The House of Rothschild, Volume 1

by Niall Ferguson

  Such open conflict between France and Britain inevitably placed a strain on cross-Channel relations within the Rothschild family. Alphonse obviously felt resentful of Palmerston’s aggressive style of foreign policy. When he heard Lionel argue the British case during a visit to Paris in early 1847, he sarcastically asked him if French policy should be “to kiss humbly the British lion’s claws.” Hannah was somewhat embarrassed to find both Anselm and Carl taking the French side when she visited Frankfurt at around the same time. “I now and then have rather a strong conversation with our friends,” she reported to Lionel, “particularly Anselm who is an enthusiast in favour of Guizot.” Anselm also took issue with James’s unhappy efforts to play the mediator, advising his uncle tersely “not to mix personally in the evolution of great historical events.”

  As so often in the diplomacy of the 1830s and 1840s, the war which everyone feared failed to break out: by the end of February 1847 James was able to report that the Spanish affair was as good as settled: “Apponyi is here with me now and he says that it is now out of the question even to think of war any more. Normanby invited him and Guizot to visit him on Tuesday week. So peace will be made over a bottle of champagne and I and my dear wife will be present to witness it, God willing.” Yet the champagne cork was scarcely out the bottle when Palmerston seized on a new bone of contention: Greek arrears on British-held bonds. This was the cue for another Anglo-French war of words, with the Rothschilds once again acting as reluctant messengers. “Guizot told the Baron,” reported Nat wearily in April 1847, “that England would be alone in her proceedings against Greece . . . & if she (England) were to kick up a row about the stupid business . . . [Guizot] wd be able to return the compliment & get his country into such a state that it wd be very hot for every body—do not repeat this at all events in these terms or as coming from us.”

  And even if war never came between the powers, there was a second danger—one which the Rothschilds were inclined to overlook. For the tendency for so many European states to run deficits in the 1840s meant more than just good business for their bankers. It was also a symptom of a fundamental political malaise within those states. Military expenditure was not, in fact, the sole cause of the deficits of the mid- 1840s. Of similar importance, as we shall see, were state subsidies for railway construction, combined with stagnant or declining tax revenues—a little-regarded side effect of slackening economic growth. As the Rothschilds insatiably added one state after another to the list of their clients, they could congratulate themselves on the diplomatic influence this gave them. The crises over Belgium and Syria really did seem to suggest that war could be averted by discreet manipulation of the European states’ purse-strings. But financial power was not absolute. Above all, it depended on the internal stability of the European states. When that could no longer be maintained, the Rothschilds proved almost as vulnerable as the princes and ministers whose purse-strings they held. In the end, it was not a war which brought the defensive walls of the July Monarchy tumbling down but a revolution; and against that threat the fortifications round Paris offered no protection.

  FIFTEEN

  “Satan Harnessed”: Playing at Railways (1830-1846)

  They’ve got the Devil into reins!

  —EICHENDORFF, DAS INCOGNITO

  I know just how these bankers think. What they are after is a chance of immediate profit, not an affair which they have to bury in their portfolios for eighteen months, no matter how good it may be.

  —CASIMIR LECOMTE, DECEMBER 1841

  In 1836 the composer Rossini travelled by train for the first time. He was on his way from Paris to Frankfurt, and took advantage of the recently built lines in Belgium to speed up his journey. He loathed the experience, refusing ever to travel by train again; but it inspired him nonetheless. In an ironical tribute to the new mode of transport, he composed a short piece for solo piano entitled “Un petit train de plaisir (Comico Imitatif ),” a humorous musical evocation of a railway journey which culminates in a derailment, the deaths of two passengers, and their journeys to Heaven and Hell. A sardonic coda evokes the celebrations of the wealthier victim’s heirs.

  Disasters are, of course, perennially fascinating, and the nineteenth century had no shortage of both natural and man-made calamities to stir the contemporary imagination. The 1830s and 1840s, in particular, saw a succession of failed harvests, great fires and epidemics, providing encouragement to the various idealist and materialist millenarians who prophesied an impending apocalypse in the years before 1848. Railway accidents, however, were an entirely novel kind of disaster, and they provided a distinctive source of artistic inspiration. If the railways were talked up by the engineers and financiers who built them as the supreme achievements of the modern age, their susceptibility to derailments and other spectacular mishaps enthralled more sceptical observers; for the railway accident was in many ways the perfect symbol of that crisis of capitalism which malcontents on both the left and the right awaited. In his comic play Das Incognito, for example, the romantically inclined German playwright Joseph von Eichendorff brought the drama to a noisy climax with an on-stage railway disaster:

  The sentry sounds the fire alarm, fleeing peasants burst suddenly on to the stage.

  SOME. Help! Flames!

  OTHERS. They’ve got the Devil into reins!

  OTHERS. Nothing but murder and smoke!

  VOICES off. Alas! The locomotive has run amok!

  FIRST SERVANT. No, that really is impertinence, It’s hit the city battlements.

  Immense crash, followed by a cloud of dust. As the dust clears, a toppled locomotive and wrecked carriages can be seen . . .

  Quite apart from relishing the pyrotechnics involved in such a scene, a contemporary audience would have appreciated the potent image of a diabolical, renegade locomotive smashing down the walls of an ancient German town. For, by the time Eichendorff wrote Das Incognito, the railways’ political potential was already widely understood. To the nationalist economist Friedrich List, the railway was “a tonic for the national spirit” and “a tight belt around the loins of the German nation” which—in conjunction with the Prussian customs union established in 1834—would bring about the long-overdue “internal unification” of Germany. For this and other reasons, railways made conservatives like Metternich uneasy: the “transformation in political and social conditions” which he saw as their inevitable consequence did not seem likely to assist him in defending the Central European status quo.

  That the Rothschilds came to play a leading role in the development of the European railway network might seem, at first sight, natural. It was, after all, Lionel who prevailed upon Rossini to take his first and only train ride, and Amschel who (allegedly) provided the inspiration for one of the principal characters in Das Incognito —the royal adviser, Paphnatius. By the late 1840s the Rothschilds had firmly established themselves as the pre-eminent private financiers of continental railway construction. Yet there was nothing inevitable about this. Indeed, the move from commercial and public finance into industrial finance was in many ways an unusual one, which relatively few established bankers even attempted, much less achieved.

  The most obvious illustration of this point is Nathan’s almost complete lack of involvement in industrial finance in Britain. In many ways, he of all the Rothschilds ought to have been the most keen to participate in the burgeoning new industrial sectors of the early nineteenth century; after all, it was he who had spent nearly a decade as a cotton merchant and (for a time) manufacturer. Yet apart from an apparently abortive mining venture in North Wales in 1825, Nathan had virtually nothing to do with industrial finance once he had moved to London and established himself as a banker. In particular, he took no part whatever in the great railway “mania” which followed the opening of the first fully fledged passenger and freight line between Liverpool and Machester in 1830. When James visited the north of England in 1843, the traffic on this line profoundly impressed him: “What is happening here with the r
ailways is quite amazing and had I come here earlier we would most certainly have built this railway. It must yield enormous sums. Never have I seen so many people as [are travelling] between Liverpool and Manchester.”

  Yet his brother had sat idly by throughout the pioneering phase of British railways. A year later Nathan’s wife Hannah wrote to her eldest son in a similar vein, as if he had yet to be persuaded of the utility of the new form of transport:

  The rail road travelling is so productive of good and general advantages to all classes of society [as] to make us grateful for this scientific invention—to this we are indebted for the earliest information[;] from our most distant friends we are favoured with the most constant and frequent communications, the loss of their society is lessened from the facility of obtaining this and affords great consolation and adds much to our enjoyment of life by this wonderful rapid communication.

  Hannah was evangelical—indeed visionary—in her enthusiasm. In 1846 she returned to the subject with equal warmth in a letter to her eldest daughter Charlotte:

  There is some luxury in going in a carriage and [being] propelled by horses: but the many delays and other inconveniences one is subject to give us a decided preference [for] railroad travelling . . . and [although] it may be objected to by many and particularly by the refined, for my part I prefer the amusement of scenes and the bustle of changes one gains . . . by this mode of travelling.

  The striking thing about these letters is that she felt the need to detail the advantages of railways, particularly to the younger generation who might have been expected to take these for granted. Clearly they did not. Indeed, Hannah had to conclude her effusion to Lionel with an apology: “I feel I am encroaching on your patience and you will say I am an enthusiast for rail roads.” We know for certain that his brother Nat was the reverse: in 1848 he declined to meet Lionel at Calais because “railway travelling makes my head ache so terribly that I really can not make up my mind to a 30 hours shaking.”

  Why was Hannah the sole rail “enthusiast” among the English Rothschilds, as she appears to have been? Writing more than four decades after the banker’s death, Disraeli suggested that Nathan (in the guise of “Mr Neuchatel”) had anticipated the inevitable bust which brought the first railway boom to an abrupt end. But Nathan was scarcely risk-averse in this sense. It seems more plausible that he preferred to concentrate on the business he knew best, namely government and commercial finance. His advice to Thomas Fowell Buxton’s son on this point bears repeating:

  “If I were to listen to all the projects proposed to me, I should ruin myself very soon. Stick to one business, young man,” he said to Edward, “stick to your brewery, and you may be the great brewer of London. Be a brewer, and a banker, and a merchant, and a manufacturer, and you will soon be in the Gazette.”

  It is possible, though it cannot be proven, that Nathan had in fact burnt his fingers in 1825, when mining companies like the one he contemplated came to grief in large numbers. It is also possible that he saw too late that he had missed a golden opportunity in steering clear of home railways; but it is unlikely. In fact, such specific explanations are probably unnecessary; for the English Rothschilds’ lack of interest in domestic industry was wholly unexceptional in the context of the mid-nineteenth-century City of London. To put it simply, the overwhelmingly commercial and overseas orientation of the major London banks—with the single exception of Glyn’s—disinclined them to involve themselves in railways. At the same time, the ease with which railway companies were able to sell their shares and scrip directly to the public—sometimes even before they had secured parliamentary incorporation—made banking intermediation more or less superfluous. We know from his reports as Austrian consul that Lionel paid attention to the development of the British railway system, as well as to the almost equally revolutionary impact of steam power in sea transport. But it is also evident from such communications that he and his brothers’ principal interest lay in exporting such innovations after they had been tried and tested in Britain. Where British industry did require banking facilities, it tended to turn to the provincial joint stock banks which proliferated in the 1830s and 1840s, rather than to the City banks.

  In France, by contrast, the so-called haute banque in Paris was not as wary of industrial investment as the City. From the 1820s onwards, there were repeated efforts to organise new kinds of financial institution large enough and ambitious enough to undertake major infrastructural investments, notably the digging of canals. But the various projects like the one instigated by Laffitte in 1825 (the Société Commanditaire de l’Industrie) foundered because of government opposition. In particular, the Banque de France was extremely suspicious of attempts to create joint-stock banks—hence the need to use the word caisse. This suspicion was shared by James. When Laffitte revived his 1825 scheme twelve years on with a proposal for a caisse with a capital of up to 250 million francs to be raised by selling shares, he was sceptical, just as he would be when the Pereires attempted a similar (but better-timed) institutional challenge to the traditional Parisian banking structures in the 1850s. There was no indication before 1835 that James would be any more interested than Nathan in expanding the scope of his financial operations.

  Yet a subtle shift in Rothschild policy can be detected in the mid-1830s. We have already seen how the need for improved securities for Spanish government loans led Nathan and James to acquire rights over the Almadén mercury mines. This did not mean that the Rothschilds themselves directly organised the business of mining, of course. All they were buying was a monopoly over the sale of Spanish mercury once it had been extracted. Nevertheless, the success of this venture encouraged the brothers—and Salomon in particular—to seek similar arrangements with other governments. It was, for example, the logical complement of the Almadén deal to secure a monoply over the mercury mines in Austrian-controlled Istria and Dalmatia. It also made sense to become more directly involved in the physical process of refining silver and gold and minting coins, though it was not until the 1840s (in France) and the 1850s (in England) that the Rothschilds formalised their involvement in this industry.

  As bankers, the Rothschilds naturally had an interest in, and experience of, the process of manufacturing money. In the same way, it might be said, they had an interest in any technological innovation that accelerated communications within Europe, given their legendary enthusiasm for the rapid transmission of financial and political news. Railways undoubtedly represented a revolutionary breakthrough in communications; yet they were in some ways less exciting to the Rothschilds than might at first be assumed. From the vantage point of the 1830s, it would obviously be a very long time before enough railway track had been laid to reduce by much the time it took to relay a letter from Frankfurt to London. And because it was letters and financial documents which the Rothschilds were primarily interested in transporting, they stood to gain relatively less from the development of railways than merchants and industrialists who wished to transport bulky commodities like coal and grain, or regular travellers who latched on to the railways as an easy way to transport themselves. In any case, trains could not give the Rothschilds any advantage even when they did begin to transport mail; for what the Rothschilds could use their rivals could use too.

  For this reason, the Rothschilds’ interest in the development of railways must be understood primarily in financial rather than developmental terms. What excited Nathan’s brothers—to be precise, what excited Salomon and James—was not really the prospect of more rapid and more comfortable travel from Paris to Brussels, though they doubtless looked forward to this. It was plainly not the substantial “social savings” with which railways have retrospectively been credited by economic historians, though the Rothschilds appreciated that railways would not only boost the demand for coal, iron and steam engines but also integrate regional commodity markets and facilitate labour mobility. It was the short-run benefits of railway finance which initially attracted them; in particular, the profits
to be made from issuing railway shares to the public.

  In essence, the Rothschilds were inclined to see railway shares as surrogate state bonds at a time (the mid-1830s) when European governments were issuing fewer and fewer new bonds. And because—unlike in Britain—continental governments became indirectly or directly involved in railway construction from a relatively early stage, this was not an unreasonable notion. Indeed, in the case of Belgium as well as some of the South German states, the building of national railway systems was actually financed by the sale of state bonds and carried out by the public sector. The Rothschilds were perfectly willing to underwrite such loans: after all, a state bond was a state bond, a relatively secure asset, however the money raised was used. Of course, the case was slightly different in those countries (such as France) where the state did not act so directly, but contented itself with licensing and subsidising private companies. Nevertheless, the fact of state involvement meant that it was comparatively easy for the Rothschilds to apply their traditional underwriting techniques to the sale of railway shares. In essence, this was how the Vienna and Paris houses were drawn into the business of railway finance. However, the realities of railway construction made it hard for both Salomon and James to sustain the arm’s-length role they had initially envisaged. It took time to secure a railway concession; time to acquire the land required; time to build the line and stations—usually longer than expected. Even once a line had opened, it took time to build up a steady level of freight and passenger traffic, and it was very rare that this level matched original projections, which were largely a matter of guesswork. Investors in railway shares were therefore not like investors in bonds, who could count on a predictable and steady flow of interest from states, barring some unanticipated revolution or military disaster. Railway investors who bought shares were buying a stake in a concern which would only begin to pay unspecified dividends in the future. It was therefore practically impossible for the bankers who marketed such shares to be indifferent to the future profitability of the companies concerned. Just as the Rothschilds could not ignore the politics of the states whose bonds they marketed, they could not ignore the management of the railways whose shares they sold. The short-term attractions of railway finance thus tended to lead the brothers into longer-term commitments.