Even when the possibility of a 40 million rouble Russian loan resurfaced in the more tranquil conditions of 1841-2, the negotiations foundered. This time it was Salomon’s turn to sound the note of caution. Evidently having been briefed by Metternich, he argued that Kankrin’s stated intention of investing the money in railways was merely a cover for increased expenditure on the army. He also echoed Amschel’s argument that a Russian loan was unlike a loan to any of the other great powers: “In the case of a loan for England, France or Austria the money remains in circulation, and quickly returns from the government’s coffers to the public. With Russia, the money that flows in is buried, poured away into the colossal European and even Asian [domains?] of this empire.”
Once again, the Rothschilds pitched their terms too low to break the Hope monopoly, refusing to buy more than a small proportion of the proposed loan firm (“à forfait” in contemporary parlance) as opposed to selling it in commission (with the option to return any unsold bonds). Subsequent desultory talks with St Petersburg in 1844 and 1846 were no more conclusive. Once it had seemed that the Rothschilds no longer needed the great powers; now it began to seem that the powers no longer needed the Rothschilds.
Spreading the Net
As we shall see, one response to this diminution of government business—adopted most enthusiastically by James and Salomon—was to become involved in industrial finance, and especially in the formation of railway companies. The alternative was to drum up new business with smaller states. This was the strategy adopted by the Frankfurt house. To cite only the most important transactions of the period from Berghoeffer’s list, it issued bonds totalling 3.5 million gulden for the Duchy of Saxe-Coburg-Gotha between 1837 and 1842, and 9.9 million gulden for the Duchy of Nassau; a 6.7 million reichsthaler lottery loan for the family’s oldest such client, Hesse-Kassel, in 1845, as well as loans to its neighbour Hesse-Darmstadt; and a 14 million gulden loan to Baden in the same year. There was also a loan to Bavaria in 1835 which led to the appointment of Carl and Amschel as “court bankers” and various other honours (including the Bavarian consulship in Frankfurt for Anselm). In the mid-1840s loans were also floated for Württemberg and Frankfurt itself. Hanover too was approached but this deal fell through at the eleventh hour. Nor was it only in western Germany that the Rothschilds were active. There was an attempt in 1835 to revive the firm’s old connection with the Danish Kingdom by issuing a £3 million loan. None of this would have been possible had the other German states been as parsimonious as Prussia. But Prussia was the exception to a rule of rising indebtedness which applied to almost all other German states during the Vormärz period. In Hanover, Württemberg, Baden and Bavaria, the ratio of debt to revenue rose between 1825 and 1850; only in Prussia did it fall. (The difference is probably best explained by the growing involvement of the western German states in railway construction during this period, and the restriction on Prussian borrowing established by the 1819 State Debt Decree.)
From the Rothschilds’ point of view, such loans to even the medium-sized German states were relatively minor transactions; yet they often took just as much time to arrange as loans to great powers (in some cases because of the growing pressures from representative bodies on previously more or less autonomous financial bureaucracies). On the other hand, the volume of business evidently compensated for the effort involved—witness the profitability of the Frankfurt house in this period. Amschel and the nephews who assisted him in Frankfurt were apparently indifferent to the political character of the German states they did business with: while Baden (for example) was a “model” constitutional monarchy, Hanover—after the abrogation of its constitution by King Ernst August in 1837—was among the most conservative regimes in all Germany.
From the point of view of the German states, it was becoming harder and harder to raise a loan without going to the Rothschilds, so dominant were they in the German capital market. This was especially true in south-west Germany. Not only in Frankfurt, but in other commercial centres like Cologne, the Rothschilds were able to exercise all the influence of a central bank: local people talked of “Rothschild shipments” of specie and “Rothschild money.” This dominance inevitably aroused comment, most of it hostile. As in the 1820s, the Rothschilds were seen by liberals as shoring up reactionary regimes. “Many of the smaller German Governments,” reported one Austrian diplomat, “have recourse exclusively to the House of Rothschild, and . . . refuse to be influenced by the dissatisfaction frequently expressed by their subjects.” This dissatisfaction was to come to a head in a matter of years. When the Hanoverian liberal Johann Stüve came to power in 1848, for example, he sought to avoid “dirty transactions with Rothschild,” which he associated with the era of Metternich.
Quite apart from floating bonds for medium-sized German states, the Frankfurt house also made good profits from loans to minor German princes such as Prince von Bentheim-Tecklenburg and Prince Viktor zu Isenburg (to name just two), as well as to major aristocratic landowners like Count Hugo Henckel von Donnersmarck. In many ways this represented a continuation of business dating back to the time of Mayer Amschel. What was novel in the 1840s was the extension of such business to the non-German parts of the Habsburg Empire. Between 1843 and 1845 loans to the value of 12.3 million gulden were issued by Salomon and his Vienna associates to a group of Austro-Hungarian noblemen notable for the size of their estates and the extent of their political influence, all but one of whom—the Habsburg Archduke Karl Ludwig—were Hungarian. Much the largest loan, to Prince Paul Esterházy, was, of course, far from being the first Rothschild loan to that powerful family. But the sudden spate of loans to other eminent Hungarians is striking. The likes of Count Móric Sándor, Count Joseph Hunyady and Count Lajos Széchényi, eldest brother of the multi-talented Magyar reformer Istvrán Széchényi, were at the apex of Hungarian society. In principle, these transactions were little different from the lending facilities provided by West End banks like Coutts & Co. to the English aristocracy. (Indeed, Esterházy had a close counterpart in the Duke of Buckingham, another land-rich but cash-poor grandee.) But this new involvement with the Magyar elite was to prove a source of political as well as financial embarrassment to the Rothschilds when, just a few years later, Hungary was plunged into a secessionist war with Austria.
In Italy, the Rothschilds pursued the same strategy of diversification. They continued to play a leading role in the finances of the Bourbon regime in the Two Sicilies, though James and his nephews worried that local bankers would sooner or later challenge Carl’s dominant position there. Here, as in Spain, there was a shift away from conventional bond issues in the 1830s. For example, the state-owned Sicilian sulphur mines were considered as a possible source of guaranteed revenue against which advances might be made to the government. Another possibility raised was that of a lottery loan, an idea which James disliked because such loans had been prohibited on the Paris bourse. It is evident from their private correspondence that the Rothschilds had a low opinion of the Neapolitan government (which was to be famously excoriated by Gladstone in 1850). On the other hand, they had no scruples about continuing to do business with “His Macaroni Majesty.” “Your Finance Minister is not a man you can reliably count on,” James told Carl after a visit to Naples in 1839. “He is a real blackguard. He is afraid to speak with the King and if one wants to accomplish anything at all in Naples, the only man who can do so is the King himself and [sic] the Minister of the Interior, who is a very smart fellow.”
Relations with the Papacy had a similar character: a fundamental contempt for the Roman government was no barrier to a profitable business relationship. As in the case of Naples, the mid-1830s saw attempts by rivals to break the monopolistic position over Papal finances which the Rothschilds had established after 1830. These were successfully seen off, and the management of the Papal debt remained firmly and profitably in the hands of their Roman partner Torlonia. This gave the Rothschilds a degree of leverage over the Papal government: on at least
two occasions Salomon protested through Metternich against ill-treatment of the Jewish community of Rome, reinforcing the widespread belief that (in the words of Alfred de Vigny) “A Jew now reigns over the Pope and Christianity.” However, this aspect of the relationship should not be exaggerated: the primary concern was profit from, not reform of, the Papal regime.
It proved rather more difficult to establish financial relations with the state which was to pose the most successful challenge to Habsburg power in Italy: the Kingdom of Piedmont-Sardinia. In 1834 the Paris house was invited by the government in Turin to bid for the management of a £1 million loan it was proposing to make. From the outset the competition for the business was fierce and Lionel was sent to Turin in an attempt to clinch the deal. The correspondence between him and his uncle James during this mission sheds light not only on Rothschild negotiating techniques but also on the difficulties of dealing with an essentially absolutist regime. Finding the Piedmontese Finance Minister impossibly obtuse, Lionel sought to strike a behind-the-scenes deal with his secretary, but was unable to overcome the King’s preconceptions about how the loan should be arranged. “If,” James advised,
our competitors come to you (for in no case must you go to them yourself ), saying that they are disposed to understand with you [sic] for the Loan, we beg you will receive their overtures and to make a contract with them, conceding to them a fourth or the half of the affair, to be disposed of as they like . . . but in this case the business must be done by you in our sole name; for you were the first on the spot, and in no case can it suit us to be in the background or to join our name to another.
However, if they did not accept such a proposal, Lionel should improve his offer, for “we are disposed to take the business if not at any price, at least at a price that will make them pay dear for it if they go beyond us . . . If the business be in the least feasible, do it, even if it should give no profit whatever, even if it were necessary to lose 2 or 3 hundred thousand francs to prove to those gent[leme]n. that we are not afraid of a sacrifice when we want to baffle them.” James carefully outlined how Lionel should deal with the government in order to outbid the competition:
Your principal object [he wrote] must be to do well to captivate the minister, and so clearly to prove to him that it is [in] his interest to contract with us rather than with another, never giving him your last word, and to show yourself in such dispositions that he can conclude nothing with the others without having enabled you to cover their offers—and when you must come to the last word you must insist that it shall in fact be the last, and that your offer shall be accepted immediately and without reserve.
If however these gentlemen are clever enough to place themselves in an equal or better position than yours in this respect . . . your plan must be to make them pay as dear for it as possible, and to abandon the field to them only when you have sown so many difficulties & thorns in it that they can gather nothing but weeds. In such case we will be easily consoled . . . there are cases when victory costs more than a prudent retreat . . .
This gives an indication of the way James himself would have operated had he himself been in Turin; and perhaps he might have succeeded. But the inexperienced Lionel was ultimately outmanoeuvred—or rather outbid—by what he called the “Bande Noire” of French bankers led by Hagermann. It was not until 1843 that renewed attempts were made to do business with Turin and relations remained embryonic before 1848.
This expansion into new areas explains why, by the early 1840s, many observers had begun to see the Rothschilds as more than merely allies of the European states: they now appeared to have acquired a unique power of their own which was independent of the great powers and nearly universal. In his essay “Rothschild and the Finances of Europe” (1844), Alexandre Weill—one of many writers of Jewish origin who were fascinated by the Rothschild phenomenon—made the point succinctly: while “Rothschild” had needed the states to become “Rothschild,” he now no longer needed them. In 1842, the liberal historian Jules Michelet declared in his journal that James knew “Europe prince by prince, and the bourse courtier by courtier” (see the epigraph to this chapter). This was barely an exaggeration. Leaving aside the two outstanding Rothschild failures—Portugal and the United States—and the exceptional case of Spain, where control of the country’s mercury mines took precedence over the floating of loans, the list of states for which the Rothschilds raised money in the decade or so before 1848 is impressively long. Conservative states borrowed to avoid parliamentary influence over financial policy, often the necessary corollary of tax reforms. More progressive states borrowed to pay for public works, notably railways, when the private sector seemed unable or unwilling to fund investment. Few did not at least contemplate employing the Rothschilds as bankers and underwriters. The benefits of this widening of the financial net were obvious. The risks would only become apparent in 1848.
“Absolument le Maître des Finances de Ce Pays”: Belgium
Perhaps the best example of Rothschild strategy in the pre-1848 period is their involvement in the finances of the newly created Kingdom of Belgium. James and his brothers had moved swiftly to establish a financial foothold in Brussels in the wake of the Belgian secession from Dutch rule in 1830, providing the new government with a lifeline of credit in the first three stormy years of its existence. In the period of relative tranquillity between mid-1833 and 1838, James energetically sought to defend and develop the position of dominance he and the Société Générale had established in Brussels. A variety of transactions helped to sustain Rothschild interest—above all, state loans to finance Leopold I’s policy of economic development, the centrepiece of which was the building of a railway network.
In directly involving itself in railway (and canal) construction, the Belgian government was to some extent breaking with the established British practice whereby the financing of railways was at first left more or less entirely to the private sector. But it was a precedent which other powers would soon follow. What the Belgians had appreciated was the strategic significance of possessing a railway network—an insight which owed much to their strained relations with Holland and, in particular, the need to avoid dependence on the established network of canals and rivers in the Low Countries which the Dutch controlled. From the Rothschild point of view, there were obvious advantages to such a policy: it always struck them as less risky to issue state bonds than private railway shares. More importantly, the development of the Belgian railway system dovetailed neatly with plans for a railway link between Paris and Belgium in which James had already expressed an interest. On the other hand, the Belgian strategy of industrial development would have made little sense if it had not been accompanied by a parallel development of the country’s own banking system. Having created three new institutions in partnership with the Société Générale (the Société de Commerce de Bruxelles, the Société nationale pour entre-prises industrielles et commerciales and the Banque foncière), James had done his best to maintain his dominant position. But the Banque de Belgique (founded in 1835 with largely French capital) was a genuine rival and James had to decide whether to resist the challenge to his position or to join forces with it. In the boom years of the mid-1830s, the Paris house worked closely with the Société Générale in floating a succession of Belgian mining companies on the Paris bourse. But in the sphere of government finance, as the inconclusive negotiations over a conversion operation in 1837 revealed, even the Société Générale had to be regarded as a rival as much as an ally. Intimate though their relations were with King Leopold, the Rothschilds were never able to rest on their laurels as the financiers of independence, especially in view of the suspicion with which they were viewed by sections of the Belgian parliament and press. Moreover, the possibility could not be ruled out that the Belgian government might one day seek to make military use of its railway network, or indeed of the money it was borrowing to pay for it. The government spent roughly three times what it spent on railways during the 1830s on bui
lding up an army.
All these conflicting factors had to be taken into consideration when the Dutch-Belgian question returned to the European diplomatic agenda in 1838-9. In essence, the question now arose whether or not the Belgian government would abide by the terms of the 1832 articles and evacuate Luxembourg and Limburg, in return for a Dutch recognition of Belgian independence. Quite apart from the territorial sacrifice, the 1832 articles entailed a financial sacrifice, because they envisaged a roughly equal division of the pre-1830 Dutch debt between the two states. It so happened that the resumption of negotiations coincided with a new Belgian proposal for a 36 million franc loan (and a parallel Dutch request), giving the Rothschilds more than usual diplomatic leverage. Despite the small sum involved, James was extremely eager to secure this new loan, partly because he expected it to be relatively easy to float, but mainly because it would be the first major Rothschild bond issue since Nathan’s death. It was a chance, in other words, for him to assert not only the Rothschilds’ continuing dominance of the bond market, but also his own leadership within the firm. If the terms were right, he declared in May 1838, “I will immediately say yes, despite all the political problems, because there won’t be any war. Belgium will have to yield and the world is so keen to do business that one really has to hurry.” The Belgians might huff and puff, James reasoned, but without French support they could do little.
The House of Rothschild, Volume 1 Page 65