The House of Rothschild

by Ferguson, Niall

  Yet Natty overestimated the power of both the City and the House of Lords. For one thing, it was not at all convincing to blame the “low price of English funds” on the government’s “socialistic doctrines.” As Lipman has shown with reference to the period 1859 to 1914, there was a difference between the average yield of consols under Conservative governments and the average yield under Liberal governments, but it was very small (less than ten basis points), and is much better explained by changes in inflation and the international situation. Consol prices did indeed fall under Campbell-Bannerman and Asquith, from a peak of 90.4 in February 1906 to a pre-war low of 71.8 at the end of 1913. But it was difficult to blame this slide on Liberal fiscal policy, and it did not have the effect of constraining Asquith or his more radical successor Lloyd George. “Politics,” as Natty occasionally had to admit, “but little influence our Stock Exchange.” Possibly some bears in the market were “influenced by the fear of prospective legislation, a temperance measure and various wild schemes which are spoken of in connection with old age pensions”; but “the chief anxiety of the City and the Stock Exchange [was] always the money market,” and that was much more influenced by the state of gold reserves, the Bank’s discounting policy and aggregate new debt creation in the global economy as a whole.

  Time and again, the markets refused to back up Natty’s condemnation of Liberal fiscal policy by falling when they were supposed to. There was no negative reaction to Asquith’s 1907 budget, despite the fact that Natty denounced it as “immoral” and tending towards “the gradual extinction of all private fortunes.” In truth, he later had to acknowledge, it was “very doubtful if the markets are at all affected by political news just now. The prices improve or decline according to the financial news of the day, the state of the money-market and the news which is received from other financial centres.” “[I]n the long run,” he conceded in early 1908 as the markets once again refused to be moved by the Licensing Bill, “very easy money always tells.” The 1908 budget was also roundly condemned by Natty, but “all the markets [were] good” after its presentation, and the stock exchange seemed not to care about the new Chancellor’s explicit warnings of “further and heavy increased taxation on what he calls the idle rich.” A slight drop in the price of consols later that summer and a sustained decline in the second half of the year offered some support for Natty’s interpretation, but neither was solely caused by Lloyd George’s talk of “robbing henroosts.” Indeed, the clearer Lloyd George’s intentions became, the less consols fell: prices actually rose in the first five months of 1909. The most that can be said is that the City discounted the People’s Budget six months before its publication and even then the effect was modest and ephemeral. The Westminster Gazette cruelly summed up the absurdity of Natty’s position when its cartoonist depicted him “escaping to the Antarctic region disguised as a Penguin” to avoid Lloyd George’s taxes (see illustration 13.i).

  Only when a tax measure threatened to bear directly on financial transactions was the argument plausible that fiscal policy was depressing the stock market. Thus Natty was on strong ground when he—along with a large number of other City representatives Lloyd George consulted—argued against an increase in the stamp duties on domestic and foreign bills of exchange on the ground that it would cause “a large diminution of business” and therefore of revenue. This argument was ultimately accepted by the Chancellor and the original scale of duties was altered to reduce the charge on “transactions of average magnitude” (defined as those greater than £1,000). Here the bankers had real leverage. But Lloyd George’s more important proposals apparently caused “no perturbation in the minds of the public” (meaning investors in aggregate): despite Natty’s campaign, the markets as a whole were “firm” in the wake of the 1909 budget. Indeed, a loan by the London County Council which was issued just after the budget was heavily oversubscribed. Nor can Natty’s claims that the markets improved on the news of the Lords’ rejection of the budget be taken seriously. As the Economist put it, the stock exchange had “now persuaded itself [that] its own interests will not be greatly affected. Prices have, therefore, been left very much to purely market influences.” So long as the markets seemed neutral, it was just as plausible for supporters of the government to argue that the Lords’ rejection would cause a financial crisis.

  The key to the ultimate failure of Natty’s opposition to Liberal finance lies here: although Liberal tax policy was unprecedentedly progressive, it was entirely orthodox in that the aim of increased taxation was to balance the budget and indeed to reduce the national debt. Lloyd George inherited a deficit when he became Chancellor, largely the result of the 1907 economic downturn, the new pensions scheme and increasing defence expenditure. The principal objective of the People’s Budget was to reduce that deficit; and, for the majority of investors interested in consols, that was the crucial thing. How the money was raised was less important, and Natty’s claim that any surplus would be squandered on “socialistic expenditure which would pander to the lower classes” was absurd. To write about “the destruction of capital” and “firm and brilliant markets” in one and the same letter was to encapsulate the contradiction in the argument.

  Natty also exaggerated the strength of the Lords on fiscal questions. As he himself admitted, “the House of Lords cannot amend [a Finance Bill], but can only reject en bloc, [and] that is a very serious thing to do.” If a budget were rejected principally because it increased tax on the very social group which was over-represented in the Lords—the wealthy elite—then a good case could be made for a constitutional reform. As early as December 1906, Lansdowne indicated that he did not wish to see a head-to-head confrontation with the government when he argued that the Trades Disputes Bill was “a test question at the last election.” When “the conflict between Lords and Commons” began in earnest over peers’ amendments to the Education Bill, Natty was right to feel nervous and wrong to assume that the resulting “agitation” would “damage the Government a good deal.” If, as he suspected in February 1907, the government wished to provoke the Lords into rejecting “very popular measures” in order to fight a new election on the constitutional issue, the stakes would be high indeed. It was all very well to sneer at “the much pampered and not over-worked British workman”; but there were now enough lower-income voters enfranchised to make the position of “those who have got something”—a typical Natty euphemism for the very rich—politically vulnerable.

  13.i: Potted Peers: Lord Rothschild, “The whole of the British capital having been exported to the South Pole as a result of the Budget Revolution, Lord Rothschild flies from St Swithin’s Lane and succeeds in escaping to the Antarctic regions disguised as a Penguin,” Westminster Gazette (1909).

  It must be added that Natty’s arguments against higher income taxes and death duties have not worn well. “[D]iminished incomes,” he reasoned, “mean a diminution of money to spend and a diminution of employment, increased death duties mean a diminution of capital and less Income Tax, increased Income Tax means less money to save and less Capital liable to death duty.” As a justification for leaving the rich in peace to enjoy their largely unearned and inherited wealth this was weak stuff. In an increasingly democratic system, a policy of “making the Income Tax ... still more disagreeable to the capitalists & to the wealthy” had undoubted and not easily refutable attractions. Even if Natty was not wholly wrong that relatively modest increases in death duties represented the thin end of a wedge, he was doomed to lose the debate—especially when he admitted the force of the argument that “the burden of taxation should fall on the shoulders of those best able to bear it.” In just the same way, the Rothschilds’ arguments against land reform to increase the number of small proprietors in the British Isles were economically reasonable, but sounded at the time like the special pleading of big landowners. It was to stretch the antiquated principle of virtual representation too far to justify the Lords’ opposition to government measures on the basis of Opp
osition by-election successes. To be sure, the Liberals saw their commanding majority in the Commons shrink as a consequence of the 1910 elections. But in the end it was the Lords who lost their power to veto finance bills. And of course Lloyd George’s taxes were ultimately put in place. “I cannot suppose,” Natty mused in January 1910, “that ... the masses ... can have any sympathy for the rich men who are to be taxed.” It was as if this had only just dawned on him.

  To make life easier for the Liberals, Natty had also unwittingly handed the government the perfect stick with which to beat him even before the People’s Budget was unveiled. It would undoubtedly have been hard for the government to justify new taxes if the surpluses which had characterised its first two years in office had continued. And it might just have been credible to oppose higher direct taxes if the budget had been unbalanced by “Old Age Pensions and various other sops which [the government‘s] democratic supporters are clamouring for.” But the reality was that a large part of the hole Lloyd George was trying to fill was due to the increased defence spending; and this was something Natty and his associates in the City had vehemently supported. Natty had publicly endorsed Richard Haldane’s programme of army reforms (though he privately opposed the conversion of the old militias into the Special Reserve).3 He and Leo had been even more enthused by the decision to increase expenditure on the navy (not least because it put the Radicals’ noses out of joint). But Natty’s involvement in the campaign for eight rather than four dreadnoughts in early 1909 was a grievous tactical blunder. When he explicitly admitted that “a large expenditure had been incurred, and he supposed a good deal more would be be necessary” if the navy were to be kept “in the highest state of efficiency,” he was giving Lloyd George the perfect opening. And when the Chancellor hit back at “the inevitable Lord Rothschild” in a speech at the Holborn Restaurant—the very day after the anti-budget meeting at which Natty had accused him of “Socialism and collectivism”—he did not miss his chance:Really, in all of these things we are having too much Lord Rothschild. We are not to have temperance reform in this country. Why? Because Lord Rothschild has sent a circular to the Peers saying so. (Laughter.) We must have more Dreadnoughts. Why? Because Lord Rothschild said so at a meeting in the City. (Laughter.) We must not pay for them when we have them. Why? Because Lord Rothschild said so at another meeting. (Laughter and cheers.) You must not have estate duties and a super-tax. Why? Because Lord Rothschild signed a protest on behalf of the bankers to say he would not stand it. (Laughter.) You must not have a tax on reversions. Why? Because Lord Rothschild, as chairman of an insurance company, has said it would not do. (Laughter.) You must not have a tax on undeveloped land. Why? Because Lord Rothschild is chairman of an industrial dwellings company. (Laughter.) You ought not to have old-age pensions. Why? Because Lord Rothschild was a member of a committee that said it could not be done. (Laughter.) Now, really, I should like to know, is Lord Rothschild the dictator of this country? (Cheers.) Are we really to have all the ways of reform blocked simply by a noticeboard, “No thoroughfare. By order of Nathaniel Rothschild?” (Laughter and cheers.) There are countries where they have made it perfectly clear that they are not going to have their policy dictated merely by great financiers, and if this sort of thing goes on this country will join the rest of them. (Cheers.) Apart from purely party moves ... there is really no move against the Budget at all.

  This was characteristically strong, not to say demagogic stuff (especially if the other countries alluded to implicitly included Russia); but it struck the Rothschild campaign at its weakest point. Natty had wanted more dreadnoughts. How did he propose they should be paid for, if not partly from his own pocket?

  Lloyd George knew when he had an opponent on the run. Speaking at a meeting at Walworth Hall in London on December 18, he warmed to his theme:Who clamoured for additional Dreadnoughts? He [Lloyd George] remembered a great meeting in the City, presided over by Lord Rothschild, who demanded that eight Dreadnoughts should be instantly laid down. The Government had ordered four, and Lord Rothschild would not pay (laughter). There had been a very cruel king in the past who ordered Lord Rothschild’s ancestors to make bricks without straw (loud laughter). That was a much easier job than making Dreadnoughts without money.

  As has often been pointed out, there was a fairly unmistakable anti-Semitic connotation to this last jibe (reminiscent of Thomas Carlyle’s allusion many years before to King John’s treatment of the Jews and of Gladstone’s swipes at Disraeli during the Bulgarian agitation). On this occasion, the lack of taste did not much diminish the effectiveness of the attack. Nor did Natty have much of an answer when a Jewish member of the government—the Chancellor of the Duchy of Lancaster Herbert Samuel—reminded him of the House of Lords’ ignominious role in opposing his own father’s admission to Parliament. Natty’s unconvincing response at an election meeting in the East End was that he was opposing “the new bureaucracy which the Government wish to introduce in this country”—a bureaucracy “similar” to the one which members of his audience had “fled from Russia to escape”! As they trundled around the country from one speaking engagement to the next, the abuse he and Lloyd George hurled at one another grew steadily cruder; the difference was that Lloyd George was winning the argument.4 Never in the history of the house of Rothschild had a partner put himself in such a politically exposed position.

  Yet within five years, the tables were turned. Lloyd George’s “ruinous financial policy” might not frighten the markets as much as it financed the Rothschilds; but by the summer of 1914 the Liberal government’s majority in the House of Commons had been so whittled away at by-elections that the Chancellor suffered a humiliating defeat: the rejection of his Finance Bill. “Mr Lloyd George,” Natty gloated on July 10, “is ... even a discredited person in the eyes of the Government’s own supporters.” Moreover, the Chancellor was about to be engulfed by a financial crisis of such magnitude that he would be driven to seek the assistance of none other than the despised Lord Rothschild.

  The cause of the crisis was an unforeseen and little regarded event in Sarajevo.

  “Hatred Let Loose”

  War was not a certainty in 1914; neither imperialism, nor the alliance system, nor any other impersonal forces made it inevitable. But it was a possibility. The question was what kind of war there would be. Another Balkan war? A continental war involving Russia and Austria, and therefore probably also France and Germany? It is important to remember that the third possibility—a world war involving the British Empire—was, of all the possible scenarios, one of the least likely. To most observers in London, including the Rothschilds, a civil war in Ireland seemed a more imminent danger.

  Even as the financial and constitutional conflict between Lords and Commons had raged in 1909 and 1910, Natty had not lost sight of the old questions of land reform and Home Rule in Ireland. By putting the Irish MPs in a pivotal position at Westminster—the two big parties were almost exactly matched—the 1910 elections resurrected the Irish question. Partly for that reason, Natty became suddenly more cautious in his attitude to the constitutional question. He was willing to do a great deal to get the Conservatives back into power, even offering to lend to a minority Balfour government if it was denied supply by the Liberals in the Commons—an extraordinary proposal. But like Lansdowne and Balfour he feared a drastic inundation of Liberal peers. No sooner had Parliament reconvened than the previous year’s battle over the budget was put to one side as a lost cause; the older and more bitter question of Ireland, by contrast, seemed as winnable as ever—provided the Unionist majority in the Lords could be preserved. There was therefore a need to restrain the “hot-headed young bloods and old bloods too, who do not weigh the consequences of their action.”

  The question which has sometimes been asked is whether Natty was himself hot-headed on the subject of Ulster. Was he in any way associated with those in the Conservative party who encouraged the Ulster Unionists to contemplate armed resistance to Home Rule? According to
one account, he “personally contributed at least £10,000 to support the Ulster Volunteer Force resistance.” The evidence in the Milner papers on which this assertion based is, however, problematic: it is not inconceivable that Natty was the individual identified by the letter “D” on a list of contributors to an Ulster defence fund. What makes it seem unlikely is that in his letters to his Paris cousins Natty was anything but militant. “It is very unpleasant, disagreeable, I may even say painful,” he told his cousins on March 19, 1914,to read of warlike preparations being made on both sides and sailors and artillery men spoken of as if England was going to embark on a real and serious military campaign. Hitherto at the crucial moment common sense and good will on both sides have proved to be such very strong factors that the danger has been averted and the problem has been solved. Will history repeat itself on this occasion? I earnestly hope so.