The House of Rothschild

by Ferguson, Niall

  The integration of the diverse Rothschild businesses has not been without its problems, of course, not least the crisis which hit the Rothschild Bank in Zurich in 1991-2. In the wake of the nationalisation of Banque Rothschild, Elie had become chairman of the Zurich bank, appointing Alfred Hartmann as general manager and later deputy chairman. The first sign of trouble came in 1984, when the bank was censured by the Swiss Banking Commission for its involvement in an illegal 50 million Swiss franc loan. Six years later, there was further embarrassment when the Zurich bank bought shares in Suchard on the eve of a Rothschild-backed bid for the company by Philip Morris. In July 1991, in a bid to stop the rot, N. M. Rothschild acquired 51 per cent of the company and Evelyn took over as chairman. What he discovered there invites a comparison with the experience of Anselm after his arrival in Vienna in 1848 (or perhaps Lionel’s when he was confronted with the Creditanstalt crisis). Initially, it was announced that 63.5 million Swiss francs of the bank’s hidden reserves would have to be liquidated to cover losses on bad loans of around 100 million Swiss francs (£40 million). Compared with the firm’s capital of 185 million francs (£74 million), these were alarming figures. But the process of cleaning out the Augean stables had only just begun. In September 1992 it emerged that a senior executive at the bank, Jürg Heer, had authorised a number of large and illegal loans, principally to two German-Canadian property financiers. Total losses on these transactions were initially estimated at 200 million Swiss francs (£80 million), a figure which later had to be revised upwards to 270 million Swiss francs—more than the firm’s entire capital. Had Rothschild Bank AG been a wholly independent entity, that would probably have been the end of its existence. However, as part of the wider Rothschild structure, it could be salvaged with an injection of 120.5 million Swiss francs, and most of the lost money was subsequently recovered.

  The Zurich crisis was a reminder of the dangers of a multinational structure with a family firm at its core: small mistakes can have grave consequences. Yet compared with the disaster which engulfed the Rothschilds’ historic rivals Barings in 1995—when a “rogue” dealer’s illegal speculations in Singapore bankrupted the firm—the Zurich crisis was trifling. The fate of Barings, which was subsequently bought by ING, is the extreme case of what can go wrong for a traditional City merchant bank. It has not, however, been alone in passing into non-British ownership. S. G. Warburg has been bought by the Swiss Bank Corporation, Morgan Grenfell by Deutsche Bank, Kleinwort Benson by Dresdner Bank and the Hambros Banking Group by Société Générale. Of the elite of City firms which used to make up the Acceptance Houses Committee, Rothschilds is one of only four which have succeeded in retaining their independence.10

  Once again historical parallels come to mind. Throughout the nineteenth century, the single most important reason why the Rothschilds were able to withstand the financial crises; revolutions and wars which swept so many of their competitors into oblivion was that a crisis in one house could be contained and resolved with the assistance of the others. The rescue of the Paris house in 1830 and the Vienna house in 1848 are the two classic examples. The reconstruction of Rothschild Bank in Zurich recalls those earlier episodes.

  The development of the N. M. Rothschild group thus needs to be understood partly as a way of defending the tradition of Rothschild independence in a world of ever-larger financial giants, not as a strategy for becoming one of those giants. At the time of writing, Rothschilds Continuation Holdings has shareholders’ equity (capital, reserves and accumulated profits) of £460 million, or total capital resources of around £800 million if a broader definition is used. In addition, the Paris-Orléans holding company has capital of around £ 100 million. Of course, this puts the group a long way behind the biggest bank in the world, HSBC, which has total market capitalisation of around £55 billion; but such a comparision does not compare like with like. A better comparison is with Schröders, one of the few other independent City merchant banks, which is only slightly ahead; or with the firm which was incorporated as N. M. Rothschild & Sons Limited in 1970. An increase in capital and reserves from £12 million to £460 million is no mean achievement: it represents growth, adjusted for inflation, of nearly 400 per cent. The question which remains is how the family-controlled “mini-multinational” structure which Evelyn has created over the past decades will fare as international financial markets become characterised by ever higher levels of integration.

  The modern financial world is often said to be quite different from the financial world of the past. Transactions, it is argued, are far larger than ever before and are executed with unprecedented speed thanks to advances in electronic communication. Public and private systems of regulation lag behind innovations like derivatives. The reserves of central banks are dwarfed by the vast turnover on the international foreign exchange markets. In the era of “globalisation,” nation states themselves are obsolete; family firms even more so. The future belongs to vast international corporations. Yet the reader of this history may be inclined to question such crude assumptions. To be sure, compared with the period between 1914 and 1945—and perhaps also with the period before 1979—the financial world has completely changed. But compared with the hundred years before the First World War, the 1980s and 1990s looks less exceptional. Relative to the world’s demographic and economic development in the nineteenth century—and certainly relative to the very limited financial resources of nation states—international capital movements in the nineteenth century were very large. Compared with what had gone before, nineteenth-century communications dramatically accelerated the speed at which business could be done. Regulation lagged far behind innovations on the bond market and stock market. Markets were volatile; trivial errors could have devastating consequences for individual firms. For most of the nineteenth century, there can be no doubt that the kind of firm which stood the best chance not only of prospering but of surviving more than a decade or two was a firm like the one founded by Mayer Amschel Rothschild and led from the ghetto to greatness by his Napoleonic son Nathan. It was rooted in a distinctive ethos of familial solidarity (concordia), a religiously rooted morality (integritas) and hard work (industria)—an ethos which proved remarkably durable despite the fissiparous tendencies of all large families, the corrupting effects of social assimilation and the myriad temptations of wealth. At the same time, its multinational structure gave it a unique degree of flexibility, enabling it to withstand even the worst economic and political crises.

  A modern financial corporation may be able to replicate this flexibility. Perhaps, through the various spin-offs of bureaucratic rationalisation we call “management,” it can even improve on the original. But it cannot easily replicate the ethos of the earlier kind of structure; for no amount of corporate rhetoric can turn its widely dispersed multitude of shareholders, directors, executives and employees into a family. Francis Fukuyama and others argue that one of the weaknesses of modern Western institutions like the corporation is that they do not elicit trust and loyalty from individual employees or investors. Perhaps the family firm does that better, even if a price is paid in forgone economies of scale.

  It is a moot point whether or not bankers benefit—as bankers—from knowing their own history; as A. J. P. Taylor once said, men learn from history only how to make new mistakes, and too much knowledge of financial history can induce excessive risk-aversion in a professional investor. At least one senior figure in the N. M. Rothschild group has observed that he is a good deal more interested in the future of the Rothschilds than in their past; he is right to be. On the other hand, the history of N. M. Rothschild & Sons and the other Rothschild houses has a contemporary relevance—indeed utility—to him and his colleagues in one respect: the name Rothschild is in many ways as big an asset as any which appears in the balance sheets of the Rothschild group. It is a brand name like no other in international finance; and if nothing else this book shows why that is.

  Moreover, the past has a more subtle influence on the present
, quite apart from its value as source material for corporate publicity. It is something to live up to—a reputation to preserve—and that is often as good a motivation in business as the more prevalent, and sometimes more short-sighted, profit motive. One of the more surprising findings of this study has been the relatively low rate of return on capital achieved by the Rothschild houses in the second half of the nineteenth century, a phenomenon partly explained by the relatively high ratio of capital to liabilities which they maintained. Part of the secret of long-run success in banking is, of course, not to go bust; the Rothschilds’ relative risk-aversion is one reason for their financial longevity. This has its roots in the psychology—to be precise, the longer time horizon—of a family firm, which has the interests of future generations as well as present shareholders to consider.

  In 1836, following the death of Nathan Mayer Rothschild, his brothers, sons and nephew bound themselves together in a new partnership agreement. In doing so, they recalled how their father Mayer Amschel had told them nearly thirty years before “that acting in unison would be a sure means of achieving success in their work”; how he had “always recommended fraternal concord to them as a source of divine blessing.” It was a principle they exhorted future generations of the family to remember:May our children and descendants in the future be guided by the same aim, so that with the constant maintenance of unity the House of Rothschild may blossom and grow into full ripeness ... and may they remain as mindful as we of the hallowed precept of our noble ancestor and present to posterity the godly image of united love and work.

  It is remarkable that, two centuries after Nathan first arrived in England, those words should still have a meaningful resonance.

  APPENDIX 1

  Exchange Rates

  Fortunately for the economic historian, the nineteenth century was characterised by a protracted process of currency convergence. After the pound returned to its pre- 1797 Newtonian gold parity in the 1820s, other major currencies one by one established more or less stable exchange rates with it. It should be stressed that the gold standard proper was a late-nineteenth-century affair. Until the 1870s, France remained on a bimetallic (gold and silver) standard, along with the other members of the Latin Monetary Union (Belgium, Switzerland and Italy). Russia, Greece, Spain and Rumania were also bimetallist, as were most American states including the US. Most German states were on pure silver standards, as were the Scandinavian counties, Holland and most of Asia. Only Britain, Portugal, Canada, Australia and Chile were strictly speaking on the gold standard in 1868. However, despite these differences, European exchange rates were relatively stable. The French, Belgian and Swiss francs were more or less consistently equivalent to one-twenty-fifth of a pound (that is, £1 = c. 25 francs: in fact, the franc-sterling exchange rate fluctuated between around 25.16 and 25.40 francs). The Prussian thaler was equally stable at around 6.8 thalers to the pound. The Austrian, Italian, Russian, Greek and Spanish currencies were not so stable, however, and were subject to periods of inconvertibility and depreciation. Table a gives some approximate sterling exhange rates for major European currencies at mid-century, though these should be used with some caution.

  Table a: Sterling exchange rates of major currencies (per pound), mid-nineteenth century.

  Source: Rothschild correspondence.

  The process of German unification was decisive in the shift from bi-metallism to the gold standard. The German decision to establish a gold-based mark rather than extending the silver thaler to the rest of the German Reich had a knock-on effect in France, which was reluctant for political reasons to smooth the German transition to gold by continuing to accept silver. Even so, until the very end of the century, a number of major currencies were not consistently on a metallic standard and were subject to periods of depreciation against sterling (this applies to the rouble and the dollar). It was not until the last two decades before the First World War that most of the world’s economies were members of the informally constituted system of fixed exchange rates known as the gold standard; only China, Persia and a few Latin American economies remained on silver. Table b gives the pre-1914 parities once most currencies had joined (strictly speaking, the currencies of Italy and Austria were not legally convertible into gold, but their exchange rates were relatively stable nonetheless).

  Table b: Sterline exchange rates of major currencies (per pound), 1913.

  Source: Hardach, First World War, p. 293.

  APPENDIX 2

  Selected Financial Statistics

  A private partnership of the sort formed by the five Rothschild houses was under no obligation in the period covered by these statistics to produce balance sheets or profit and loss accounts. The figures for the capital of the five houses produced in tables c and d are taken from the surviving partnership agreements. The profit and loss accounts for N. M. Rothschild & Sons are based on summaries (the purpose of which is not known) which begin in 1829. The accounts are simple: on one side all the year’s sales of commodities, stocks and shares are listed, on the other, all the year’s purchases and other costs; the difference is recorded as the annual profit or loss. Table e gives the “bottom line” data and also figures for net appropriations (withdrawals and new capital) by partners. The balance sheet figures in table f are based on a similar series of summaries dating from 1873.

  Nineteenth-century banks did not draw up balance sheets or profit and loss accounts in a standardised way, so comparisons with other banks for which figures are available must be made with extreme caution.

  Table c: Combined Rothschild capital, 1818-1904 (selected years, £ thousand).

  Sources: CPHDCM, 637/1/3/1-11; 1/6/5; 1/6/7/7-14; 1/6/32; 1/6/44-5; 1/7/48-69; 1/7/115-20; 1/2/1-7; 1/9/1-4; RAL, RFamFD/3, B/1; AN. 132 AQ 1, 2, 3, 4, 5, 6, 7, 9, 10, 13, 15, 16, 17, 19; Gille, Maison Rothschild, vol. II, pp. 568-72.

  Table d: Rothschild partners’ shares of capital, 1852-1905 (percentages).

  Sources: CPHDCM. 637/1/7/115-20, Societats-Übereinkunft, Oct. 31, 1852; AN, 132 AQ 3/1, undated document, c. Dec. 1855; AN, 132 AQ 2, Partnership act, no. 2, Sept. 1879; Oct. 24, 1882; June 28, 1887; April 2, 1888; Nov. 23, 1899; Dec. 24, 1900; Dec. 16, 1901; Nov. 27, 1902; July 24, 1903; Gille, Maison Rothschild, vol. II, pp. 568—72.

  Table e: N. M. Rothschild & Sons: profit and loss accounts, 1849-1918 (£).

  Sources: RAL, RFamFD/13F; RFamFD/13E.

  Table f: N. M. Rothschild & Sons: balance sheets, 1873-1918 (£, end of calendar year).

  Sources: RAL, RFamFD/13a/1; 13B/1; 13C/1; 13D/1; 13D/2; 13/E.

  NOTES

  The endnotes have been substantially reduced in number for the paperback edition. Scholars seeking detailed references should consult the hardback, which also contains a complete bibliography.

  ONE Charlotte’s Dream (1849-1858)

  1 According to Greville, Gutle frequently went on such excursions and went “constantly to the opera or play.” She was clearly not as ascetic as Borne and others liked to think.

  2 Amschel subsequently offered to lease him the house in the Bockenheimer Landstrasse, though Bismarck declined, rightly detecting in Amschel’s overtures an attempt to curry favour. According to that other arch-reactionary the King of Hanover, Amschel did this sort of thing “whenever any foreign Prince or Minister or man of distinction comes to Frankfurt.” At his dinners there was “great grandeur and sumptuousness as to show of plate and luxuries, but he amuses the company by telling them where he bought his fish and meat, and the immense sums he has sacrificed on the occasion ... shewing every moment le parvenu and the narrow minded lender and discounter of bills of exchange.”

  3 In 1862, James’s son Salomon James married Mayer Carl’s daughter Adèle. In 1865, Anselm’s son Ferdinand married Lionel’s daughter Evelina. In 1867, Lionel’s son Nathaniel (“Natty”) married Mayer Carl’s daughter Emma. In 1871, Nat’s son James Edouard married Mayer Carl’s daughter Laura Thérèse. In 1876, Anselm’s youngest son Salomon Albert (“Salbert”) married Alphonse’s da
ughter Bettina. Finally, in 1877, James’s youngest son Edmond married Wilhelm Carl’s daughter Adelheid.

  4 The exception was Anselm’s daughter Sarah Louise, who married a Tuscan aristocrat, Barone Raimondo Franchetti in 1858.

  5 Her fears may have been confirmed by the couple’s somewhat perfunctory honeymoon, which attracted adverse press comment.

  6 Thus Nat and his wife wished to settle £10,000 in consols on Anselm’s daughter Hannah Mathilde on the occasion of her marriage to Wilhelm Carl.

  7 Venison can be kosher, but not if killed in a hunt as this almost certainly was.

  8 Macaulay reported after dining at Lionel’s in 1859 that “pork in all its forms, was excluded”; instead he was served “Ortolans farcis à la Talleyrand ... accompanied by some Johannisberg which was beyond all praise.”

  9 “I hope,” noted Charlotte, “the differences may yet be settled, as in these times of religious excitement, quarrels between Christian clergymen and Jewish patrons of livings would be very disagreeable.”

  10 Charlotte’s frequent use of the word “Caucasian” to mean Jewish is an unusual feature of her correspondence. The word was coined by the eighteenth-century anatomist Johann Friedrich Blumenbach to describe one of five racial types he discerned on the basis of measuring skull shapes. As the others were Mongoloid, Ethiopian, American and Malayan, he clearly intended the category to include all European and Middle Eastern peoples.

  11 These efforts were not universally appreciated. According to The Times, “The Synagogue of that city [Jerusalem], whose members are known for their deep aversion to every innovation, and to progress in general, have pronounced a sentence of excommunication against all Israelites who should participate either as collectors or donors, in the subscription now open in Europe for the purpose of... establishing at Jerusalem ... an extensive hospital and schools for adults and children of both sexes. Among the persons visited with this anathema are the heads of the different branches of the firm of Rothschild, who have subscribed 100,000 f. towards that charitable undertaking.”