The culmination of this feud came in 1839, when the Bank of England turned to the Banque de France for assistance in replenishing its reserve, now reduced by the American crisis to £3.7 million. When he heard that the Governor of the Banque, comte d’Argout, was offering assistance, James was initially wholly opposed:
The French Bank has already been trying for a long time to reach an understanding with the English because, purely out of a sense of pride, they want to be able to claim that England is in debt to them, but where would things be if, God forbid, war were to break out? What would happen if France were to require money? Would the English Bank then open its coffers and come to the aid of the French? I read in the newspapers that the two Banks are trying to reach an understanding and that is why I am writing to you about this matter. Our own interests are very much against this scheme succeeding and we must therefore do everything we can to frustrate its success.
Despite the entreaties of the Banque’s Deputy Governor “that a House like ours which has rendered eminent service to the Bank of England ought to take part in the intended operation,” James and Anselm were unyielding. And to reinforce the resolve of his cousins in London, Anselm added an intimidating postscript:
Do not take any rash step in a large operation. Your mother tells me that Herries told your good father in her presence to mind and not trust the Bank without any guarantees . . . as the Bank being involved in difficulties may stop suddenly. Mind, you are not your good father and do not have his influence, and he was capable of acting in other ways than prudence would direct you.
The point was echoed by Hannah herself a few days later: “I would not advance any thing to the Bank without having Exchequer Bills or any other Government security for it is absolutely necessary to be well prepared and to have a sufficient supply of available property. I do not forget a former event when Herries was very apprehensive of a stoppage of the Bank.”
Did the Rothschilds really believe that the Bank of England might be about to suspend payments? It seems unlikely. What was really at issue was whether the Banque and Bank between them could resolve a monetary crisis without recourse to Rothschilds. However, if James thought a Rothschild boycott would suffice to undermine the agreement reached between Curtis and d’Argout, he was badly mistaken. Realising that the deal was unstoppable and that the profits would be substantial, he was forced to execute an abrupt volte-face, now resolving “to go into the business with the Bank as far as I possibly can.” He had left it too late, and the business was entrusted to Barings and a consortium of Paris houses.5 This was the last straw for James:
[In 1825] we arranged for such large quantities of gold to be brought in and thereby saved the Bank, and now it is Baring who is the recipient of everything. The Bank should at least share [the business] out . . . so that the business is properly distributed . . . You have no other defender at the Bank than that man Curtis who is a two-faced scoundrel . . . If gold should go out, and it is no different to Paris, then I will most certainly give preference to gold and [this time] I won’t say, “I don’t want to do it because of the Bank.” No! On the one hand I will make it clear that if we have an interest in the deal we will do everything to be of service to the Bank but on the other hand they will treat us with respect . . . Only if we engage in a lot of wheeling and dealing can we stay in the public eye and make ourselves an object of fear. Baring can’t say, “I won’t give Rothschild anything.”
This, however, was bluster. Although James talked of spoiling the market for the bills on London Baring would need to buy, he knew full well that, with the Bank of England as Baring’s client, “everyone will therefore lick his backside to get the business.” There was no realistic way of starting a “war with the Bank, at least not for the time being,” because, as he had to admit, “they are stronger than us.” All he could do was ruefully assess what had gone wrong and fantasise about revenge:
As far as the Bank of England is concerned, when the time comes and it is in our power to do so then we can show them that it is a lot better to maintain friendly relations with us. I don’t know whether I should not perhaps write to Curtis that we would prefer not to renew the £5,000 next time round [possibly a reference to a private loan to Curtis]. This will need some very careful thought given to it for it will doubtless result in him bearing an enormous grudge against us. Indeed, over the recent past he has not shown himself to have been too great a friend of ours and had it not been for the English House I would not have cared the least for his friendship . . . [I]t would perhaps have been smarter if at the time we had given him a small share of the commission from the Bank and this would have been a lot better than everything else. The man is a businessman just like us and purely out of a sense of friendship people don’t always treat us preferentially.
Although there were half-hearted attempts to re-establish links towards the end of the year, the damage had been done. “I am not prepared to run after the Deputy Governor and lick his backside,” declared James as the negotiations over the BUS dragged on. In 1843, after a period of more or less frozen relations, Lionel closed the Rothschild account at the Bank of England.
In truth, the row had been allowed to grow out of all proportion: as Nat sensibly observed in its aftermath, “I think the only advantage of a [central] bank is in being able to get out money whenever you want it & that it is folly to care about what people say.” In his determination to get the better of Baring and to establish the Rothschilds in a pre-eminent position in the United States, James had lost sight of that. The net result of his enthusiasm for America—an enthusiasm his nephews had never wholly shared—had been a large amount of bad debts from the defunct Bank of the United States; and a comparable quantity of bad feeling at the Bank of England.
FOURTEEN
Between Retrenchment and Rearmament (1840)
Monsieur Rothschild knows Europe prince by prince and the bourse courtier by courtier. He carries all their bank balances in his head, those of the courtiers as well as those of the kings; he can tell them how they stand without consulting his books. He says to one such: “Your account will go into the red if you appoint that minister.” “
—MICHELET
In the troubled years immediately after the 1830 revolution, James and his brothers had constantly urged the great powers to avoid war. To say that they were successful in this would be, as we have seen, to exaggerate their influence over great power diplomacy; nevertheless, the fact remains that the Rothschilds got what they wanted: peace. Yet there was a fundamental paradox at the heart of Rothschild pacifism. For governments which heeded their advice and avoided international confrontation were in a position to curtail their military expenditures—and therefore to dispense with the need for new loans. This meant that in the years after 1833 all the major powers effectively ceased to be Rothschild clients. Peace seemed to be making the five houses redundant.
This was especially obvious in Prussia, where the need for new loans had more or less been eliminated. With revenues rising from the new Customs Union (Zollverein) founded in 1834, and expenditure static or falling, Prussia was able to halve the proportion of total expenditure which went on debt service from 22 per cent in 1821 to 11 per cent in 1850. Having been more than three times the size of total annual revenue, public debt was just twice as much by mid century. Thus, when negotiations resumed in 1844 to complete the process of converting the old 1818 sterling loan into lower-interest, thaler-denominated bonds, Rothschild hopes that this might pave the way to a new loan were unrealistic. Their old friend Rother no longer needed them.
In Britain too, the period before 1848 saw public borrowing dwindle to nothing. The 1835 loan to compensate the slave-owners in the West Indies was the last major loan issued by a British government before the Crimean War. This reflected above all the liberal reformation of British public finances associated with the career of Sir Robert Peel as Conservative leader. In the years after 1835, the Whig government came under scathing attack from Peel for
running what were, in view of the economic circumstances of the mid-1830s, very trifling deficits. Altogether in the five years 1836 to 1841 the government’s net borrowing came to around £4 million. However, there was a hand-to-mouth quality to the way this was done which strengthened Peel’s case, as did the fact that much of the excess of expenditure over receipts could be blamed on a variety of overseas “adventures.” The 1839 funding operation involving £5 million of exchequer bills, which the London Rothschilds happily monopolised, was a case in point. Peel’s remedy on coming to power after his sweeping election victory in 1841 was the product of two decades of reflection on the fiscal and monetary implications of liberal doctrine, and had four aspects. Firstly, and most conventionally, he carried out a conversion operation, reducing the interest on £250 million of stock from 3.5 to 3.25 per cent. Secondly, and unprece dentedly, he secured the reintroduction of income tax (at a flat rate of 7d in the pound on incomes above £150), hitherto regarded as a wartime expedient. Thirdly, developing a conception of monetary policy which dated back to the 1819 committee he himself had chaired, he redrafted the Bank of England’s Charter in an effort to perfect the working of the bullionist system. Finally, following the practice initiated by Huskisson in the 1820s and in conformity with the classical economists’ principle of laissez-faire, he stepped up the pace of trade liberalisation, reducing the number of duties on imports. Altogether 605 import duties were repealed between 1842 and 1846 and a further 1,035 were reduced. The logical culmination of this process was the repeal of the Corn Laws, a step which the majority of Peel’s own backbenchers, with their pronounced agrarian interests, regarded as a betrayal of commitments made by them to their rural constituents during the 1841 election campaign.
With hindsight, this programme of reforms was less coherent than it appeared to Peel at the time. Quite apart from its politically self-destructive quality (by no means unique in nineteenth-century British history), its economic consequences were far from comfortable, even by the standards of what has been called the “Age of Atonement.” Theoretically, lower import duties, by increasing the volume of trade, were supposed to generate additional income. But this was unlikely to happen under the depressed conditions of the 1840s, which the Bank Charter Act tended to aggravate by restricting domestic banknote circulation as the Bank of England’s gold reserve declined. As a result, the income tax—supposedly a temporary measure—soon began to look more like a permanent fact of life, even if Peel’s ideological heir, Gladstone, never quite gave up hope of doing away with it. Nor was Peel able to set the nation on the course of debt redemption which he had intended: it was not until 1844-5 that the government was able to eliminate the deficit, and it proved possible to run surpluses for just three consecutive years before the 1847-8 crisis put the government back in the red. Nevertheless, there was no denying the “soundness” of Peelite finance at the time: indeed, it set the benchmark of fiscal and monetary orthodoxy for the rest of the nineteenth century. The price of 3 per cent consols rose from 87 in October 1841 to 101 just over three years later, a clear indication of City approval.
It was still possible, on the other hand, for bankers to grumble about the medicine they were being given, even when they knew it was doing the nation’s finances good. It is significant in this context that, as early as 1830, Peel had conceived a revived income tax as a way of “reach[ing] such men as Baring, his [Peel’s] father, Rothschild, and others, as well as absentees [from] Ireland . . . to reconcile the lower with the higher classes and to diminish the burthen of taxation on the poor man.” The Rothschilds were less than pleased when they were duly “reached” in 1842. Of course, they had other reasons for feeling hostile to Peel’s government. Not only were the Tories opposed to Jewish emancipation, but the advent of a Tory ministry threatened to revive the possibility of an Anglo-Russian alliance against liberal France. Still, Rothschild opposition to Peel’s fiscal policy was pronounced from the outset, and the main reason seems to have been the income tax.
While Nat could see the advantages of balancing the budget, and rightly foresaw the rise in consols which would follow it, he disliked the means Peel had adopted. He anticipated practical difficulties in assessment, for example. “How will it be possible,” he mused shortly after Peel’s Chancellor Goulborn had unveiled his first budget, “for the tax collectors to ascertain the real incomes of merchants & bankers who by and large do not know themselves what they can term their income until their balances are made?” A year later he candidly asked his brothers whether, in preparing their tax return, “you value all the stock at the market price and add the increased price to your profit or whether you take unrealized stock at the valuation of last year & pay only upon realized profits & real income?”—a question which reveals some of the difficulties inherent in taxing men like the Rothschilds, whose approach to accounting had always been quite cavalier. “It is a most disagreeable business with yr stinking tax gentlemen,” he wrote in early 1844, “& particularly if you have to show yr books to the commissioners—let me know how yr balance is, I recommend your taking no profit in the account upon unsold stock.”
This is not to suggest that the Rothschilds contemplated tax evasion: on the contrary, Nat advised his brothers “most strongly to give [the Commissioners of the Income Tax] an exact amount of the profits . . . a few hundred pounds more or less [in] charges is of little consequence, whilst it would be terribly disagreeable to be fined or even blamed by the gents in offices.” They were only too well aware that “the amount in question” would be one “of serious import to the Revenue.” Rather, their anxieties related to the possible unintended side-effects of the new tax. Their biggest concern was that, if earnings from foreign investments were taxed, bondholders would switch to domestic investments—a worrying prospect for a bank which specialised in capital export. “I think my dear Lionel,” Nat urged from Paris, “you ought to make strong representations to the government about charging the income tax upon all coupons of foreign bonds paid in London . . . it is a great pity & will in a good measure stop business.” At the very least, the fact that British (but not foreign) holders henceforth paid tax on their income from foreign bonds seemed likely to tempt some clients to do business through the Rothschilds under bogus foreign names. The advent of income tax—a model which James feared would soon be adopted in other countries—seemed to herald an end to the golden age when governments had borrowed from capitalists like the Rothschilds and their clients, rather than taxing them.
Even in Austria and France, where such an overhaul of the fiscal system was only a remote possibility, the years from 1834 to 1841 were relatively lean for the Rothschilds. In Austria, public spending remained more or less constant and there were no new loans. It was even possible to repay the “fortress money” which had been borrowed from the Rothschilds in the name of the German Confederation in 1831. The same was true in France: although the July Monarchy experimented with public works schemes, these were financed out of taxation before 1841. Indeed, total expenditure was slightly lower in 1839 than it had been in 1831 and the national debt was actually reduced by 169 million francs. The most Molé could offer was yet another conversion, an operation which James regarded with little enthusiasm in the light of past experience.
The financial position of Russia was altogether different, though the net effect was essentially the same from the Rothschilds’ point of view. Russian public spending continued to rise in nominal terms from 1833 until 1839, but this was to some extent a monetary phenomenon as recurrent deficits were financed by the printing of paper roubles. The resulting inflation was halted—albeit temporarily—by Kankrin’s reforms of the currency in 1839 and 1843, which replaced the paper rouble with a new “hard” rouble backed by a gold and silver reserve. This reform raised the possibility of a stabilisation loan to establish the new currency’s bullion reserve. James eagerly proposed floating such a loan simultaneously in London and Paris. “It should not be too difficult to impress upon the Russian Gov
ernment the advantage of this,” he wrote revealingly,
not only because it will enhance their credit but also because it is in their own best interest to ensure that all the wealthy people [in England and France] have a substantial investment in Russia and would suffer a financial loss if ever such an unfortunate idea as to march into Russia and wage war or to castigate the Russian state, were to be implemented . . . I am extremely keen for this deal to succeed and not because of the profit we stand to make but rather because I want our House to resume the relationship we had with Russia.
Salomon wholeheartedly agreed. A loan to Russia would, he argued, be “a very desirable . . . even a very brilliant deal”: “Quite apart from the pecuniary returns which it would bring, such a loan would be of great importance for us, in that a new, close relationship with Russia would bring us back on top with all the [great powers?] in Europe, and a loan with Russia is always good for the morale of our house.” Amschel echoed this sentiment. But not for the first time Rothschild efforts to supplant the traditional dominance of Hope & Co. in St Petersburg came to nothing. The younger Rothschilds—and particularly those in London—evidently had their doubts about the project, proposing terms which struck Salomon as excessively harsh:
For Russian 3 per cent paper you offer 70, less commission of 2 per cent makes 68! Is that a reasonable price, when you consider that . . . Austrian 3 per cents [stand at] 81 and Belgian 3 per cents [at] 71? When the bonds of a state which has scarcely emerged from revolution are valued at [such] prices? We must fear with good reason that such a proposal, coming from the House of Rothschild, would make us a laughing stock. In addition to this all too low price, you propose to take [only] [£]1 million for yourselves and to take the rest only in commission and even this is not to be binding in the event of a war breaking out between any two of the great powers in Europe or America within six weeks [of the agreement being signed].
The House of Rothschild, Volume 1 Page 64