for the sake of maintaining cordial relations and in accordance with your wishes and those of our brother Salomon, I have in fact written to him on five occasions, and I completely forgot the stupid letter which he wrote to me . . . as if it never existed. Please ask for these to be sent to you from Naples, and you will then see that I did write, for I want to maintain peaceful relations and don’t want any quarrels. Well, I did all that I consider an upright man is obliged to do for his brother. [T]hey can complain about me, but I will not write any more until such time as I receive letters from them, for I am no less a Rothschild and I can stand on my honour as much as our brother Carl.
Of course, the fact that the other brothers appealed to Nathan when they fell out shows how far Nathan remained “the commanding general”—the pillar on which the entire Rothschild edifice rested, as unshakeable as the pillar he stood beside at the Royal Exchange. But disputes such as these suggest that additional buttresses were needed to preserve that edifice intact.
The Rothschild System
If there was a single “secret” of Rothschild success it was the system of co-operation between the five houses which made them, when considered as a whole, the largest bank in the world, while at the same time dispersing their financial influence in five major financial centres spread across Europe. This multinational system was regulated by the partnership agreements which were drawn up and revised every few years and which were, in effect, the constitution of a financial federation. The earliest such agreement, as we have seen, had been drawn up in 1810, but this was untypical because of Mayer Amschel’s continuing dominance and the wartime exclusion of Nathan. It was the three-year contract of 1815 between all five brothers which was the first authentically “federal” agreement. The crux of the matter at this stage was the superior wealth of the London house. According to the preamble of the agreement, the brothers’ “partnership property in London[,] at Paris and at Frankfurt on the Main consists of the sum of £500,000 or thereabouts,” but most of this was evidently Nathan’s. The contract sought to redefine the brothers’ collective assets by excluding some items (presumably real estate), and redistributing some £200,000 in the form of promissory notes of £50,000 each from Nathan to his four brothers. The resulting shares of a total notional capital of £336,000 were Nathan, 27 per cent; Amschel and Salomon, 20 per cent each; Carl and James, 16 per cent each. Moreover, it was agreed to defray all expenses from the London house’s revenues and to share net profits at the end of each year equally.
In the three years during which this contract ran, as we have seen, the brothers’ capital grew at a phenomenal rate, from £336,000 to £1,772,000. So much of this increase was due to Nathan’s immensely successful speculations in consols that, although the proportions of the total capital were more or less unchanged, his brothers now agreed to weight the distribution of profits in his favour. As Carl saw it,
Nathan should have a bigger part than a fifth. He has a big family, he needs more. Whatever you arrange, I will give my agreement . . . You told me yourself that Nathan has to be given [some] prerogatives. We owe everything, really everything to him. He saved us. We wanted to take a jump earlier [that is, to sell] and he kept us back.
There were now technically “three joint mercantile establishments [conducted] under . . . the . . . five partners’ mutual responsibility”: N. M. Rothschild in London, M. A. von Rothschild & Söhne in Frankfurt and James’s new house in Paris, de Rothschild Frères. Henceforth, half of all the profits of the London house would go to Nathan, while his brothers would receive an eighth each; he would also receive four-sixteenths of the profits of the other two houses, while his brothers received three-sixteenths apiece. The 1818 agreement also introduced a new system whereby each of the partners received 4 per cent of their individual capital share per annum by way of an income to cover their expenses (both business and domestic); any lump sums spent on legacies for children, houses or landed estates were to be deducted from the individual’s capital. In addition, “to preserve regularity in the books and accounts . . . it has been determined that in the running transactions of the three joint establishments although they form but one general joint concern each respectively is to charge exchange, brokerage, postages, stamps and interest pro and contra at the rate of 5 per cent.” To reinforce the sense of collective identity it was now specified that each House had to inform the others of the transactions it carried out on a weekly basis.
Although initially intended to run for just three years, this agreement in fact remained in force until 1825. However, it would be wrong to infer from this a high level of fraternal harmony. Quite apart from the periodic disputes described in previous chapters, the four continental brothers on one occasion felt obliged to draw up a separate agreement between themselves, the terms of which suggest a quite serious rift between themselves and Nathan.3 Significantly, the 1825 agreement restored the 1815 system whereby profits were shared equally, reflecting the fact that the capital of both the Frankfurt and Paris houses had grown so rapidly as to outstrip that of the London house. On the other hand, Nathan’s personal share continued to be counted as more than a quarter of the joint capital, which now stood at more than £4 million. Moreover, although Salomon and Carl had more or less settled in Vienna and Naples, their houses were not given equal status with the original three, and continued to be treated as mere “branch establishments” of the Frankfurt house, without any separate capital until 1828 (and thereafter relatively little). This was probably intended to check the centrifugal tendencies discussed above. The partners now bound themselves to “mutually inform each other . . . of all the transactions, of whatever nature they may be, which have occurred” on a monthly rather than weekly basis.
The 1825 agreement also saw the first steps taken to bring the next generation into the firm, with the decision to admit Salomon’s son Anselm as a partner following his marriage to Nathan’s daughter Charlotte. The brothers were experiencing the first intimations of mortality: the 1825 documents included a clause permitting Amschel to withdraw from the business “if the work becomes too hard for him,” and sought to anticipate possible disputes over inheritance by binding each of the partners’ heirs to accept whatever their share might be without resort to law. It was specifically stated that, if the heirs of a deceased partner took legal action against the surviving partners, a third of the deceased’s share of capital would be forfeit and would be given to the poor of Frankfurt, London and Paris!4
In describing their terms, it is easy to lose sight of the secrecy of these agreements, which such sanctions were intended to preserve. When the brothers met at Frankfurt in August 1828 to take stock of what had been a relatively disappointing three years, Nathan’s wife and two of his sons were present but were wholly excluded from the negotiations, just as they would be eight years later. “Papa and his Brothers with Anselm are almost continually engaged in deliberating upon the arrangement of their concerns,” reported Hannah, “which are held in the Tower in the Garden and are perfectly secret.” The most she could say was that “every thing among the family seemed to be going on with much unanimity.” This was probably something of a relief to her, as the accounts drawn up in 1828 revealed that, though the partners’ personal shares remained formally unchanged, the relative importance of the London house had continued to decline. Its share of the total capital was now just over 27 per cent, compared with 42 per cent in 1818. This share increased only very slightly in the eight years which intervened before the next such meeting at Frankfurt—the fateful 1836 gathering during which Nathan unexpectedly died. As a result, the continental partners were able to secure new and potentially more favourable terms for the distribution of profits: henceforth, Nathan would receive 60 per cent of the profits of the London house but just 10 per cent of the profits from Frankfurt, Naples and Vienna, while his brothers would each get 10 per cent from the London house and 22.5 per cent from the continental houses.5 This rule—which undoubtedly increased the relative auton
omy of the London house—was retained despite Nathan’s death: all his rights were simply transferred to his four sons.
It goes without saying that the Rothschilds were financially successful; indeed, the rate of growth and size of their capital in the period before 1850 were unprecedented in banking history. Table 10a summarises the available figures for the combined capital of the various houses in the first half of the century:
Table 10a: Combined Rothschild capital, 1797-1844 (£ thousand).
Sources: CPHDCM, 637/1/3/1-11; 637/1/3; 637/1/6/5; 637/1/6/7/7-14; 637/1/6/32; 637/1/6/44, 45; 637/1/7/48-52; 637/1/7/53-69; 637/1/8/1-7; 637/1/9/1-4; RAL, RFamFD, B/1; RAL, RFamFD/3; AN, 132 AQ 1.
The sheer scale of the Rothschilds’ resources can hardly be over-emphasised: to take a single year—1825—their combined resources were nine times greater than the capital of Baring Brothers and eleven times larger than the capital of James’s principal rival in Paris, Laffitte. They even exceeded the capital of the Banque de France (around £3 million at this time). Surviving figures for the individual houses are patchy, especially before 1830. For the London house, ledgers survive from 1809 but there are no profit and loss accounts for the years before 1828. Illustration 10.vi gives the “bottom line” data for the period up until 1850: annual profits as a percentage of capital at the beginning of the year. A number of points stand out from these figures: firstly, the large fluctuations in performance, ranging from the very successful (1834), when profits were close to a quarter of capital, to the wholly disastrous (1847), when close to a third of the firm’s capital was lost. Averaged out, profits were in fact rather unremarkable, though this partly reflects the fact that all expenses were deducted before net profits were calculated, rather than being paid out of profits. The figure for profits (or losses) was merely added to (or deducted from) the previous year’s capital; a system quite unlike that used by the Rothschilds’ great rivals Barings, who tended to calculate gross profits, and to distribute these to the partners. Perhaps the biggest difference between the Rothschilds and their rivals was that the Rothschilds ploughed back their net profits, so that their capital tended to accumulate, while the Barings kept their capital more or less constant and sought to maximise the profits on which they could then live. Between 1829 and 1846, while the capital of N. M. Rothschild increased by 90 per cent, that of Barings increased by just 50 per cent.
The other house for which detailed accounts survive is the much smaller Naples house. Considering its size, the Naples house was singularly profitable, especially in the first decade of its existence. Its average annual profits were more than £30,000 between 1825 and 1829, at a time when its capital was little more than £130,000; and throughout the 1830s and 1840s its profits averaged around £20,000. Unlike the London and Paris houses, it appears never to have recorded a loss despite the financial crises of 1825, 1830 and 1836. Carl may have been regarded by contemporaries as the least gifted of the five brothers, and his letters intimate a certain dullness. Yet there can be no doubting his financial acumen.
There are, unfortunately, no complete data for the profits of the Paris, Frankfurt or Vienna houses in this period. In the French case, the only surviving figures are for the years 1824-28, and all they tell us is the extent of the damage done to James’s position by the crisis of 1825 (when his losses totalled no less than £356,000) and the speed with which he recovered from the setback (his profits in the succeeding two years were £44,000 and £124,000). However, it is possible to infer average annual profits for all the houses from the combined capital accounts (table 10b), though the different periods which elapsed between agreements make these a rather approximate guide to performance. These suggest—rather unexpectedly—that the London house was in fact the least economically successful of the three principal Rothschild houses: average annual profits were higher at both Frankfurt and Paris for the period 1818-44. Nathan’s brothers—and Amschel in particular—have often suffered in comparison with the man they regarded as their “commanding general”; but even in the period of Nathan’s dominance, the Frankfurt house was more profitable than the London house. The Vienna house too was highly profitable in view of its small capital base.
10.vi: N. M. Rothschild & Sons, annual profits as a percentage of capital, 1830-1849.
Table 10b: Average annual profits of the five Rothschild houses, 1818-1844 (£ thousand).
Source: As table 10a.
The question, of course, is whether it is legitimate to make such comparisons when the houses were still regarded by the partners as inseparably linked. The Rothschild correspondence indicates that the individual houses derived a substantial part of their profits from a collective strategy whose architect before 1836 was Nathan. There would have been no need for the brothers to write so frequently and in such detail to one another if this had not been the case. Nor would the fundamental principle of profit-sharing have lasted for long if the individual partners had not continued to feel dependent on one another. The balance sheets of the Naples house give a good indication of how inextricable the activities of the five houses were: between 1825 and 1850 the share of its assets which were monies owed to it by the other Rothschild houses was rarely less than 18 per cent and sometimes as much as 30 per cent. This seems to have been the case for all the houses. In 1828 some 31 per cent of the assets of the Paris house were credits to the other Rothschilds, mainly to New Court.
How exactly did the brothers make their money? Thus far, we have principally been concerned with the Rothschilds’ business in government bonds, as (to judge by their letters) this was the activity which interested them most in the period before 1836. It was also the activity which most impressed contemporaries, because of its obvious political implications. Table 10c provides figures for the total nominal value of the loans issued by the London and Frankfurt houses in the period (unfortunately, no lists of issues appear to exist for the other houses).
Table 10c: The nominal value of loans issued by the London and Frankfurt houses, 1820-1859 (by decade, £).
Sources: Ayer, Century of finance, pp. 16-81; Berghoeffer, Meyer Amschel, pp. 29-42, 206-28.
These figures confirm that the Rothschilds (and especially the London house) were throughout the period the dominant force in international bond issues. Between 1815 and 1859 the London house issued altogether fifty loans, primarily for governments, the nominal value of which was around £250 million—very roughly a tenth of total British overseas assets in the 1850s. By comparison, Baring Brothers issued just fourteen loans in the same period, to a nominal amount of £66 million. Table 10d shows the regional distribution of loans—including a small number of quite large private sector issues—in which the London house participated between 1818 and 1846. These figures show that the contemporary view of the Rothschilds as “bankers to the Holy Alliance” was exaggerated; the London house’s biggest clients were France and Britain, with Prussia, Russia and Austria some way behind.
Table 10d: Loans issued by the London house, 1818-1846 (by recipient).
Source: Ayer, Century of finance, pp. 14-42.
It is relatively easy to show the importance of government bonds in the balance sheets of the various houses. The earliest surviving balance sheet of the London house (that of 1828) reveals that a very large proportion of the bank’s assets—more than a quarter—were invested in British government bonds. The proportion rises to 37 per cent if its holdings of Danish government stock are added. In the same year, 35 per cent of the French house’s assets took the form of French 3 per cent rentes. The “state securities account” comprised exactly the same proportion of the Vienna house’s assets, suggesting some sort of rough Rothschild policy to keep the proportion of (supposedly) “gilt-edged” securities at around a third. However, it is much harder to compute the profits made from such issues. Commissions and other charges varied considerably from case to case, as we have seen; and some major issues actually lost large sums (the French loan of 1830, for example). In any case, much of the money which
the brothers made on the bond market came not from issuing new bonds, but from speculating in existing bonds. Here too precise figures are hard to come by. To judge by the records which have survived, accounts were made up primarily with a view to calculating the returns on specific lines of business or transactions and ensuring that there were no discrepancies between the various inter-Rothschild accounts. Like the ledgers of most nineteenth-century firms, the London house’s did not group its transactions according to type: purchases and sales of all kinds were logged as they occurred and then totted up at the end of the year. It would in theory be possible to add together the profits obtained from purchases and sales of government bonds, but it would be exceedingly laborious and it has not been attempted here. The Naples house had a “rentes account,” but it also maintained separate accounts for its dealings in other government securities—Neapolitan, Roman and so on. Because it constantly changed its half-yearly accounting conventions, creating new accounts as it went along, it is well-nigh impossible to make more than an impressionistic assessment of its activities. The most that can be said is that the lion’s share of its profits came from between five and ten joint accounts, some with other Rothschild houses, some with other Italian-based banks; from commissions charged on transactions for third parties; and from interest on various unspecified loans.
Of course, this would not matter if the Rothschilds had dealt only in government bonds. But their banking activities were in fact quite heterogeneous, and grew more so over time. Government finance was their first love. Of comparable importance, however, in terms of the volume of business, if not the profit-margins achievable, was the classic business of the London “merchant banker”: the acceptance of commercial bills or bills of exchange. In the words of the 1882 Bills of Exchange Act—which gave statutory precision to a practice dating back more than three centuries—a bill of exchange was “an unconditional order in writing addressed [and signed] by one person (the drawer) to another (the drawee) . . . requiring . . . the drawee, who when he signs it becomes the acceptor, to pay at a fixed . . . future date a sum . . . to . . . a specified person or to the bearer.” In other words, the seller of some goods would draw on the buyer in order to give him credit for a specific time (often three or four months), thus allowing him to put off payment until the goods had arrived and been sold on to a manufacturer or retailer. The role of the merchant banks was twofold: to act as a bill’s acceptor on behalf of a buyer (charging an acceptance commission) or to buy it from a drawer at a discount (charging interest). A discount house could also rediscount a bill by selling it to a central bank, for example, and adding its own signature or endorsement. The banker who accepted a bill was effectively “selling the use of [his] name,” that is, his reputation for creditworthiness.
The House of Rothschild, Volume 1 Page 46