Having begun his business career in England as a textile exporter, Nathan Mayer Rothschild was technically a merchant who came to specialise in various financial services. He himself said in 1817: “[M]y business . . . consists entirely in Government transactions & Bank operations”—but by the latter he probably meant operations with the Bank of England. He did not mean the kind of deposit banking which Bagehot called “our English banking” and which remains the principal activity of the big high-street banks today.
Nor can N. M. Rothschild & Sons really be regarded as an autonomous firm: until some time between 1905 and 1909 it was one of a group of Rothschild “houses” run by a family partnership—though the London house is the only one of these which has had an uninterrupted existence until the present day (Rothschild & Cie Banque is only an indirect descendant of the original Paris house, which was nationalised in 1981). At its zenith from the 1820s until the 1860s, this group had five distinct establishments. In addition to Nathan’s in London, there was the original firm of M. A. Rothschild & Söhne in Frankfurt (after 1817, M. A. von Rothschild & Söhne), which his eldest brother Amschel took over when their father Mayer Amschel died; de Rothschild Frères in Paris, founded by his youngest brother James; and two subsidiaries of the Frankfurt house, C. M. von Rothschild in Naples, run by the fourth of the brothers, Carl, and S. M. von Rothschild in Vienna, managed by the second-born Salomon. Up until the 1860s, the five houses worked together so closely that it is impossible to discuss the history of one without discussing the history of all five: they were, to all intents and purposes, the component parts of a multinational bank. Even as late as the first decade of the twentieth century, the system of partnerships continued to function in such a way that “English” Rothschilds had a financial stake in the Paris house and “French” Rothschilds a stake in the London house. Unlike modern multinationals, however, this was always a family firm, with executive decision-making strictly monopolised by the partners who (until 1960) were exclusively drawn from the ranks of male Rothschilds.
Perhaps the most important point to grasp about this multinational partnership is that, for most of the century between 1815 and 1914, it was easily the biggest bank in the world. Strictly in terms of their combined capital, the Rothschilds were in a league of their own until, at the earliest, the 1880s. The twentieth century has no equivalent: not even the biggest of today’s international banking corporations enjoys the relative supremacy enjoyed by the Rothschilds in their heyday—just as no individual today owns as large a share of the world’s wealth as Nathan and James as individuals owned in the period from the mid-1820s until the 1860s (see appendix 1). The economic history of capitalism is therefore incomplete until some attempt has been made to explain how the Rothschilds became so phenomenally rich. Was there a “secret” to their unparalleled success? There are numerous apocryphal business maxims attributed to the Rothschilds—for example, to hold a third of one’s wealth in securities; a third in real estate; and a third in jewels and artworks, to treat the stock exchange like a cold shower (“quick in, quick out”); or to leave the last 10 per cent to someone else—but none of them has any serious explanatory value.
What exactly was the business the Rothschilds did? And what use did they make of the immense economic leverage they could exercise? To answer these questions properly it is necessary to understand something of nineteenth-century public finance; for it was by lending to governments—or by speculating in existing government bonds—that the Rothschilds made a very large part of their colossal fortune.
II
All nineteenth-century states occasionally ran budget deficits and some almost always did—that is, their tax revenues were usually insufficient to meet their expenditures. In this, of course, they were little different from eighteenth-century states. And, as before 1800, it was war and the preparation for war which generally precipitated the biggest increases in expenditure; poor harvests (or troughs in the trade cycle) also caused periodic revenue shortfalls by reducing receipts from taxes. These deficits, though often relatively small in relation to national income, were not easily financed. National capital markets were not very developed and an internationally integrated capital market was only gradually taking shape with its first real centre in Amsterdam. For most states, borrowing was expensive—that is, the interest they had to pay on loans was relatively high—because they were perceived by investors as unreliable creditors. Budget deficits were thus often financed either by the sale of royal assets (land or offices), or by inflation if the government was in a position to debase the currency. A third possibility, of course, was to raise new taxes, but, as had been the case in the seventeenth century and as was to be the case throughout the nineteenth century too, major changes in tax regimes generally necessitated some kind of political consent via representative institutions. The French Revolution was precipitated by just such a bid for new revenue from the Estates General, after all other attempts at fiscal reform had failed to keep up with the costs of the crown’s military activities. One exception to the rule was the British state, which since the later seventeenth century had developed a relatively sophisticated system of public borrowing (the national debt) and monetary management (the Bank of England). Another exception was the small German state of Hesse-Kassel, which was effectively run by its ruler at a profit through the hiring out of his subjects as mercenaries to other states. Involvement in the management of his huge investment portfolio was one of the first steps Mayer Amschel Rothschild took in order to become a banker rather than a mere coin dealer (his original business).
The period 1793-1815 was characterised by recurrent warfare, the fiscal side-effects of which were profound. Firstly, unprecedented expenditures precipitated inflation in all the combatants’ economies, the most extreme form of which was the collapse of the assignat currency in France. The European currencies—including the pound sterling after 1797—were thrown into turmoil. Secondly, the disruptions of war (for example, the French occupation of Amsterdam and Napoleon’s Continental System) created opportunities for making large profits on highly risky transactions such as smuggling textiles and bullion and managing the investments of exiled rulers. Thirdly, the transfer of large subsidies from Britain to her continental allies necessitated innovations in the cross-border payments system which had never before had to cope with such sums. It was in this highly volatile context that the Rothschilds made the decisive leap from running two modest firms—a small merchant bank in Frankfurt and a cloth exporters in Manchester—to running a multinational financial partnership.
Nor did the final defeat of Napoleon end the need for international financial services; on the contrary, the business of settling the debts and indemnities left over from the war dragged on for most of the 1820s. Moreover, new fiscal needs quickly arose from the political crises which beset the Spanish and Ottoman Empires in this period. At the same time, fiscal retrenchment and monetary stabilisation in Britain created a need for new forms of investment for those who had grown accustomed to putting their money in high-yielding British bonds during the war years. It was this need which Nathan and his brothers successfully met. The system they developed enabled British investors (and other rich “capitalists” in Western Europe) to invest in the debts of those states by purchasing internationally tradeable, fixed-interest bearer (that is, transferable) bonds. The significance of this system for nineteenth-century history cannot be over-emphasised. For this growing international bond market brought together Europe’s true “capitalists”: that elite of people wealthy enough to be able to tie up money in such assets, and shrewd enough to appreciate the advantages of such assets as compared with traditional forms of holding wealth (land, venal office and so on). Bonds were liquid. They could be bought and sold five and a half days out of seven (excluding holidays) on the major bourses of Europe and traded informally at other times and in other places. And they were capable of accruing large capital gains. Their only disadvantage was, of course, that they were also capabl
e of suffering large capital losses.
What determined the ups and downs of the nineteenth-century bond market? The answer to this question is central to any understanding of the history of the Rothschild bank. Obviously, economic factors played an important part—in particular, the conditions for short-term borrowing and the appeal of alternative private securities. But the most important factor was political confidence: the confidence of investors (and especially of big market-making investors like the Rothschilds) in the ability of the bond-issuing states to continue to meet their obligations—that is, to pay the interest on their bonds. There were only really two things which might cause them not to do so: war, which would increase their expenditures and decrease their tax revenues; and internal instability, ranging from a change of ministry to full-blown revolution, which would not only dent their revenues but might also bring to power a new and fiscally imprudent government. It was for indications of either of these possible crises, with their intimations of default, that the markets—and the Rothschilds more than anybody—watched.
This explains the importance they always attached to having up-to-date political and economic news. Three things would give an investor an edge over his rival: closeness to the centre of political life, the source of news; the speed with which he could receive news of events in states far and near; and the ability to manipulate the transmission of that news to other investors. This explains why the Rothschilds spent so much time, energy and money maintaining the best possible relations with the leading political figures of the day. It also explains why they carefully developed a network of salaried agents in other key financial markets, whose job it was not only to trade on their behalf but also to keep them supplied with the latest financial and political news. And it explains why they constantly strove to accelerate the speed with which information could be relayed from their agents to them. From an early stage, they relied on their own system of couriers and relished their ability to obtain political news ahead of the European diplomatic services. They also occasionally used carrier-pigeons to transmit the latest stock prices and exchange rates from one market to another. Before the development of the telegraph (and later the telephone), which tended to “democratise” news by making it generally available more rapidly, the Rothschilds’ communications network gave them an important advantage over their competitors. Even after they lost this edge, they continued to exercise an influence over the financial press through which news reached a wider public.
Information about the chances of international or domestic instability fed directly into the bond market, leading to the daily fluctuations in prices and yields which investors followed so closely. However, the relationship between politics and the bond market went the other way too. For the movements of prices of existing government stock—the products of past fiscal policy—had an important bearing on present and future policy. To put it simply, if a government wished to borrow more by issuing more bonds, a fall in the price (rise in the yield) of its existing bonds was a serious discouragement. For this reason, bond prices had a significance which historians have too seldom spelt out. They were, it might be said, a kind of daily opinion poll, an expression of confidence in a given regime. Of course, they were an opinion poll based on a highly unrepresentative sample by modern, democratic standards. Only the wealthy—the “capitalists”—got to vote. But then political life in the nineteenth century was itself undemocratic. Indeed, the kind of people who held government bonds were, very roughly speaking, the people who were represented politically, even if there was sometimes tension between those property owners whose assets were held primarily in the form of land or buildings and the bondholders whose portfolios were composed mainly of paper securities. These capitalists were thus to a large extent Europe’s political class and their opinions were the opinions that mattered in a stratified, undemocratic society. If investors bid up the price of a government’s stock, that government could feel secure. If they dumped its stock, that government was quite possibly living on borrowed time as well as money.
The singular beauty of the bond market was that virtually every state (including, as the century advanced, all the new nation states and colonies) had, sooner or later, to come to it; and most states had sizeable amounts of tradable debt in circulation. The varying fortunes of government bonds provide a vital insight into the political history of the period. They are also the key to understanding the extent and limits of the power of a bank like Rothschilds, which for much of the nineteenth century was the prime market-maker for such bonds. Indeed, it can be argued that, by modifying the existing system for government borrowing to make bonds more easily tradable, the Rothschilds actually created the international bond market in its modern form. As early as 1830 a German writer observed how, thanks to innovations in the form of bonds introduced by the Rothschilds since 1818,
each possessor of state paper [can] . . . collect the interest at his convenience at several different places without any effort. The House of Rothschild in Frankfurt pays the interest on the Austrian metalliques, the Neapolitan rentes and the interest of the Anglo-Neapolitan obligations in either London, Naples or Paris, wherever it suits.
At the core of this book, then, is the international bond market which the Rothschilds did so much to develop, though due attention is also paid to the many other forms of financial business the Rothschilds did: bullion broking and refining, accepting and discounting commercial bills, direct trading in commodities, foreign exchange dealing and arbitrage, even insurance. In addition to the inevitable web of credits and debits with other firms which arose from these activities, the Rothschilds also offered to a select group of customers—usually royal and aristocratic individuals whom they wished to cultivate—a range of “personal banking services” ranging from large personal loans (as in the case of the Austrian Chancellor Prince Metternich) to a first class private postal service (as in the case of Queen Victoria). Contrary to Bagehot’s impression, they sometimes took deposits from this exclusive clientele. And the Rothschilds were also major industrial investors—an aspect of their business which has often been underestimated. When the development of railways raised the possibility of transforming Europe’s transport system in the 1830s and 1840s, the Rothschilds were among the leading financial backers of lines, beginning in France, Austria and Germany. Indeed, by the 1860s James de Rothschild had built up something like a pan-European railway network extending northwards from France to Belgium, southwards to Spain and eastwards to Germany, Switzerland, Austria and Italy. From an early stage, the Rothschilds also had major mining interests, beginning in the 1830s with their acquisition of the Spanish mercury mines of Almadén and expanding dramatically in the 1880s and 1890s when they invested in mines producing gold, copper, diamonds, rubies and oil. Like their original financial business, this was an authentically global operation extending from South Africa to Burma, from Montana to Baku.
The primary concern of this book is therefore to explain the origins and development of one of the biggest and most unusual businesses in the history of modern capitalism. Nevertheless, it is not intended as a narrowly economic history. For one thing, the history of the firm is inseparable from the history of the family: the phrase “the House of Rothschild,” which has often been used by previous historians (and film-makers) was used by contemporaries, including the Rothschilds themselves, to convey this unity. While the regularly revised and renewed partnership agreements regulated the management of the Rothschilds’ collective business activities and the distribution of the profits which accrued, of equal importance were the nuptial agreements which, at the height of the family’s success, systematically married Rothschild to Rothschild, thus keeping the family’s capital united—and safe from the claims of “outsiders.” When Rothschild women did marry outside the family, their husbands were prohibited from having a direct involvement in the business, as were the female Rothschilds themselves. The partners’ wills were also designed to ensure the perpetuation and growth of the bus
iness by imposing the wishes of one generation on the next. Inevitably, there were conflicts between the collective ambitions of the family, so compellingly spelt out by Mayer Amschel before he died, and the wishes of the individuals who happened to be born Rothschilds, few of whom shared the founder’s relentless appetite for work and profits. Fathers were disappointed by sons. Brothers resented brothers. Love was unrequited or prohibited. Marriage was imposed on unwilling cousins, and husbands and wives quarrelled. In all this, the Rothschilds had much in common with the large families which populate so much nineteenth- and early-twentieth-century fiction: Thackeray’s New-comes, Trollope’s Pallisers, Galsworthy’s Forsytes, Tolstoy’s Rostovs and Mann’s Buddenbrooks (though not, happily, Dostoevsky’s Karamazovs). The nineteenth century, of course, was an era of large families—the birth rate was high and, for the rich, the death rate fell—and perhaps in this sense alone the Rothschilds were not (as Heine once called them) “the exceptional family.”
Because they were so rich, the Rothschilds could plainly claim a material equivalence with the European aristocracy; their success in overcoming the various legal and cultural obstacles to full equivalence of status is one of the most remarkable case studies in nineteenth century social history. As men whose father had been prohibited from owning property outside the cramped and squalid Frankfurt Judengasse, the five brothers had an understandable interest in the acquisition of land and spacious residences; though it was the third generation3 who were responsible for building most of the spectacular palaces and town houses which are the family’s most impressive monuments. At the same time, the Rothschilds energetically pursued and acquired decorations, titles and other honours, securing the ultimate prize—an English peerage—in 1885. The third generation also threw themselves into hunting and horse-racing, those quintessentially aristocratic pastimes. A similar process of social assimilation is detectable in their cultural engagement. James and his nephews had a passion for collecting art, ornaments and furniture which they passed on to many of their descendants. They also extended their patronage to include writers (Benjamin Disraeli, Honoré de Balzac and Heinrich Heine), musicians (notably Fryderyk Chopin and Gioachino Rossini) as well as architects and artists. In more ways than one, they were the nineteenth century’s Medicis.
The House of Rothschild, Volume 1 Page 2