The key lay in controlling the sterling exchange rate, and this was in many ways the brothers’ principal concern in this period. As early as June 1811, when they were first engaged in smuggling bullion across the Channel, Amschel accused James of “forcing the rate of exchange in Jerusalem [London] too high” (meaning, in fact, that the pound was falling against the franc); and James’s letters to Nathan the following year frequently refer to his efforts to keep the franc from rising. “It is impossible,” he assured Nathan, “to do more than I do to keep [the exchange] so low as possible.” These early experiences explain the success with which the Rothschilds avoided substantial depreciation when transferring larger sums for Herries. To Herries’s surprise and satisfaction, Nathan was able to disburse as much as “£700,000 in the purchase of bills on Holland and Frankfurt, without its having produced the smallest effect or excited any sensation on the market . . . The exchange is better now than when the operation commmenced . . . I am convinced that £100,000 negotiated by a foreign minister or an officer of the commissariat would have produced ten times the effect of Rothschild’s operations.” The fall of Paris to the Allied armies naturally strengthened the pound, but the continued payment of subsidies soon threatened to weaken it again. For this reason, the Rothschilds intervened to push it up further. By now the markets were tending to follow the Rothschild lead. As Carl noted: “When we buy, everybody buys.” This reflected the widespread belief that the Rothschilds were acting “on behalf of the English government and that this is being done in order to force the rate of the pound sterling up [and] . . . that we succeeded very well in doing so.”
In reality, of course, the Rothschilds had reasons of their own for holding up the pound. With movements of sterling more or less predictable, it was possible to engage in profitable arbitrage on the back of the big subsidy transfers. In May 1814, for example, Salomon drew Nathan’s attention to the substantial gap between the Paris and London gold quotations. A month later it was Nathan’s turn to urge James to buy undervalued pounds in Frankfurt. The subsidy payments to Gervais generated a succession of profits from exchange rate differences. For example, Amschel went to Berlin in July to take advantage of the premium on ducats over louis d’or. The ducats which were delivered to Gervais in August and September had been bought by James at a lower price in Amsterdam, yielding an extra profit of some 4 per cent.
Such transactions probably accounted for the lion’s share of the profits the Rothschilds made in this decisive period. Amschel was only half joking when, during the post-war surge in sterling, he wrote urging Salomon: “Do your stuff, make the Frankfurt house richer by a million francs, the Paris house richer by a million louis d’or and the London house richer by a million pounds, and you’ll be awarded the order of the Grande Armee!” Yet it must be stressed that this was a strategy fraught with risk. It was exceedingly difficult to accumulate the cash necessary to carry out the subsidy transfers to Russia and Prussia on time. The Frankfurt house found its sources of credit all but exhausted on more than one occasion, and Carl and Amschel frequently complained that Nathan was biting off more than they could chew. Raising sums of the order of 600,000 gulden was, as Carl complained, “no joke.” At the same time, the governments concerned in the subsidy transfers naturally resented the fact that the Rothschilds were making these large profits on the side. Even Herries and Gervais on occasion complained about what was going on, while the Prussian government managed to pass at least some of the costs occasioned by the unexpected fall of the pound in August back on to the Rothschilds. The exchange rate was also a stumbling block in the negotiations with Austria.
Moreover, the success of arbitrage and forward exchange operations hinged on rapid communication. As far as possible, the brothers sought to keep one another abreast of news which might affect the exchange markets: the impending payment of a new subsidy, the likelihood of further military action, the imminence of the peace treaty being signed. And, as we have seen, they were already able to transmit such information through their own couriers considerably faster than was possible through official channels or the regular post. Yet the time-lags could still be substantial and Nathan was constantly being urged to speed up the system. When sterling surged by 6 per cent in Amsterdam, James wrote impatiently for guidance:
Now, dear Nathan, if you think the subsidies are going to stop, then you can be sure that the exchange rate will rise again, as there will be fewer bills. But if you think that there will be further transfers, then the exchange [rate] will fall again . . . One simply no longer knows what to do about the exchange rate. It is terrible that you, dear brother Nathan, don’t bother to write me your opinion, because now it is vital to know what is going on over there.
So anxious was Amschel to have up-to-date news from London that he asked Nathan to send his letters by more than one route—via Paris and Amsterdam as well as Dunkirk—and to use colour-coded envelopes so that his contact at the post office could tell at a glance whether the exchange rate was rising (blue) or falling (red).
And even with the benefit of swift communications, it was still possible to be caught out. In July 1814 Nathan unexpectedly remitted—“like a madman”—more than £100,000 to his brothers in Frankfurt. This caused the pound to drop at once in Frankfurt; and when the slide persisted into August and spread to Amsterdam, a “depressed” Carl began to fear that Nathan had lost control of the market. Salomon nervously warned Nathan not to “bring the pound below a certain level”: “If you are not careful you will not remain the master of the Stock Exchange.” Even as matters stood, confidence in sterling on the continent had been badly damaged. These anxieties were merely compounded by Amschel’s continuing confidence (which may have been due to the fact that, just as he had feared, bad news had not reached him soon enough). It was time, Carl felt, to stop speculating in sterling:
But if you were to write about this to Amschel [in Berlin] he would do exactly the contrary and would buy sterling immediately without thinking things over first. No one on earth can imagine what I have to go through. Immediately after his arrival in Leipzig he proceeded to purchase £10,000 at 136. His opinion is that the pound will rise to 140 but if it were to reach 140 he still would not be able to decide whether he could sell or not. He would maintain the fact that it would rise to 150 and so forth . . . If therefore you write to him, have a fixed . . . amount in your mind and tell him half of it, as he will no doubt buy more in any case.
When Amschel realised his mistake, he found it “astonishing”—the more so as he was held responsible for the fall of sterling in Berlin! “Could I have been more careful?” he retorted, stung by his brothers’ criticisms. “You really want to be able to go out in the rain without getting wet.” Salomon’s gloomy conclusion was that Nathan had overreached himself: “No man on earth can at any time fix the rate of the pound except a government which would be ready to risk half a million pounds during one year in order to carry out a monetary plan . . . I do not think there is any point in buying sterling for the purpose of keeping the rate of the pound from falling, because there is too much of this currency already in the world.” James even suggested a change of strategy: running up sterling debts on the assumption of continuing depreciation. It was only gradually—and with Nathan “operating . . . as much as lies in my power” to push the rate back up—that the brothers recovered their confidence in the pound. By November James found that it was once again enough for him “to put in an appearance” at the Hamburg stock exchange for the pound to rise, and the same was true when he visited Berlin early in the New Year.3 By February he could confidently report to Nathan: “It depends solely on me whether the pound rises or falls in Paris.”
There was another (and not dissimilar) way of profiting indirectly from the subsidy business: by speculating on fluctuations in bond prices. Like exchange rates, bond prices were highly sensitive to large international transfers, as well as to related political developments. For example: the price of Russian bonds had plummeted
from 65 per cent of their face value to just 25 between February and October 1812, for the reason that the French invasion had led to the suspension of interest payments on the government debt. News of the retreat from Moscow led to a rally: on November 30 they were quoted at 35 in Amsterdam and by March 1813 they had risen to 50, only to fall back to 41 in June on news of Napoleon’s victories in Saxony. As the prospect of an Allied victory neared, so Russian bonds rallied, with the payment of subsidies from Britain strongly implying an imminent resumption of interest payments. It therefore made sense for anyone who anticipated the defeat of France to buy the bonds of states allied to Britain while they were still in the doldrums. The Rothschilds attempted to do so, albeit rather late in the day. By the time Nathan sent his brother-in-law Moses Montefiore to Paris with instructions to make some speculative purchases, Russian bonds were already close to par. Nevertheless, James was convinced that they would go higher, having received information (from Gervais) that interest payments would soon be resumed. Amschel also made purchases of modest amounts of bonds from neighbouring German states that August. And in March 1815 Rothschild purchases based on similar calculations pushed up the price of Austrian bonds. However, it seems that much less money was made from these transactions than from arbitrage and foreign exchange speculation, which were on a much larger scale. Indeed, the last bond purchases very probably led to considerable losses—for reasons which will become clear.
Nathan’s Waterloo
As soon as the French had been defeated, of course, and Napoleon exiled to Elba, the end of the subsidy business was in sight—or seemed to be. Nor did any major new money-making opportunity present itself. The French financial position in 1814 appeared to preclude the payment of reparations. Although the debts of the French state accumulated in the period before around 1800 had been largely wiped out by the assignat inflation, Napoleon’s wars had run up a new internal debt of 1.27 billion francs and rentes perpétuelles (the French equivalent of British consols) stood at around 58 (that is, 42 per cent below par). Napoleon had succeeded in reforming the currency, giving a monopoly on note issue to the Banque de France and effectively placing the new franc on a bimetallic (gold and silver) standard. But by 1814 the reserves of precious metal in Paris were severely depleted. The most the victorious Allies therefore asked of the restored Bourbon regime was a modest contribution to the costs of the military occupation of France in the form of interest-bearing bons royaux. The Rothschilds might have expected to play a major part in these transactions, given their dominant role in the British subsidy transfers. But they were disappointed. Although they seem to have handled some franc-denominated payments to Russia, their bid to convert the Austrian share of the bons royaux into cash for a commission of 0.5 per cent was rejected, as were later proposals to the other Allied powers.
For this reason, it is tempting to see Napoleon’s return from Elba on March 1, 1815, as an immense stroke of luck for the Rothschilds. Just as the brothers appeared to be losing the peace, Bonaparte’s “Hundred Days” plunged Europe back into war, restoring the financial conditions in which the Rothschilds had hitherto thrived. This idea that Nathan profited from the dramatic events of 1815 is central to Rothschild mythology: it has been repeatedly claimed that, by obtaining the first news of Napoleon’s defeat at Waterloo—before even the government itself—Nathan was able to make a huge sum of money on the Stock Exchange. The more fabulous elements of the myth—Nathan’s presence at the battle itself, his riding alongside Wellington, his stormy night crossing from Ostend to Dover, his profits of between £20 and £135 million—have long ago been debunked. Nevertheless, historians—including Victor Rothschild himself—have continued to assume that the Rothschilds benefited at least to some extent from the resumption of war and the final Allied victory. Even if the money made from buying British government stock immediately after the battle can have amounted to little more than £10,000, their total profits from the Waterloo campaign have been estimated at around a million pounds.
The real story is very different. It is true that the resumption of war appeared to promise a return to the lucrative business conditions of 1814—but not because of its effect on consols, which, as we have seen, had hitherto been of relatively minor importance to Nathan. (It was the Barings who were once again given responsibility for a new issue of gilts in 1815.) Rather, it was to a resumption of his previous business with Herries that he now looked, on the assumption that Napoleon’s return would create the same urgent need for transfers of money from England to the continent as the year before. Up to a point, this was perfectly correct. But the Rothschild correspondence reveals that the resumption of payments to Wellington and to Britain’s continental allies proved a source of far less easy pickings than in 1814. Indeed, it is possible that a series of miscalculations by the brothers led to losses rather than profits in the critical period before and after Waterloo. On this occasion, it seems, reality is diametrically opposite to myth.
To begin with, Napoleon’s return was, as Nathan put it, nothing but “unpleasant news” for the Rothschilds. Early March had seen the brothers buying Austrian stocks in the expectation of a bull market in both Vienna and London. When the news of the escape from Elba reached Nathan on March 10, this prospect evaporated. There was, he informed Salomon, “stagnation on ’Change . . . in the bill way, and I am prevented from making you a large remittance.” The effect on Paris was even worse: “It is practically not possible to continue business at present,” reported James. True, Nathan was quick to reorientate his operations. On the assumption that the British government would soon once again need cash on the continent, he began buying up bullion in London, which he then sold to Herries for shipment to Wellington. Immense sums were involved: in the first week of April alone, Nathan bought “100,000 guineas gold, £50,000 foreign and upwards of 100,000 Spanish dollars and . . . nearly £200,000 good bills.” To maximise the amount he could offer Herries, Nathan also sent Salomon to Amsterdam and James to Hamburg with orders “to purchase plenty of gold for the armies” and send it to London. The first shipment to the continent—three ingots worth around £3,000—was despatched on April 4; around £28,000 followed on May 1, and by June 13 more than £250,000 had been sent. On April 22 Nathan sold Herries gold worth around £80,000; by October 20 he had provided gold coins worth a total of £2,136,916—enough to fill 884 boxes and 55 casks. In addition, he offered his services again to relay a new tranche of subsidies to Britain’s allies, which at their peak reached the unprecedented level of a million pounds a month. This time, not only Russia and Prussia but the previously aloof Austrians found they had little option but to accept payment from the Rothschilds—as did a gaggle of other states, including Saxony, Baden, Württemberg, Bavaria, Saxe-Weimar, Hesse, Denmark and Sardinia. Altogether, Herries’s account with Nathan in 1815 amounted to £9,789,778.4
Assuming that the commissions charged for these transfers were, as in 1814, somewhere between 2 and 6 per cent, that figure might seem to imply profits in the region of £390,000. However, this overlooks the role of exchange rate fluctuations which, as in 1814, were the key to the profitability of the transfer payments. The immediate impact of Nathan’s bullion purchases in London was to weaken sterling, pushing up the price of gold by as much as 23 per cent. This represented a major gamble, as it remained uncertain throughout March whether Britain would in fact go to war against Bonaparte once more. (Had it been postponed, Nathan might have found himself with a large stock of unwanted and depreciating bullion.) When the decision for war was finally confirmed, Nathan sought once again to strengthen sterling’s exchange rate with the continental currencies—he was duly credited with pushing the pound up from 17.50 francs to the pound to 22. The Rothschilds’ “commanding general” was now quite confident of his ability to control the exchanges: “You need be under no uneasiness from anywhere,” he told James. “Our resources here are like lions, equal if not superior to all and every demand.” He was equally sanguine in a letter to Carl: “
I am not limited to a trifling difference in the exchange . . . which will give me great command over the market.” Nathan was also convinced that his latest agreement with Herries was effectively risk-free, as it provided for immediate reimbursement of every amount sent to the continent (where previously he had advanced the government considerable sums).
But he miscalculated in two vital respects: in assuming that it would take another lengthy war to defeat Napoleon, and in assuming that the financial paralysis which had prevailed on the continent a year before would quickly return, leaving the field empty of competition. In fact, barely three months elapsed between the return from Elba and the defeat at Waterloo, and for the first two of these there was minimal military action. As a consequence, the Rothschilds’ rivals in Amsterdam, Hamburg and Frankfurt were able to compete in the money markets in a way they had not in 1814. The first signs of trouble came in Hamburg, where—to Nathan’s dismay—James found himself unable to hold up the exchange rate in his purchases of bullion. Then from Amsterdam it was reported that Wellington had more bullion than he knew what to do with, so that on May 5 Nathan “received orders from Government this day to desist in my operations owing to your having sent off so much specie.” Furiously, he laid the blame on James:
The House of Rothschild, Volume 1 Page 17