The House of Rothschild, Volume 1

by Niall Ferguson

  It is also worth noting how much more sympathetically Nucingen is portrayed here, suggesting the influence of the growing friendship between Balzac and James. Nucingen knows he is making a fool of himself: “Hêdre hâmûreusse à mon hâche, cheu zai piène que rienne n’ai blis ritiquille; mai ké foullez-vû? za y êde!” (“Etre amoureux à mon âge, je sais bien que rien n’est plus ridicule; mais que voulez-vous? ça y est!”) And he manages to recover some dignity when she spurns his advances, writing her an elegant and sensitive letter—in perfect French.

  By contrast, Nucingen’s final appearances in Un Homme d’affaires (1845) and La Cousine Bette (1846) are brief: here he is merely the last resort of desperate borrowers like Maxime de Trailles, the Balzac-like wastrel Desroches and Baron Hulot, the poor Bonapartist functionary in need of a dowry for his daughter. By this time, the exigencies of his own financial position were plainly uppermost in the writer’s mind: the dedication of a book about disreputable creditors to James on the eve of Balzac’s own request for financial assistance is thus revealed as a characteristic joke. Even the sum of money which Hulot tries to borrow from Nucingen is similar to the amount Balzac borrowed from James in the same year La Cousine Bette was published. Historians are usually nervous of using literature as evidence; but when art so closely imitates life, and in doing so sheds so much light on the otherwise obscure private life of a man like James de Rothschild, it would be a pity to ignore it.

  THIRTEEN

  Quicksilver and Hickory (1834-1839)

  I simply can’t see why, when we ask you for the time being not to do something or other, then, without any particular reason, the very same thing happens, because everyone must know what is best for the place where he resides.

  —JAMES TO HIS ENGLISH NEPHEWS, OCTOBER 1836

  The Rothschild system of issuing and trading bonds for the European powers was immensely lucrative as well as giving the family real political leverage. Yet it had its limits. When the Rothschilds attempted to extend their geographical reach to new regions in the course of the 1830s, they encountered difficulties. With the benefit of hindsight, the historian can see that one of the greatest omissions of the period was the failure to establish a stable and reliable Rothschild base in the United States of America. However, to see why this did not happen it is necessary to unravel a complex story of trial and error which had its roots in the highly unstable finances of Spain and Portugal; for the route which led the Rothschilds to the Americas started here.

  Iberian Dilemmas

  While the rest of Europe had revolutions, it might be said, Iberia had dynastic civil wars. Superficially, there were ideological divisions, as elsewhere, between ultra-conservative clericals, moderate constitutional liberals and more radical democrats. Fundamentally, however, the politics of Spain and Portugal in the 1830s and the 1840s had more in common with the politics of the Wars of the Roses. From a banker’s point of view, there is nothing a priori wrong with civil war in a foreign country. Like any other kind of war, civil wars require money and with domestic tax systems in disarray that money usually has to be borrowed. Though they were more cautious than other bankers, the Rothschilds proved ready and willing to lend to whichever side they thought would win in both Portugal and Spain. Their principal concern in the first phase of this involvement was that other powers might become embroiled in the conflicts, leading to the general European war which was the Rothschilds’ recurrent nightmare. As it turned out, no such escalation occurred, though Britain, France and Austria all sought to interfere indirectly in the affairs of the Peninsula. The real difficulty was that, in the absence of decisive foreign intervention, the Iberian civil wars dragged on inconclusively. This meant that by the late 1830s the interest was no longer being paid on loans raised just a few years before. As a result, Spanish and Portuguese bonds performed the same role in the bond market of the 1830s as had been played by Latin American bonds in the 1820s: as James put it succinctly (and repeatedly), they were little better than “shit.”

  This resemblance was not coincidental. For earlier events in Latin America were not only responsible for sending inveterate troublemakers like Dom Pedro back to Europe; they also fundamentally weakened the fiscal systems of both Portugal and Spain, which had come to rely heavily on the revenues from their transatlantic empires. Portugal and Spain were thus not merely politically unstable; in many ways that was also true of France, where a similar kind of dynastic feud had seemed a possibility after 1830. The Iberian problem was one of chronic national insolvency. Trying to make money from two countries which recurrently teetered on the verge of bankruptcy proved much less easy than the more sanguine Rothschilds initially assumed.

  The Portuguese story is the less complex of the two; it also proved to be the less lucrative. We have already seen that Nathan had interested himself in the affairs of Portugal and her sister-kingdom Brazil in the 1820s, arranging loans for both, secure in the knowledge that this was a traditional British sphere of interest. In doing so, he had unwittingly been lending to both the combatants in the impending civil war: Dom Miguel, whose coup he had backed in 1828, and his brother Dom Pedro, the Emperor of Brazil and father of Maria II, the Queen of Portugal whom Miguel had overthrown. In April 1831 Pedro was forced to abdicate in Brazil in favour of his son; he at once set off for France, intent on restoring his daughter to power in Portugal. For no very good reason, French liberals (and some British Whigs) tended to assume that Pedro was a kindred spirit, casting Miguel as a kind of Portuguese Charles X. Pedro therefore had little difficulty in raising money in Paris and men in London, and by July 1832 was able to seize control of Oporto. However, in the absence of popular support it took him until May 1834 finally to secure Miguel’s surrender—a victory which he mainly owed to the assistance he received from the English sea captain Charles Napier. Four months later Pedro himself expired, having lived just long enough to restore his daughter to power.

  Yet that did not bring Portugal’s political troubles to an end. Finding Maria a suitable husband proved harder than expected when her first consort, the Duke of Leuchtenberg, died after just four months of marriage, and a replacement—Ferdinand of Saxe-Coburg, nephew of the Belgian King—was not found until 1836. More seriously, Maria’s supporters quickly split into two rival factions: moderate “Chartists” (loyal to the constitution of 1826) and more radical “Septembrists” (who looked further back to the more liberal 1822 version). Shortly after Maria’s marriage to Ferdinand, the latter faction forcibly seized power. The Chartists attempted to do the same in 1837 and succeeded five years later. In 1846 there was yet another revolution, which precipitated joint Anglo-Spanish intervention the following year.

  The Rothschilds watched the unfolding of the Portuguese civil war with mixed feelings, loath to miss out on any lucrative new business, but worried that the conflict might escalate. By 1832 James had begun tentatively to participate in the operations of the Spanish financier Juan Alvarez Mendizábal, who had issued a £2 million loan for Pedro in Paris the year before. This was a gamble, for although there was indirect British and French support for Pedro, Austrian-backed support for Miguel could not be ruled out. Moreover, Miguel was able to raise a 40 million franc loan in Paris that same year. This explains why James was so pessimistic about the “Portuguese rubbish” from the outset. His view was that only a guarantee from Britain and France would make a Portuguese loan into “a nice piece of business”; but this Palmerston (wisely) refused to give. It is therefore not unreasonable to conclude that, when he and Nathan issued a £4 million loan for the restored government of Maria II in 1835, they were consciously dealing in what might today be called “junk bonds.” For, even with Pedro dead and Miguel exiled, the likelihood of Portugal maintaining interest payments on these bonds was low. Thus James regarded those to whom he sold the bonds as, to put it mildly, naive. “We have a great many asses who have been buying this shit,” he candidly reported to Nathan in early April. The 3 per cent bonds—which the Rothschilds issued at
67.5—enjoyed a temporary vogue, but within a matter of months were sliding rapidly as political instability persisted in Lisbon. Within a year they had fallen to 55; and by 1839 they stood at just 25. James later explained the rationale of the Rothschild involvement: such bonds were “the only thing on which one can gamble and speculate, for what is there to gain from the French rentes? Nothing. So the world is now speculating on this shit. One can gamble with these but one can never hold on to them.” In other words, these high-yielding bonds were never seriously regarded as assets for long-term investors. They were mere speculative objects.

  The trouble with selling “rubbish” is that some naive investors—or unlucky speculators—will inevitably be left holding it when the interest ceases to be paid; and they are unlikely to think very highly of the original vendor. For the sake of their own reputation, and therefore their ability successfully to float future bond issues, it was in the Rothschilds’ interest to avoid a Portuguese default. As early as March 1835 James was nervously suggesting that the Rothschilds “should send someone over there [to Lisbon] two months before the interest falls due so as to assist the Government. We are too deeply involved in this matter not to try to render any assistance we can to these people.” By May it was obvious that even with a change of Finance Minister there was not going to be enough cash to pay the interest due that year. “I think that we will have to pay the interest,” he concluded gloomily. The disadvantage of this, however, was that bondholders would “get accustomed to the idea that you will [always] have to extend your helping hand, and in the end you will be unable to retreat.”

  As it turned out, however, Nathan’s plan for a further £1 million advance was rejected in favour of a more generous offer by Goldschmidt, prompting a wave of retaliatory selling by the Rothschild houses in London and Paris. “There is no occasion for our supporting the market now that others have interfered in the Portuguese affairs,” wrote Lionel angrily from his dying father’s bedside in Frankfurt. “We can job in and out and only study our own advantage.” James was beside himself at the conduct of the Lisbon government: “The miserable Portuguese Minister wants to cut the throat of his own credit so that one can’t tell the world with any degree of certainty that the interest will be paid, and so he makes it appear as if he wants to bring everything down.” “Your Portuguese are giving me a fever,” he wrote to London in December 1836. “Never before in my life has anything upset me so much. These people are nothing more than the scum of the earth.” The only aim now was to “persuade the public that these people have positively decided to ruin the credit and that we on our part have been doing everything in our power to prevent this.” “We have to get out of this shit as quickly as we can,” he reiterated a day later, “because we are dealing here with thoroughly disreputable people and with a minister who speculates on the demise of his own country.”

  Yet when the same problem arose in 1837 Lionel had no option but to offer once again to bail the government out: after all, the bonds on which the interest was due were still the bonds which had been issued by Rothschilds two years before. James too could see no alternative but to offer another short-term advance, especially now that the Rothschilds’ old friends the Saxe-Coburgs had become involved through Ferdinand’s marriage to Maria. The strategy in 1837 was to give Lisbon one final injection of cash “to prevent it being said that a Rothschild loan was not paid,” and then to pull out. Even this attempt at damage-limitation misfired, leading to a protracted and highly embarrassing legal wrangle with the Portuguese government. 1 Lionel sought to rationalise what had happened: Portuguese bonds might have fallen from 75 to 25, but “still our name is not lost.” His uncle was unconvinced. “I don’t wish to speculate with any money whatsoever on this muck” was more or less his last word on the subject of Portugal. Subsequent attempts to involve the Rothschilds in the country’s finances were firmly rebuffed. Nor did their rivals let them forget the débâcle. When Barings were approached for a loan in 1846, one of the partners argued strongly against any involvement on the grounds that “Portuguese credit has been so tainted by the mismanagement of the Jews and Jobbers . . . that it would not be a very desirable connexion for any House wishing to stand well with the public.”

  Spain was politically not so very different, though economically she had much more to offer than Portugal. Here too the source of conflict was dynastic: did Salic law—giving preference to the male line—apply in Spain, in which case Ferdinand VII’s brother Carlos was his rightful heir; or should the throne pass to his only child, Isabella, born in 1830? Technically, Isabella’s case was the stronger: although Salic law had been introduced in 1713, it had been repealed—albeit secretly—by Carlos IV in the Pragmatic Sanction of 1789, and Ferdinand took the precaution of publi cising this fact five months before his daughter’s birth. On the other hand, when he fell ill in 1832, it became apparent that his brother Carlos had enough might (if not right) on his side to challenge Isabella’s claim, forcing her mother Maria Christina into temporarily revoking the Pragmatic Sanction. Ferdinand’s unexpected recovery forced Carlos to flee to Portugal, but civil war was now more or less inevitable. When the king finally died in September 1833, Carlos revealed that he had no intention of recognising Maria Christina’s regency, returning to Spain to mobilise his supporters ten months later. As in Portugal, the dynastic dispute had an ideological significance: Carlos was the Spanish Dom Miguel, the reactionary “wicked uncle,” while his sister-in-law Christina (after an initial dalliance with reforming absolutism in the person of Cea Bermudez) allied herself with “moderate” liberals like Martinez de la Rosa, and therefore enjoyed conditional support from the more “progressive” democrats who harked back to the revolution of 1820. The war also had a regional dimension: while Carlism was strongest in the countryside of Navarre and the Basque provinces, Isabella’s cause appealed more to the bureaucrats of Madrid and the financiers of the country’s main commercial centres.

  There were four reasons for offering financial support to the government of the young Queen. As in the case of Portugal, there were the short-run profits to be made from selling new, high yield bonds to investors bored with increasingly predictable consols and rentes; but of course such bonds could just as easily be issued for Don Carlos. The decision to plump for Isabella was partly diplomatic: the Quadruple Alliance of 1834 between Britain, Portugal, Spain and (later) France seemed to signal unequivocal foreign support for Isabella’s regime from the two powers who traditionally wielded most influence in the Peninsula. More importantly, however, Spain (unlike Portugal) had a particular kind of asset which proved irresistibly attractive to the Rothschilds as a security for any loans: the mercury mines of Almadén to the west of Ciudad Real, one of only two major sources of the metal in the world at this time. For over three centuries, the mines had played a pivotal role in the international monetary system because of the use of mercury (or “quicksilver” as the Rothschilds preferred to call it) in the refining of silver and gold in Latin America. This in itself made them attractive to bankers. The crucial point was that the Spanish government traditionally sold the rights to work the mines and to market their output to private companies, most famously mortgaging them in the sixteenth century to the Augsburg bankers, the Fuggers. Decisively, these mines were controlled by Isabella’s forces for most of the civil war. Finally, despite the dramatic contraction of her American empire, Spain still had lucrative commercial ties with her remaining colonies, notably Cuba and the Philippines; the former in particular was attractive to the Rothschilds because of its importance in the tobacco trade.

  There were also, on the other hand, three difficulties attendant on any financial involvement with Spain. Firstly, and most obviously, there was the confusion caused by the country’s protracted and inconclusive civil war. It was not until 1839—six years after Ferdinand’s death—that the Carlist forces were effectively defeated. During that period, there were repeated changes of government in Madrid, as “Moderados” and “Progresi
stas” (to give the factions their later names) vied for control, the latter pressing for a more parliamentary and anti-clerical regime than Maria Christina had ever intended. Matters were further complicated by the growth in political influence of the leading military commanders; indeed it was one of these, General Baldomero Espartero, who, with Progresista support, forced Maria Christina to abdicate as Regent just a year after leading her forces to victory. Espartero in turn was ousted in 1843 and replaced a year later by his rival General Narváez, who presided over what amounted to a decade of Moderado hegemony until yet another revolution in 1854.

  The second argument against involvement in this unstable country was furnished by the bonds issued under the liberal regime of the early 1820s, the so-called “Cortes” (that is, parliament) bonds, which King Ferdinand had refused to honour following the suppression of the revolution. A law of 1831 formally “deferred” interest payments on these bonds for forty years, but this was scant consolation to the investors who had bought them; and the English holders of the Cortes bonds were determined to oppose any further issues of Spanish paper on the London stock exchange until they had secured better terms. Events were to reveal the extreme difficulty of re-establishing Spanish credit internationally with memories of default so fresh. Finally, the support of the so-called “Northern courts”—Austria, Russia and Prussia—for the Carlist cause proved to be stronger than their support for Dom Miguel. Even if he could not contemplate direct military intervention, Metternich proved able to exert considerable diplomatic influence over events in Spain.

  For all these reasons, the Rothschilds were initially reluctant to act alone in Spain. As early as December 1830 James and Nathan entered a kind of “sleeping” partnership (in return for a 2.5 per cent commission on sales) with the company which leased the Almadén mines in that year. This was intended as a first step towards greater involvement. “When the time comes that the Government wants to farm it out,” James observed to his brother, “you will then be well placed to know exactly who all the customers are and how much one can sell and you will then find it that much easier to submit a proposal for the whole sum.” More problematically, as it proved, James committed the Rothschilds to share all Spanish financial business with a consortium of Paris bankers led by the Spaniard Aguado. This provided a degree of camouflage for speculative dealings in existing Spanish paper (for the Cortes bonds continued to be traded, though at a price of around 30); but it placed awkward restrictions on Rothschild room for manoeuvre when new business had to be discussed with the Spanish government. By the summer of 1833, when a major tobacco deal came to nothing, Lionel was already finding the agreement with Aguado and his associates more a hindrance than a help.