The House of Rothschild, Volume 1

by Niall Ferguson

  Such buying and selling of commercial bills was one of Nathan Rothschild’s principal activities. Its importance can be inferred, again, from the surviving balance sheets: in 1828 “bills receivable” accounted for a quarter of the London house’s assets; “bills payable” for 5 per cent of its liabilities. Such business was less important to the continental houses, reflecting the greater volume of international trade conducted through London in the nineteenth century. As Nathan put it in his evidence to the Bank Committee in 1832, “this country in general is the Bank for the whole world . . . all transactions in India, in China, in Germany, in the whole world, are guided here, and settled through this country.” Nevertheless, the other Rothschild houses still played an important subsidiary role in his operations, as Nathan explained:

  I buy on the Exchange bills drawn from Liverpool, Manchester, New-castle and other places, and which come to every banker and merchant in London. I purchase £6,000 or £7,000, and sometimes £10,000 of those bills in a week, and I send them to the Continent to my houses; my houses purchase against them bills upon this country which are purchases for wine, wool and other commodities . . . [I]f there be not a sufficient supply of bills abroad on this country we are obliged to get gold from Paris, Hamburg and elsewhere.

  This was a reasonably accurate summary of what went on. The Rothschilds did not seek to make their money from the commissions they charged for accepting bills (indeed, Nathan was well known for charging half a per cent less than other firms); rather, the aim was to profit from exchange rate differentials between the various European markets. The Rothschild correspondence constantly alludes to such arbitrage transactions: was the price of “London” (short-hand for bills on London) high enough in Paris or Frankfurt to justify Nathan sending a large amount to James or Amschel? “And now, dear Nathan,” wrote James in a typical letter of 1832,

  I am starting once again to busy myself with the bills of exchange business, and beg you to evaluate [precisely] what you are sending us. We are buying London here at 25.65 francs and 3 per cent [which] is equal to 25.84½ francs and you send us £21,000 Parisian at 26.07½ [and] 4 per cent, which is equal to 25.79, that is a loss of a fifth without the brokerage. Well, I am only bringing this to your attention because we don’t want to operate at a loss when dealing with the bills of exchange.

  This gives a flavour of the complex calculations involved, and the very narrow differentials the brothers sought to exploit. As a multinational partnership, they were uniquely positioned to do such business.

  Yet the Rothschilds were not as dominant in the market for bills as they were in the market for bonds. In his influential survey of the City, Lombard Street, Walter Bagehot called them “the greatest . . . of the foreign bill-brokers”; but this accolade properly belonged to the Barings. In 1825 Nathan’s acceptances totalled £300,000 compared with £520,000 for Baring Brothers. Twenty-five years later, acceptances at New Court had risen to £540,000, but the figure for the Barings was £1.9 million; and the gap widened still further in the second half of the century, when new-comers like the Kleinworts made the running. Apart from the obvious fact that the Rothschilds put government finance first—it is almost invariably discussed before commercial business in the brothers’ private correspondence—this primarily reflected the fact that the greater part of the bills business was generated by transatlantic trade, rather than by trade between Britain and continental Europe, which the Rothschilds were better placed to finance. As we shall see, there were attempts to increase the Rothschild share of the American market, but they were only fitful; throughout the first half of the nineteenth century, the Barings had the upper hand there.

  Bill-broking led naturally into numerous connected avenues of activity. One of the most important of these, from an early date, was the international bullion market. As Nathan stated in his 1832 testimony, there was often a gap between the total volume of bills representing British imports and those representing exports; in the terms of contemporary classical economics, a trade deficit or surplus automatically necessitated a movement of specie out of or into London provided it was big enough to pay the cost of shipping and insuring specie, as well as melting and re-minting if necessary. When the exchange rate reached the so-called “gold points” it paid to import or export gold (or silver in some countries). For the Rothschilds, transfers of gold from England to the continent had been a vital stepping stone towards direct involvement in English war finance before 1815, and the brothers never lost their interest in the bullion business, doing substantial amounts of business with the Bank of England and the Banque de France. This was what Nathan alluded to when he loftily told a Hamburg house: “My business . . . consists entirely in Government transactions & Bank operations.” Here too complex calculations were involved, especially when coins were being melted down into bars to be re-minted in another market. “And now, dear Nathan,” wrote James in another typical letter, “[when thinking of buying] silver at 11 grain gold, where you can consider the rest as profit, a lot will depend on the assay, for ½ grain is equivalent to ⅞ per cent. Well, at 591/8, this is equivalent to 25.82 francs, and one has the chance here to make a profit when it is being assayed, and I therefore strongly urge you not to let the opportunity pass by.” “The van loaded with silver ingots” which blocked Prince Pückler’s access to New Court was no rare sight: to judge by the brothers’ letters, consignments of bullion worth tens of thousands of pounds regularly passed between Paris and London.

  Another related field of activity was direct involvement in commodity trade itself. Buying and selling goods rather than paper had, of course, been an integral part of Mayer Amschel’s business, and Nathan himself had begun his career in Britain as a textile merchant, later branching out into “colonial goods.” However, to judge by the partners’ correspondence, the Rothschilds’ interest in such business appears to have dwindled in the 1820s, and it was not until after 1830 that it revived. Unlike the Barings, who dealt in a wide range of traded goods, the Rothschilds preferred to specialise, aiming to establish a dominant role in a select number of markets. The key commodities which attracted their attention were cotton, tobacco, sugar (primarily from America and the Caribbean), copper (from Russia), and, most importantly, mercury (from Spain). More will be said about these below. Very occasionally they dabbled in other goods: iron, wool and wine, for example. The hostile cartoonist who portrayed “Blauschild” as a travelling salesman doing business “in all branches of commerce” was therefore in error: the Rothschilds were never jacks-of-all-trades (see illustration 10.vii). To give one example: although their relatives the Worms brothers established a tea plantation in Ceylon—which they even named “Rothschild”—the bank never seriously involved itself in the tea trade.

  The final area of business which the Rothschilds entered as a result of their mercantile activities was insurance. The first half of the nineteenth century saw a boom in insurance, with numerous companies being founded in London and elsewhere. Nathan’s involvement in the founding of the Alliance Assurance Company in 1824—the only joint-stock company in which he ever took a serious interest—has been variously explained, but never satisfactorily. According to the company’s official history, it was the result of a casual meeting with his brother-in-law Moses Montefiore; others have suggested that the aim was partly to provide employment as an actuary for their relative Benjamin Gompertz, an accomplished mathematician. A third hypothesis advanced is that the existing insurance companies had been discriminating against the Jewish business community. In fact, the Rothschilds had been interested in insurance for some years, understandably in view of the high premiums they themselves had been obliged to pay to insure shipments to the continent before 1815. As early as 1817 James was able to report “quite nice profits” from an unidentified French insurance company. In 1823 a further impetus was provided by a request for assistance from the Duke of Saxe-Coburg, whose applications for a new life insurance policy had been rejected by two existing London companies, in
cluding the recently founded Guardian. Above all, Nathan seems to have wanted to break the cartel of Lloyd’s (located directly above him on the first floor of the Royal Exchange), the London Assurance and the Royal Exchange which monopolised marine insurance in London. Just days after the “Alliance British and Foreign Life and Fire Assurance Company” had been established with a capital of £5 million, the MP Thomas Fowell Buxton, one of the new company’s auditors, introduced a bill into the House of Commons to end the monopoly of marine insurance. At the same time, Nathan sought to enlist the support of his old friend Herries (then Financial Secretary to the Treasury). “The object of this Society,” he wrote, adopting the characteristic puffing rhetoric of the 1820s joint stock bubble,

  is to promote all kinds of national industry, by affording facilities in the advancement of Capital, and to protect Commercial men and society in general by granting insurancies [sic] on shipping and every species of property exposed to risks. There are other ends, equally salutary, towards which the views of the Company will be directed, all tending to give an impetus to manufactures, and to attract and retain in their ports every branch of foreign commerce.

  This is . . . the policy . . . of the whole European Continent at the present moment: everywhere, efforts are [afoot] to introduce a spirit of commercial enterprise, to revive trade where it has languished, and to discover new channels in which it may be directed . . . [I] request you will bring this subject before the consideration of my Lord Liverpool, who will no doubt perceive in these facts additional grounds for persevering in that liberal principle upon which His Majesty’s Government has acted, by removing every obstacle in the way of an open, free and unrestricted trade.

  10.vii: I. Nussgieg, after G. Geissler, Der Musterreiter (1825).

  This was a well-judged appeal to the economic liberalism of the government; but then came the crux of the matter. According to Nathan, the existing marine insurance companies lacked:

  that energy and those liberal extended views which are necessary, at the present day, to retain the advantages which they have hitherto monopolised, and I am sure I shall be borne out in the assertion that if insurancies are to be tied up by their old fashioned modes of thinking and acting, Establishments of a similar nature will arise in every part of the Continent, and will eventually wrest from their hands the business which they now conduct exclusively.

  The government was evidently persuaded, for the bill received the royal assent in June. However, one of the new company’s shareholders (who was also an underwriter at Lloyd’s) managed to obtain an injunction to restrain the Alliance from becoming involved in marine insurance on the ground that this went beyond its original objects. As a result, a second company had to be created, the “Alliance Marine Assurance Company,” also with capital of £5 million.

  The Rothschilds’ new incarnation as insurers was initially greeted with some public scepticism. A contemporary cartoon (A New Court Fire Screen, by “an Amateur”) depicts a stagecoach loaded with a group of country investors and their bags of money drawing up in front of the “Hollow Alliance Fire and Life Preserving Office” (see illustration 10.viii). The office has three entrances: one marked “German Porter’s Lodge,” one marked “English Porter’s Lodge” and one in the middle, in front of which three men (Rothschild, Montefiore and Gompertz) converse in French. Nathan declares, “Ma fois, c’est entre nous,” Montefiore replies, “C’est bien fait pour mon beau père,” and Gompertz mutters, “Experience makes men wiser.” Another sign to the left reads “No Holidays except Dog Days and the Fifth of November,” while on the other side the office hours are stated: “From Sun rise to Moonshine.” Above the middle door there is a notice: “No Persons to be admitted but those with empty heads and full pockets.” The English porter tells the newly arrived investors: “No! All full at a premium,” but his German counterpart cries, “No! No! Open your door in order to get plenty of room to take in our Gentry Friends.”

  Yet this cynical assessment was unfounded. Unlike so many of the joint-stock companies of the period, the Alliance was no mere vehicle for mulcting naive investors, but a securely founded enterprise with a long and prosperous future ahead of it. After two years at 4 New Court, next door to Rothschilds, it moved to Bartholomew Lane. Nor was this the only Rothschild foray into insurance. In 1839 they became involved (albeit less directly) in the rapidly developing Rhineland market, lending their support to the Colonia fire insurance company set up by the Oppenheims and others. This connection survived the turbulent events of the 1840s (in particular the great Hamburg fire of 1842, which all but exhausted the company’s resources), and in 1852 the London, Frankfurt and Paris houses were involved again as major shareholders in the Cologne Reinsurance Society.

  10.viii: “An Amateur,” A NEW COURT FIRE SCREEN (1824), published by H. Fores.

  The Rothschild Network

  The ever-increasing volume of the Rothschilds’ business, the diversification of their financial activities and the expanding geographical range of their interests inevitably exceeded the capacities of five brothers. It was usually possible for one of the partners to make personal visits to Brussels, the Hague, Berlin or Madrid when major government loans were being negotiated. But if they wished to conduct regular business in those capitals, other arrangements had to be made. Similarly, buying and selling commodities like cotton, tobacco, sugar, copper and mercury were impossible without effective and reliable representation in the key markets: New York, New Orleans, Havana, St Petersburg and Madrid. Throughout the 1820s and 1830s it was necessary not only to expand the number of partners by initiating the new generation into the management of the five houses, but also to increase the number of clerks in the five offices and to establish a select group of salaried agents employed to take care of the bank’s interests in such new markets. Radiating out from London, Paris, Frankfurt, Vienna and Naples, the lines of communication with these agents formed a complex new network, greatly increasing the volume of correspondence, but also increasing the volume of business which could be done in the name of Rothschild. Nor was this network of formal influence all; of comparable importance was the larger but looser network of links to other banks, as well as to stockbrokers, central banks and financial newspapers. If every individual or firm which conducted regular correspondence with the Rothschilds is counted as a part of their network, then it was immense indeed.

  The expansion of the partnership to include the sons of Salomon, Nathan, Carl and finally James was achieved with relatively little friction. The eldest members of the next generation—Anselm and Lionel—seem to have accepted without reservation their hereditary vocation, passing without complaint through the successive stages of a Rothschild apprenticeship: work in the paternal house, then one or more stints in an uncle’s house and finally a solo foreign mission. Anselm was formally made a partner in 1826; but it was not until 1830 that the brothers had sufficient confidence to entrust him with sensitive negotiations in Berlin, and even then he was carefully coached beforehand by his anxious father, who gave him the classic Rothschild advice to “listen to everything and say little in reply”:

  You are now the plenipotentiary of all the brothers . . . and in the same way all the brothers will [have to] approve everything, as fundamentally the business entails a considerable risk, so do not write too little . . . and be hard-working and busy and in all these undertakings put your reliance in the Almighty, who will give you luck and His blessing.

  In fact, it was not long before Anselm had the self-confidence to begin asserting his notionally equal authority as a partner. Within a year he felt sure enough of himself to criticise his uncles’ investment strategy following the July Revolution, and James was soon asking for his assistance in Paris “as he really has character.” This was perceptive: when the next and far greater revolutionary crisis swept across Europe, Anselm would play a decisive role in limiting the damage to the five houses, even at the expense of his own father’s feelings.

  Nathan’s eldest
son Lionel also passed through his apprenticeship years with flying colours. In 1828 he was formally “initiated into the business” when he was appointed “Lieutenant General” while Nathan travelled to Frankfurt to meet his brothers. “You are now the General all on your own,” wrote James, offering avuncular encouragement, “and you will no doubt attend to the business very nicely.” “Make some nice business deals, like a man,” he added a few days later. “Show that you are a clever and good businessman.” Three years later, as he struggled to remain afloat in the wake of the 1830 revolution, James’s tone was altogether less patronising: