The House of Rothschild, Volume 1

by Niall Ferguson

  By the summer of 1825, therefore, the Rothschilds had succeeded triumphantly in establishing themselves as the leading specialists in European public finance—and not only European. One by one, the powers of the Holy Alliance had followed the British lead, entrusting their loans to Rothschilds: first Prussia, then Austria, then Russia. Finally, France too had to abandon her preference for more established Parisian houses. In the space of three years, the brothers had provided the crucial financial assistance which enabled Austria to suppress revolution in Naples, and France to restore royal absolutism in Spain. Yet their contemporary image as “bankers to the Holy Alliance” was in some respects a caricature. It understated what might be called their political agnosticism, their tendency to assess business opportunities in financial rather than political terms. James neatly summed up the Rothschild attitude to Restoration politics in an exuberant letter to Nathan in late 1826:

  It would be a mortal sin to be dependent on a Villèle and on a Canning and on what these Gentlemen may wish to say in the Chambers, as a result of which one will be unable to sleep at night, and why so? Because they want more than they can afford to pay and we have to thank the dear Lord that we can extricate ourselves from this situation. What we now want to say is, “[You want] a loan? You can have one, as much as you want, and draw a certain profit from it. But to keep all the millions, to that we say no!”

  The attraction of counter-revolution, in other words, was not that it restored despots, but that it generated new financial needs. Nor were conservative regimes given preferential treatment. As the conditions attached to the 1818 Prussian loan show, Nathan in fact saw constitutional structures for controlling government finance as preferable to the extravagance and inefficiency which often characterised absolutist regimes, and which in any case tended sooner or later to generate revolutionary pressures. Ultimately, that was why he was unwilling to lend to absolutist Spain without a guarantee from constitutional France. Such views would also condition the Rothschilds’ attitude to the increasingly reactionary drift of French policy under Charles X, who succeeded his brother in September 1824. And if, on the other hand, the Rothschilds preferred to lend to a constitutional monarchy like Brazil rather than a republic like Colombia, events would soon confirm the economic rationality of that preference. Where Laffitte, the follower of Saint-Simon, was “truly liberal” (in Byron’s phrase), Rothschild was more politically ambivalent, a conditional supporter of the Holy Alliance at best.

  Saving an Old Lady

  If the French Prime Minister Villèle had hoped the large 1823 loan would ultimately “free him from the hands of these gentlemen”—meaning the Rothschilds—he quickly found himself more firmly in their grip. The sustained rise of the rentes in 1823-4 was not so much proof of “the strength and power of France”; it was proof that interest rates throughout Europe were falling. This presented the Rothschilds with a new business opportunity: the conversion of government bonds bearing higher rates of interest into new bonds with lower rates. Though new to France, such operations had been undertaken in Britain before (for example, in 1717 and 1748-57). Indeed, Vansittart had converted £150 million of 5 per cents into 4 per cents in 1822; and two years later a further £75 million of 4 per cents were converted into 3.5 per cents by Frederick Robinson, his successor. For the governments which undertook such conversions, the benefit was obvious: the annual burden of debt service was significantly reduced. For the Rothschilds, the benefit was obvious too: such large-scale operations justified fat fees. The only difficulty lay in persuading bondholders who had enjoyed substantial capital appreciation and wished to continue enjoying annual interest of 4 or 5 per cent to accept less. One reason for the boom in continental and Latin American bonds between 1822 and 1824 was precisely the refusal of British bondholders to do so. Confronted with the option of converting their British 5 or 4 per cents or redeeming them and reinvesting the cash in higher-yielding assets, many did the latter, fuelling the speculative fever.

  In France, when Villèle proposed to convert 2,800 million francs of 5 per cent rentes into 3 per cents issued at 75, the bondholders’ reaction took a different form. The arguments for conversion were the same as in England: more than a third of the French budget was being consumed by the costs of servicing the state’s debt and, with 5 per cents rising from 93 to a peak of 106, the time for such an operation seemed right.19 But the proposal became mixed up with the vexed question of compensation for losses suffered by royalist émigrés during the Revolution and was narrowly rejected in the Upper House following spurious claims by Chateaubriand and others (notably financiers like Casimir Périer who had been excluded from the deal) that it was an Anglo-Austrian racket to defraud the humble French rentier. A second, heavily modified scheme—which offered to convert 5 per cents on a voluntary basis in return for tax breaks—was pushed through in 1825, but only 30 million francs’ worth of bonds were exchanged, leaving James with a substantial sum on his hands at a time when the market price was falling. Ouvrard later claimed that the Rothschilds had doubly insured themselves against the possible failure of the first conversion scheme by not only insisting on an official safety net of 100 million in treasury bills (to be issued if the banks were left with large quantities of rentes on their hands), but also surreptitiously selling both 5 per cents and 3 per cents. Suspicions that the Rothschilds were cutting their losses by selling rentes—which were justified in 182520—brought to an end the brief period of harmonious relations with Villèle which had begun in 1823. In the wake of the conversion fiasco, the French premier made a concerted effort to direct government business back to James’s rivals in Paris, organising Laffitte and the Receivers-General into a syndicate to undertake a loan to Haiti and to issue 1,000 million francs of 3 per cent rentes for the benefit of the dispossessed émigrés.

  Yet the reality was that the Rothschilds had enjoyed a lucky escape. As Nathan’s well informed Times obituarist remembered:

  [H]ad it [the Villèle conversion] been carried, the convulsion in the money markets of Europe which shortly followed it would probably have proved fatal to him with such a burden on his shoulders, notwithstanding all his vast resources. Indeed, it was a common remark of his own at the time, that neither he nor the houses engaged in the undertaking with him could have stood the shock.21

  It was indeed fortunate that Villèle’s scheme foundered when it did. For 1825 was to be the year in which the great speculative bubble burst on the London stock exchange. And not only would it have been awkward for Nathan to have been left holding millions of 3 per cent rentes at such a time; the conversion might also have made it more difficult for his brother James to assist him in containing the English banking crisis of that year.

  The 1825 crisis had in many ways been prophesied by Nathan and the other opponents of the decision to resume gold convertibility six years before. Between 1818 and 1823 the Bank of England’s note circulation fell by around a third, a dramatic contraction. In 1824 a temporary influx of gold generated a big expansion in the note issue, but this was followed by an equally sharp contraction in 1825. At the same time, though fiscal policy was gradually being brought under control following Vansittart’s resignation in December 1822, the enthusiasm of Huskisson at the Board of Trade for cuts in import duties made balancing the budget harder than it might have been. The medium-term aim of these first steps towards free trade was to increase the volume of commercial activity, in conformity with the principles of the political economists; but the short-term effect was to reduce revenues. Even with sharp cuts in expenditure, the government still found itself having to resort to both short- and long-term borrowing. Moreover, as Nathan complained, Huskisson’s policy was also giving rise to a trade deficit: as he told Herries in April 1825, “The consequence of admitting foreign goods (which had not been met by any corresponding liberality on the other side of the water) was, that all the gold was going out of the country. He had himself sent two millions within the last few weeks; the funds fell rapidly, and no
advantage is gained by any human being.” It was this outflow of gold which lay behind the sharp monetary contraction of 1825. Under these circumstances, the high prices which had been reached on the London stock exchange during the 1822-4 bubble could not be sustained. In April 1825 the market began to slide. The heaviest falls were experienced by British industrial securities and Latin American bonds: the Brazilian bonds which Nathan had issued at 85 were down to 81.25 by July and just 56 by March of the following year.22 But the bonds of the formerly Spanish republics fared even worse: Mexican, Colombian and Peruvian all fell below 20. Even the best paper—British 3 per cent consols—was affected, falling below 75 compared with a peak of more than 97 the previous year. Such a severe asset-price deflation was bound to bring a banking crisis in its wake.

  There is an old anecdote which describes Nathan threatening to exhaust the Bank of England’s reserve by bringing an immense number of small denomination notes to its counter and demanding gold. This is another Rothschild myth which is diametrically opposed to the truth. In fact, Nathan’s relations with the Bank of England were close and mutually beneficial. Beginning in the summer of 1823, when he borrowed 3 million silver dollars to finance his first loan to Portugal, he set out to establish a direct line of communication with the Governor with the intention of circumventing the Bank’s established bullion brokers Mocatta & Goldsmid. It worked, though his parallel challenge to Mocatta & Goldsmid’s position as the East India Company’s sole bullion brokers and his later efforts to deal directly with the Mint were thwarted. Thereafter, Nathan’s dealings with the Bank were regular, as he later told the 1832 Committee on the Bank Charter (with characteristic oversimplification): “You bring in your bank notes, they give you the gold.” Much of the time, Nathan was a buyer or borrower of gold and silver. In December 1825, however, it was the other way round: the Rothschilds gave the Bank their gold, supplying the “Old Lady” of Threadneedle Street with enough specie from the continent to avert a suspension of cash payments. James had in fact been sending substantial quantities of gold across the Channel since the beginning of 1825, if not earlier. In the first week of January alone, he had sent gold worth nearly £500,000, which he expected to “impress your Bank” (meaning the Bank of England). By the middle of the month, he was talking about “our old established practice” of “buy[ing] some gold whenever we can find any.”

  It was at the end of the year, however, that his assistance mattered most. As a succession of banks stopped their payments—six failed in London alone—the Governor of the Bank informed the government that a suspension of cash payments might be the only way to avert a general financial collapse, as he would be unable to meet the demand for gold likely when exchequer bills fell due. Liverpool and his colleagues were determined not to sanction this, suspecting the Governor of exaggerating the shortage of bullion to undo the work of the 1819 Committee. On the other hand, the Bank’s reserve of coined gold which could be used immediately was running out fast, and the Cabinet was sufficiently alarmed at the prospect of an unauthorised suspension by the Bank that “orders had been given to the regiment of Guards to remain in the City in case of disturbance.” Some City insiders—notably Henry Thornton, who was battling to rescue Williams & Co.—had already realised that “the Jew King of the City, Rothschild” had a stock of gold in reserve, and according to one account, “by dint of a little persuasion and exhortation [by Alexander Baring] the Jew was induced to bring out his gold, first charging 2½ per cent commission, then saying he did it out of public spirit, and lastly begging that they would never tell it or he would be besieged night and day.”

  The government, however, may have hesitated to approach Nathan because of his well-known antipathy towards Huskisson, whose policies, as we have seen, he held responsible for the crisis. On December 17 - the turning point of the crisis—the wife of Charles Arbuthnot, the Joint Secretary of the Treasury, recorded in her diary “the detestation in which Mr Huskisson is held in the City” as well as their “utmost contempt” for the Chancellor, Robinson. The feeling was evidently mutual. According to her informant, Nathan’s old friend Herries (now Financial Secretary to the Treasury),

  Mr Huskisson has done all he can also to ruin Rothschild by spreading reports that their house was in danger, & he made Mr Canning write to Paris to enquire into the affairs of [Rothschild’s] brother. Ld. Granville sent his private secretary to pump Rothschild. R found out what he was at & instantly shewed him his accounts & proved to him that he was worth 2½ millions.

  Evidently, this led to a change of heart on both sides, which no doubt owed something to Herries’s mediation and Huskisson’s absence: “Rothschild has made the most gigantic efforts to assist the Bank and he told Mr Herries that, if he had been applied to sooner, he wd. have prevented all the difficulty. As it is, if they can hold out till Monday or Tuesday, he will have enormous sums over in sovereigns from Paris, & the pressure will be entirely relieved.”

  Nathan had done two things that evening: firstly, he had advised the government to intervene in the money market itself by purchasing exchequer bills to inject liquidity into the market; secondly, and more important, he had delivered gold to the Bank, beginning with £300,000 of sovereigns, and continuing with larger sums in the succeeding weeks until confidence had finally been restored. In fact, the reserve touched its lowest level (just over a million pounds) on December 24; however, Nathan was still delivering gold a year later, pledging a million pounds in the course of March 1826 and a total of £10 million by September. His principal source was James in Paris (as he later reminded Nathan, “I emptied my coffers for your gold”). But, as Nathan recalled, “there was a good deal [of gold] supplied from the whole world; I imported it, and it was imported almost from every country; we got it from Russia, from Turkey, from Austria, from almost every quarter in the world.” The Bank’s ledgers describe the influx of myriad kinds of gold coin from France, Italy, Holland and Germany.

  The crisis of 1825 had come close to being another 1797 (the year when the Bank had last suspended cash payments), a monetary crisis with the potential to destabilise the British economy as a whole. As it was, 73 out of 770 country banks failed and, as Huskisson himself admitted, the country came within forty-eight hours of “putting stop to all dealings between man and man except by barter.” Looking back in 1839, Wellington had no doubt who had averted disaster: “Had it not been for the most extraordinary exertions—above all on the part of old Rothschild—the Bank must have stopped payment.” Of course, Nathan would not have made such immense deliveries of gold without asking for a generous commission in return. The operation has to be seen as part of his campaign to establish himself as the dominant force in the London bullion market. On the other hand, there is no reason why he should have bailed out the Bank and the government free of charge, when the crisis was so manifestly the product of policies he had advised against. The rescue of the Bank was a remarkable achievement which owed everything to the international nature of the Rothschilds’ operations. In effect, the brothers were establishing that system of international monetary co-operation which would later be performed routinely by central banks, and on which the gold standard came to depend. Increasingly, their position in the international bullion market was becoming as dominant as their position in the international bond market.

  Byron was therefore not far wide of the mark when he suggested in Don Juan that Baring and Rothschild reigned over both royalists and liberals, and that their loans could “seat a nation or upset a throne.” He erred only in regarding the two bankers as financial equals. In 1815 they had been. By 1825 they were not. As early as August 1820 the Bremen delegate to the German Confederation’s Diet in Frankfurt had a conversation with his Austrian counterpart Count Buol which acutely identified the unrivalled extent of the Rothschilds’ political influence in Europe:

  This house has, through its enormous financial transactions and its banking and credit connections, actually achieved the position of a real Power; it has
to such an extent acquired control of the general money market that it is in a position either to hinder or to promote, as it feels inclined, the movements and operations of potentates, and even of the greatest European Powers. Austria needs the Rothschilds’ help for her present demonstration against Naples, and Prussia would long ago have been finished with her constitution if the House of Rothschild had not made it possible for her to postpone the evil day.

  The Frankfurt banker Simon Moritz von Bethmann echoed this judgement in a letter written at around the same time:

  N. M. Rothschild, who is equipped with a vulgar talent, audacity and vanity, constitutes the centrifugal point around which the stock exchange revolves. He alone determines the exchange, buying and selling £100,000 each day . . . I can well understand why the Rothschilds are such useful instruments for the [Austrian] government.

  Both men had their reasons for disliking this phenomenon, as we shall see; but they did not exaggerate it.

  FIVE

  “Hue and Cry” (1826-1829)

  Seyd Umschlungen Millionen.

  —CAPTION TO A GERMAN CARICATURE OF NATHAN ROTHSCHILD