The House of Rothschild, Volume 1

by Niall Ferguson

  Moreover, those commitments in turn exposed the Rothschilds to new and unwelcome kinds of public attention. For railways had in many ways a more direct and perceptible impact on the lives of ordinary men and women than the states which notionally governed them; and the Rothschilds were in some ways much more publicly conspicuous as railway financiers than they had ever been as the financiers of states. In theory, ordinary people might have complained that the indirect taxes they paid on articles of consumption were partly going towards paying the Rothschilds their commissions and the interest on the bonds they held for themselves; in practice, that connection was rarely made in the Vormärz period. The impact of railway companies on everyday life, by contrast, was more obvious, particularly when things went wrong—and never more glaringly than when there were railway accidents. One unintended consequence of their involvement with railway finance was that the Rothschilds were subjected to a new and militant kind of criticism, in which they were cast not as the mere paymasters of reactionary regimes, but as exploitative capitalists in their own right. Interestingly, it was in the critiques of the early railway era that, for the first time, the family’s Judaism began to be thought of less as a religious identity and more as a racial explanation for their alleged exploitativeness.1

  Salomon’s Line: The Nordbahn

  Given the revolutionary implications of railways, it is perhaps surprising that the first Rothschild railway should have been conceived and constructed in Habsburg territory. Salomon was not the most enterprising of the Rothschild brothers; indeed, to an extent he had allowed himself to lapse into the rather old-fashioned role of “court Jew” to Metternich, with whose political objectives he increasingly tended to identify. Nor did he himself much enjoy the experience of railway travel; as late as 1846 he still refused to take advantage of the rail link through Belgium when going from Frankfurt to Paris. Taken as a whole, moreover, the Habsburg Empire was very far from being the most economically dynamic state in Europe; and the suspicious attitude of its bureaucracy towards any innovation which might have unpredictable social side-effects was notorious. Yet it was Salomon who became the first Rothschild to interest himself directly in a railway project in 1830. It was not his own idea but that of a professor at the Vienna Polytechnic Institute named Franz Xavier Riepel, a mining expert who believed that the new technology of railways could be used to link the salt mines of Wieliczka in Galicia and the iron and coal mines of Moravian Ostrau (Ostrava) to the imperial capital more than 200 miles to the south-west. Nevertheless, it is a tribute to Salomon’s vision—or perhaps to his growing financial foolhardiness—that he regarded this scheme as practicable. To say the least, this was an ambitiously long line for the time. Even more remarkably, Salomon seems to have envisaged from an early stage that it would also be extended southwards from Vienna to Trieste on the Adriatic. Such things were possible in England, where Salomon despatched Riepel (along with Leopold von Wertheimstein) to acquire some practical experience of railway building and operation. But was it realistic to embark on such a long line in Habsburg territory?

  Initially, the biggest obstacle to the scheme was political inertia in Vienna itself. On the basis of a report drafted by Riepel after his visit to England, Salomon submitted a petition to the Emperor to allow land to be acquired for the project. Predictably, it was shelved, the Crown Prince observing with true Habsburg insight that “Even the coach to Kagran isn’t always full.” The postal authorities also expressed reservations, fearing a threat to their monopoly. Undaunted, Salomon pressed on. He took over the horse-drawn railway line linking the Danube and the Gmündensee from an insolvent French engineer named Zola (the novelist’s father), and commissioned Riepel to investigate the best possible route for the line to Moravia and Galicia. Finally, in April 1835—just six weeks after the death of the Emperor Franz —he felt ready to renew his appeal for imperial and royal backing. This time he was successful—an outcome which probably owed more to Metternich’s and Kolowrat’s decision to back the scheme than to the credibility of Salomon’s claims that “the achievement of this great means of communication would be of benefit to the State and the public weal, no less than to those who join in the undertaking” and that the proposal was “based . . . strongly upon the interests of the common weal” and “entirely patriotic” motives.

  It was agreed that a joint-stock company should be set up to construct a line between Vienna and Bochnia (south-east of Cracow). As a second thought, to ensure that there would be no royal change of mind, Salomon suggested that the line be called the “Kaiser-Ferdinands-Nordbahn.” This appeal to royal vanity was successful. For good measure, he also sought—as he put it to Metternich—to “take such steps as may be appropriate for inducing such statesmen as are the bearers of honoured names to place themselves as patrons at the head of this national undertaking.” Specifically, he sought to enlist Metternich, Kolowrat and the head of the imperial Treasury, Count Mittrowsky, as board members. This use of noble names to lend respectability to new companies—in return for financial perks—was a device widely employed in England and elsewhere; in the Austrian case it was essential to overcome royal and bureaucratic opposition.

  In fact, the benefits of the Nordbahn—as the line was usually known—might well have ended up being greater for the “common weal” than for those who actually invested their money in it. The line was supposed to take ten years to build. The final stretch to Bochnia was not completed until 1858. It was supposed to cost 12 million gulden (£1 million), roughly 16,600 gulden per mile. The actual figure was closer to 27,750 gulden. Yet—as so often in the history of railways—short-term benefits to investors tended to compensate for (or at least to distract from) such long-term cost overruns. From the moment the concession was granted, demand for shares in the firm dramatically outstripped supply. Of 12,000 shares (each worth 1,000 gulden), Salomon retained 8,000, so that just 4,000 were offered to the public. There were 27,490 applications, driving the share price up well above par.

  These short-term capital gains help explain why other Austrian bankers hurried to compete—even when they realised better than Salomon the formidable practical problems involved. No sooner had he secured the Nordbahn concession than Sina petitioned to be granted the concession for the line from Vienna to Trieste, a petition which enjoyed some official support on the familiar grounds that Sina, unlike Salomon, was Austrian born and hence a Habsburg subject. It is not wholly apparent why, after so many years of amicable co-operation in the realm of Austrian bond issues, the major Vienna banks failed to co-operate over railways; but Salomon did not fire the first shot. Indeed, in allowing Sina and Arnstein & Eskeles substantial shareholdings in the Nordbahn and according them due influence on the company’sIs provisional board of management, he was singularly accommodating. Unfortunately, the other bankers appear to have been intent on some sort of spoiling operation. At the second general meeting of the Nordbahn, Ludwig von Pereira (a partner at Arnstein & Eskeles) launched a well-researched technical critique of the engineering plans and financial projections, a move which succeeded in arousing the hitherto dormant anxieties of the Emperor. It was only with difficulty that Salomon and Riepel were able to rebut Pereira’s criticisms, at least some of which, it must be said, were to prove quite justified. The climax of this prototypical boardroom battle came in October 1836, when Salomon moved a resolution demanding that the building of the railway be commenced or the company liquidated. With 76 out of the 83 votes in favour, he was able to force Sina and Eskeles to resign.

  From the outset, Salomon had intended that the Nordbahn should be the basis for a succession of branch lines to the major cities on either side of it: his original petition had specifically mentioned subsidiary lines to Brünn, Olmütz and Troppau. Even while he was locking horns with Pereira—and before a single rail had been laid down—he therefore continued to secure supplementary concessions from the government to allow him to add further branches: to Pressburg, to Bielitz, to Deutsch-Wagram and so on. Work f
inally began on the first stretch of line north from Vienna in 1837, and trains were running along the first section between Deutsch-Wagram and Florisdorf by the end of the following year. It was not until 1839, however, that freight and passengers began to be carried between Vienna and Brünn, so that for more than two years the company was pouring money into materials and men (some 14,000 in all) for no return, and was kept going only by a Rothschild advance of some 8 million gulden. Small wonder Lionel felt it advisable to reassure Metternich that most English railways “will yield a profit of eight to ten per cent”; there was no sign at this stage that the Austrian line would do so, and its shares duly fell below par. As Salomon later recalled, the Nordbahn had required “the expenditure of large sums of money, and . . . patient waiting; sacrifices that I was called upon to make, to the amount of several hundred thousand.”

  Yet from 1841 onwards Salomon’s senior manager Goldschmidt began to detect an improvement on his weekly visits to monitor traffic at the main terminus. As with the British railways, it was the unexpectedly large amount of passenger traffic—especially families of day-trippers on Sundays—which helped to boost receipts. As early as 1841 up to 10,000 people were regularly using the initial stretch of line from Vienna to the suburb of Vienna-Neustadt.2 In 1843 the shares rose for the first time since their issue above par to 103; a year later they reached 129 and by 1845 they stood at no less than 228. This represented a huge if belated capital gain to the original investors—above all, to Salomon himself.

  Yet it would be unjust to Salomon to suggest that he operated with the short-term speculative gains solely in mind. On the contrary, he genuinely does seem to have had an entrepreneurial vision of an integrated Austrian transport system. Not only did he envisage from the outset a railway which would link Galicia and Moravia to the imperial capital and southwards to Italy; he hoped also to extend his network into Hungary. A good illustration of the extraordinary—almost mes sianic—role Salomon saw himself playing in the Habsburg lands in this period is provided by the police report of his trip to Pressburg in June 1844 to attend a meeting of the Central Hungarian Railway Company. It was little short of a royal visit. The Danube steamer made an unscheduled stop at Königsplatz to allow him to disembark. The occupants of rooms at the Hotel zur Sonne were unceremoniously evicted from their rooms to make way for the Rothschild party, despite the fact that they planned to return to Vienna by coach that night. And when it was rumoured that the mercurial Hungarian reformer Istvàn Széchényi—who was already running his own Danube steamship company—intended to support a challenge by Sina to Salomon’s dominance of the Central Hungarian board, the venue of the meeting was hastily changed. To cap it all, Salomon responded to the flattering toasts proposed in his honour that evening by Carl Esterházy, Andrássy and other pro-Rothschild bigwigs with a pompous speech, concluding that he would follow the example of his schoolmaster who told his pupils: “I am going but I am leaving my cloak behind, and it will tell me what everybody has done, and how they have behaved in my absence.” Salomon’s self-importance can hardly have been diminished by the enthusiastic welcome he had received earlier in the day from the local Jewish community, a crowd of whom gathered on the river bank to greet him. “Count Esterházy,” the police observer reported,

  frustrated their intention of according the Baron a special welcome, as he would not allow the Jews to carry out their scheme of letting off forty rockets. They were restrained even from shouting their welcome which in view of the ill feeling between the citizens and the Jews here, might easily have led to a breach of the peace.

  Esterházy might be willing to ingratiate himself with the Austrian railway king, but he had no desire to let Salomon’s poor co-religionists bask in his reflected glory.

  Nor was Salomon content to dominate the development of the Habsburg railway system. He also pursued a strategy of “vertical integration” (bringing together different stages in a particular economic process under a single corporate roof ). As early as 1831 he saw the need to foster independent Austrian supplies of iron and steel, so that the development of the imperial railways would not be reliant on imports from the foundries of Britain. Although his first bid to purchase the Witkowitz Ironworks company in the Ostravian coalfields was unsuccessful (because as a Jew he was prohibited from owning land), he was able to lease the works indirectly from the Archibishop of Olmütz, Count Chotek, in 1841 by setting up a company in partnership with the banker Geymüller. When Geymüller went bankrupt soon after, Salomon petitioned again to be allowed to buy the works and this time was successful. The Witkowitz works—the first in the Habsburg Empire to use the puddling process necessary for the production of rails—was to remain one of the Austrian house’s principal industrial assets for almost a century. At the same time, Salomon began to interest himself in coal mining.

  Finally, Salomon’s vision of a rail link from Vienna to Trieste led him to expand Rothschild interests beyond land transportation into shipping, taking a leading role in the foundation of the Austrian Steamship Company or Austrian Lloyd in 1835. When the company got into difficulties in the 1830s, Salomon gave it the same life-saving injection of capital he gave the Nordbahn at the same time, in the form of a 500,000 gulden loan in return for a mortgage on the company’s seven steamers. As with the Nordbahn, the investment proved a sound one, with profits rising from around 82,000 gulden to nearly 370,000 gulden between 1841 and 1847. Salomon’s decision to invest in a salt factory in Venice at around this time needs to be seen as part of a strategy of expansion into the Adriatic region.

  The question which remained to be answered was whether this bold business strategy would prove financially sustainable. As we have seen, there had been a recurrent need to inject cash into the various concerns which Salomon was seeking to knit together. Such strategies of vertical integration, though apparently rational, do not always deliver the internal gains in efficiency and economies of scale they seem to imply. Moreover, loosely connected business empires of the sort he was building are often especially vulnerable to a deterioration in economic conditions. Unfortunately for Salomon, such a deterioration was fast approaching.

  Frankfurt: The Taunusbahn

  By comparison with its Vienna branch, the Frankfurt house itself played a relatively modest role in railway finance before 1848. This may have been a matter of temperament; it is more likely to have reflected the different political environment of southern Germany in the Vormärz era. Although (like the British state) the Austrian state did little to facilitate the building of railways other than to grant concessions, it was at least a single entity, so that negotiations for a line stretching as far as the Nordbahn could be conducted at the imperial level. In southern Germany, by contrast, even relatively short railway lines could cross multiple state borders, and therefore required co-operation between several governments. Particularist jealousies, however, meant that such co-operation was rarely forthcoming; indeed, the larger states self-consciously pursued railway policies which were designed to maximise their own internal cohesion at the expense of inter-state communications. In Bavaria (where the first German railway was opened to link Nuremberg with Fürth less than four miles away), as well as in Baden, Württemberg and Hanover, the construction of railways was undertaken on the Belgian model by the state governments themselves. Here, therefore, the most that the Rothschilds could do was to underwrite the bonds issued to finance railway building. The state nearest to them, Hesse-Kassel, by contrast, allowed some railways to be constructed privately, as did Prussia and Saxony. The result was a degree of confusion which precluded a grand strategy of the sort adopted by Salomon in Vienna and doomed to disappointment the hope expressed in the Leipzig-based Allgemeine Zeitung des Judenthums in 1837 that “the House of Rothschild [would] unerringly place itself at the head of a movement which will completely reshape the European monetary system: the destruction of the trade in paper [meaning stock exchange speculation] [and] the injection of capital into industry.”

 
As early as January 1836, Amschel ran into difficulties when he sought to secure a concession for a line between Frankfurt (a free city) and Mainz (in Hesse-Darmstadt), which naturally had also to pass through Hesse-Kassel: three separate jurisdictions for a line of less than twenty miles. It took seventeen months merely to secure the legislation needed for the compulsory purchase of land in Hesse-Kassel. When in 1838 a concession was secured from the Frankfurt Senate for the so-called Taunusbahn, Amschel and Bethmann had to buy out a rival company which had been authorised to build a line along a parallel route by the authorities in Kassel. A similar conflict arose in the case of the plan to link Cologne to the Belgian network between the proponents (led by David Hansemann) and opponents (led by Ludolf Camphausen) of a route through Aix-la-Chapelle. A merger of their two companies to produce the Rheinische Eisenbahngesellschaft could be achieved only at the price of Camphausen’s withdrawal.