and hence for the country.
The most Natty was willing to do in the absence of government support was to help the Bank of England find the gold it would need as news of the crisis spread. In time-honoured fashion, he had already sent an immediate request to Alphonse for a three-month loan of £2 million in gold from the Banque de France to its counterpart in Threadneedle Street. On November 12 Lidderdale asked Natty to arrange for a further £1 million to be sent; this too was immediately done, with consols accepted by the Banque as security pending an appropriate issue of treasury bills.2 The effect was to ease pressure on the Bank, helping to boost its reserve from the low point of £11 million on November 7 to £16.6 million a month later. As Alphonse pointed out, however, this could not be “considered as a solution of all the difficulties.” The key remained to bring Salisbury on board, which meant overcoming the opposition of Goschen. Already on November 12 Natty had gained half a point: after his meeting with Salisbury, the Cabinet agreed to pass a bill of indemnity if the Bank of England were forced to violate its charter by lending to Barings on “Argentine securities ... provided they obtained Gladstone’s consent.” This helps explain why Natty had found his interview with Salisbury “rather satisfying”: he felt he was overcoming the government’s obduracy. The next day, apprehension of “some serious contingency” (as the banker John Biddulph Martin put it) began to spread, and “the many rumours that had been in circulation concentrated themselves with more and more persistence on the name of Baring Bros.,” though when Biddulph left the City “everything [was still] going on as usual.” It was only on Friday the 14th that dangerously large numbers of bills on Barings began to be brought to the Bank of England for discount; and it was this which decisively strengthened the case for direct government action. That afternoon, with Goschen on his way to a routine speaking engagement in Scotland, Salisbury and Smith agreed to bear half of any loss arising from Barings’ bills taken in by the Bank during a twenty-four period beginning at 2 p.m. that day.
The next move was to set up a guarantee fund to spread the costs of any loss which might be left when Barings’ assets were finally liquidated. This was achieved at a meeting in the Governors’ Room at the Bank between members of the Bank’s Committee of Treasury and the leading merchant bankers. Again the negotiations were delicately balanced. Lidderdale opened the bidding by saying that the Bank itself would pledge £1 million on condition that at least £3 million was guaranteed by other City firms. Currie promptly offered £500,000 on condition that Rothschilds do the same. Once again, the fate of Barings was in Natty’s hands. According to Tom Baring (no unbiased party) he hesitated and was only “shamed” by Currie into agreeing. Currie himself recorded more reliably that Natty “hesitated and desired to consult his brothers”—that old Rothschild device to buy time—“but was finally and after some pressure persuaded.” That pressure, according to Edward Hamilton, took the form of Lidderdale telling Natty: “We can get on without you.”
Perhaps they could have; but Natty’s assent, however reluctantly given, made the task immeasurably easier: thereafter, the guarantee fund grew rapidly as all the leading merchants joined the list of contributors, followed by the joint-stock banks the following day. By the end of the twenty-four-hour “window,” £10 million had been accumulated (the figure later rose to £17 million, though only £7.5 million was actually needed)—
proof, as Alphonse commented,that the English houses perfectly understand their responsibility and by preventing the catastrophe threatening the house of Baring they are acting in their own self-interest, in as much as the house of Baring just now is the keystone of English commercial credit. The downfall of this house would bring forth a terrific calamity for English commerce all over the world.
More important, the news of the government guarantee and the formation of the syndicate reassured holders of bills endorsed by Barings that they would get their money. Still, this was far from being the happy ending of the story; and the ramifications of the Barings crisis show just why Natty had hesitated at the crucial moment. The possibility still existed of a general Argentine default, which would at a stroke have wiped out the value of a fifth of Barings’ assets. Even as things stood, Argentine securities were down to 40 per cent of their March 1889 value by July 1891. Natty now found himself chairman of a committee of bankers entrusted with the task of defending the interests of all British bondholders in Buenos Aires.3 Although he favoured the imposition on the government of a programme of currency stabilisation based on the hypothecation of customs revenues, a more piecemeal approach ended up being adopted. In 1892 it was agreed to advance the government a new loan in order that it should buy the waterworks and thus liquidate one of Barings’ most onerous obligations; but that merely increased the Argentine external debt to £38 million and a further loan in 1893 pushed the total up still further. The condition of this second loan—the so-called Romero agreement—was financial control over the Argentine rail network. It was not in fact until 1897 that the Argentine government fully resumed interest payments.
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