The House of Rothschild

by Ferguson, Niall

  There were also resemblances between the post-war periods after 1815 and after 1918. In both cases, there was an attempt to make the loser pay for part of the costs of the war. In both cases, wartime inflation had so reduced the internal debt of the loser state that it was better able to make such payments than was generally admitted or realised. After 1815 copious amounts of British capital stood available to finance the restored continental regimes; after 1918, it was American capital which the various “successor states” of Central Europe—not only Germany but also Austria, Hungary and Czechoslovakia—could draw on. Nevertheless, in both cases the new regimes in the defeated states proved unstable. The Weimar Republic, like restored Bourbon France, lasted just fifteen years. Britain, like Austria in the 1820s, lacked the financial resources to “police” post-war Europe. America, like Britain in the 1820s, gradually withdrew from continental commitments, despite being well able to afford them. The biggest differences between the 1820s and the 1920s were that Britain wrote off most of her allies’ war debts, unlike America after 1918; the reparations burden imposed on France in 1815 was substantially less as a proportion of national income (around 7 per cent) than that imposed on Germany in 1921 (around 300 per cent); and, finally, the regimes which had to deal with the problems of the 1920s were democratic. This meant that bankers, bondholders and direct tax payers were no longer politically over-represented as they had been in the 1820s. It was partly for this reason that Morgans could not play in the 1930s an analogous role to that played by the Rothschilds in the 1830s, using their financial influence via the bond market to discourage aggressive foreign policies. The economic and political crises of the 1930s exposed the limits of financial power in a way without parallel in the nineteenth century.

  All this provides some excuse for the Rothschilds’ inter-war·difficulties. Yet, if the period had given the bank a much smoother ride, it is debatable how much more successful it would have been. The bank which Ronald Palin joined as a young clerk in 1925 seemed to belong to the age of Dombey & Son. Save at lunchtime, when a green blind was drawn across the glass door, the partners could be seen at their desks in the panelled and upholstered splendour of “The Room,” but to Palin they seemed “a higher order of creation” with whom communication was minimal. They had their own entrance, their own dining room, and their desks were fitted with a row of bell-pushes which could be used to summon any member of staff. There was even a special office on the top floor called the Private Accounts Department (“Whores and Jockeys” to the staff) which handled the partners’ private affairs. In the words of Lionel’s son Edmund, who joined the bank in 1939, “The family who sat in the Room and the staff who occupied the General Office or sat in the Front Hall were two races apart.”

  At the top of the hierarchy of clerks was the general manager, an office occupied for most of the inter-war years by the Hungarian-born Samuel Stephany, and the various departmental heads and senior clerks like the Nauheim brothers. The New Court office layout had a haphazard quality: located above the Room were the offices of the staff manager and the chief accountant, as well as the Control Department and the Private Accounts Department. The “General Office” was in fact a cramped public counter reached through a narrow back hall, which also contained the Cashiers and Bullion Department. In spite of its name, the Stock Department handled the business of bills of exchange and was divided into a Bills Receivable and a Bills Payable department. There, at rows of high sloping desks, clerks laboriously numbered and cancelled bills, then presented them for acceptance to the “walks” man. Even more cumbersome was the mode of operation of the Dividend Office, which dealt with issues and interest payments on foreign bond issues as well as dividends on the bearer shares of the bank’s small number of corporate clients like Royal Dutch. It was, in Palin’s words, “a time-and-motion student’s nightmare,” with its old-fashioned machines for cancelling coupons in the Coupon Department, its Brunsviga calculating machine and its actuarial tables. Speed was at a heavy discount. According to one anecdote, when the future Dividend Office chief Lionel Stewart was asked by one of the partners to tell him what 1 per cent of a hundred million was, he replied immediately: “One million.” “Don’t guess, boy,” he was rebuked. “Go away and work it out.” The maxims of the general manager Stephany were intended to foster the same mentality. “Anyone can make a mistake,” he was fond of saying. “The man who never made a mistake never made anything. But Heaven help the man who misses a mistake when checking.” Another piece of Stephany advice to younger employees was: “Never copy a total, always make it.”

  This emphasis on punctiliousness would be more comprehensible had it not been combined with the most leisurely working practices imaginable. The chief of the Coupon Department, George Littlehales, lived in Mersea, for example, and rarely arrived at work before noon. At one o‘clock he went to lunch; at 2.30 he set off again for home. As a junior clerk, Palin “rarely arrived much before 10.30 in the morning and could always count on two free days at the weekend.” It was characteristic of the New Court order of priorities that there were three tape machines in the partners’ waiting room: one for stock exchange prices, one for general news and one for sporting news. Like dons, the senior clerks had their own dining room and butler, while their juniors perpetuated the ambience of a minor public school, bestowing nicknames (Littlehales was known as “the Egg”), playing practical jokes and looking forward impatiently to the lunch break (“Children’s Hour”). Long-serving Rothschild employees like George Tite and Shirley Snell lived like P. G. Wodehouse characters who had been obliged by a deficiency of inherited wealth to finance their leisure pursuits in the City. Tite summed the inter-war atmosphere up perfectly when he told Palin: “This, my boy, is the best club in London. We really ought to be paying a subscription instead of receiving a salary.” In fact, he and his colleagues received more than just their salaries. In addition to his basic pay of £100 a year, paid quarterly, Palin received “lunch money” of £48 a year; “poundage” (notionally a payment from the Inland Revenue for the work of collecting income tax on foreign dividends); “touchings” from the partners on birthdays and anniversaries ; one-eighth per cent brokerage on allotments of bonds and shares to applicants they had introduced to the bank; as well as holiday money.

  This relatively generous remuneration perhaps explains why Rothschilds still managed to recruit talented figures like Michael Bucks (later general manager) and Peter Hobbs (later investment manager), who both joined the firm at around the same time as Palin. Generally, however, the system of recruitment was feudal in style. One senior employee had joined the bank as a porter on the strength of his mother’s years of domestic service for the Roseberys. Palin himself was introduced to the firm because his father knew a director of the Bank of England. His interview consisted of being asked by the staff manager to spell “parallel” and “acknowledgement.” Many employees were from families which had worked at New Court for generations: the Williamses and the Mercers, for example (typically, the young Ernest Mercer was referred to as “Mercer’s son’s brother’s son”), while Rothschild couriers were still recruited from Folkestone families who had worked for Nathan himself. The first women employed at New Court were the unmarried daughters of two rabbis. They were confined to segregated offices at the top of the house and given lunch in a separate room in the basement (a practice which continued, like that of Saturday closing, until the 1960s). Palin’s verdict does not seem unduly harsh: Rothschilds had become “an organisation ... managed largely by amiable eccentrics who did very little work and that without much seriousness and by antiquated methods.” It seemed to be sinking into “genteel inactivity.”

  Nor was this air of stagnation peculiar to the London house. When Edouard’s son Guy joined the Paris house in 1931, he was struck by the way “the past clung to everything and everyone.” His training took the form of learning to quote interest rates in fractions instead of decimals, which he was taught by a clerk whose other function was to
read him selections from the newspapers in the morning. “The staff,” Guy later recalled, “were imbued with the grandeur of ‘the name’ and of the responsibilities [it] imposed. Vestiges of the previous century were encountered at every moment and in every corner, even some that no longer had any reason for being,” like the trifling account kept for the Vatican which dated back to the time of Baron James. Just as the London partners insulated themselves from the day-to-day running of business in the Room, Edouard and Robert passed their working hours in the vast “grand bureau,” using the identical system of bell-pushes to communicate with their employees. “The bare-walled ... ill-lit ... depressing and drab” offices which housed the clerks “also recalled the past in their haphazard arrangement and their odour of stale tobacco and mustiness. After decades of underemployment, everyone worked slowly, without supervision or discipline.” Guy quickly realised that “Rothschild Frères was more of a family secretariat than a working bank,” whose main activity was “gently prolonging the nineteenth century.”

  Yet such impressionistic accounts understate the extent of Rothschild activity in the 1920s and 1930s. It would perhaps be more historically accurate to regard the memory of “immobility” as a consequence of the two great economic traumas of the inter-war period, rather than a cause of problems peculiar to the Rothschilds.

  In some ways the 1920s and 1930s were no less active periods for N. M. Rothschild & Sons than the previous two decades had been. If one adds together the nominal amounts of bond and share issues which the bank underwrote, the total for 1920-39 is only 5 per cent lower than the period 1900-19. The difference was twofold. Firstly, the bulk of inter-war business was done in partnership with other City firms, principally the Rothschilds’ erstwhile rivals Barings and Schröders, rather than with the Paris and Vienna houses. Other examples of collaboration include the Rothschilds’ entry into the Chinese loan consortium in 1919 (a field still dominated by the Hong Kong & Shanghai Bank), and their involvement with the purchase of various German-owned Turkish railway companies (via Swiss intermediaries) in conjunction with Schröders, Lloyds, the Westminster Bank and the National Provincial Bank. For reasons which are not wholly clear, it seems to have proved very difficult to resume the traditional co-operation between the three Rothshild houses after the war; and this may help to explain why the links which still remained with Paris and Vienna ultimately proved so problematic. The second difference was that the bond issues of the 1920s proved to be among the most disastrous investments of modern times because of the successive economic and political crises which afflicted the borrowing countries. Table 14c gives a geographical breakdown of the Rothschilds’ major inter-war loans and share issues, which shows that British and European issues predominated, followed by Latin American and Asian—primarily Japanese (though here the Rothschilds were members of a large group led by the Westminster Bank, so the figure in the table substantially exaggerates their role).

  Table 14c: Major bond and share issues in which N. M. Rothschild & Sons participated, 1921-1937.

  Source: RAL.

  Closer examination reveals, however, that the Rothschilds were involved in lending to some of the most unstable regimes of the inter-war era. This was the unintended consequence of a rather uncritical resumption of pre-war patterns of business activity.

  It was, of course, logical enough for a firm with such close historical links to Central Europe to play a leading role in financing the new states established in the ruins of the Habsburg and Hohenzollern empires. Unfortunately, even the most stable of these proved to be less than easy to deal with. Czechoslovakian bonds worth around £10 million were issued by a Barings-led consortium of N. M. Rothschild, Schröders and the New York firm of Kidder Peabody in 1922 and 1923; but the first tranche of bonds dipped below par because of an ill-timed attempt by the City of Prague to issue its own paper. The Rothschilds appear to have eschewed the disastrous German bond issues of the early 1920s, most of which were reduced to near-worthlessness by the hyperinflation of 1922-3; but they were drawn back to the German market (partly under the influence of Max Warburg, then at the height of his powers), raising £835,000 for the Prussian province of Westphalia and combining with Barings and Schröders to float major loans for the cities of Hamburg and Berlin in 1926 and 1927. In addition, the London house joined the Vienna house as shareholders in the Warburgs’ ambitious International Acceptance Bank (IAB), founded in 1921 to help finance the yawning post-war German trade deficit; and were later involved in another Warburg project, the London-based Industrial Finance and Investment Corporation Ltd. Hungary was perhaps the most important Central European client of the period: here it was New Court which took the lead, issuing loans for £7.9 million in 1924, £2.25 million in 1925-26 and £1.6 million in 1936.

  Finally, there was Austria. In addition to the £3 million government loan of 1930, which was handled jointly with Barings, Schröders and Morgan Grenfell, the London house was indirectly interested in the Austrian economy—perhaps more than it realised before 1931—through its sister house in Vienna. Louis perhaps rather resembled Max Warburg in his over-optimistic assessment of the Central European economy in the 1920s. He elected to hold on to the Witkowitz ironworks once they became part of an independent Czechoslovakia (though he might have acted differently had they gone to Poland). More important, he increased Rothschilds’ involvement in the bank founded by his grandfather some six decades before: the Creditanstalt. In July 1921, he accepted the post of president of the Creditanstalt board (Verwaltungsrat), and it was in conjunction with the Creditanstalt that the Vienna house involved itself in concerns like the IAB and the Dutch-based Amstelbank. It was a former Creditanstalt director and supervisory board member, Wilhelm Regendanz, who managed to persuade the London Rothschilds to issue £2 million bonds for an Austrian firm, the Vorarlberger Illwerke at Bregenz, the failure of which was an early warning of what lay ahead for the Central European economies.

  When the Bodenkreditanstalt got into difficulties in October 1929, it was to Louis that the Austrian government turned. He obliged by agreeing to what amounted to a merger of the two banks. On Wednesday October 18, the Paris house wrote to congratulate him on his action. “Thanks to your decisiveness and courageous attitude,” wrote Edouard, “you saved Vienna’s finances and avoided events that could have been extremely serious for your country and that would certainly have had repercussions in other financial capitals and markets.” Had he known what the following Tuesday would bring, he would have been offering anything but congratulations. Neither he nor Louis realised that history was about to repeat itself: just as Louis’s great-grandfather Salomon had bailed out Arnstein & Eskeles on the eve of the 1848 crisis, so Louis’s decision to bail out the Bodencreditanstalt was to bring the Vienna house to the brink of ruin.

  It seemed equally logical for the London house to continue its traditionally close relationship with Latin America and above all with Brazil and Chile.9 During the war, the American ambassador in Brazil had commented that “the Rothschilds have so mortgaged Brazil’s financial future that ... they will place every obstacle in the way of her entering into banking relations with any other house than their own or with any other nation than England.” This was a pardonable exaggeration. The London house issued bonds with a nominal value of more than £28 million for the Brazilian federal government in the inter-war years, plus an additional £17.5 million for Brazilian states and railways. (The total figure for Chile was around £10 million.) In the case of Brazil, financial (and political) stability hinged in large part on the world market for coffee; the 1922 loan of £9 million—in conjunction, once again, with Barings and Schröders—was specifically designed to finance the government’s coffee price-support scheme and placed control of coffee exports in the hands of a committee of City banks (a repeat of what had been attempted, despite Rothschild reservations, in 1908).

  Doubts about the reliability of the Banco de Brasil persisted, however, and when the Brazilian government approached N
ew Court for another £25 million loan in 1923 “to liquidate the floating debt and set Brazilian finances in order,” Lionel asked Edwin Montagu to lead a mission to Brazil in the hope of imposing “some palatable form of foreign financial control” on the Banco de Brasil. Unfortunately, the best that Montagu and his colleagues could come up with was a suggestion that the London banks might buy the Brazilian government’s shares in the Banco, which Lionel rejected on the ground that it would be “most unpopular in Brazil for the national bank to be owned by foreigners.” In any case, the Bank of England’s temporary embargo on foreign loans undercut the planned loan, and three years later—after a spat between Brazil and Britain over the admission of Germany to the League of Nations—the Brazilian government turned instead to Wall Street. The London house nevertheless continued to exercise control over the coffee support scheme, which was transferred to the São Paulo state goverment in 1924, and resumed its dominant role in Brazilian federal bond issues when Brazil returned to the gold standard in 1927. The Rothschild agent in Brazil, Henry Lynch (known locally as “Sir Lynch” after his knighthood), remained a key figure in the country’s finances throughout the period. In Chile the stability of government finance was also linked closely with a staple export—nitrates for use in fertilisers and explosives.