The House of Rothschild, Volume 1

by Niall Ferguson

  All this helps explain why Amschel and his nephew Anselm preferred to let other banks in the region take the lead in such negotiations. As Anselm explained in 1838, “here in Germany, railways get off the ground only with a great deal of effort.” It was not untypical that the Elector of Hesse-Kassel’s son expected Amschel to secure him a bribe from the company seeking the Frankfurt-Kassel concession. Quite apart from the time wasted in negotiations, he grumbled, railway shares in Frankfurt were being adversely affected by such delays. The Rhineland company’s, for example, fell by around 20 per cent in 1838 after cost overruns had necessitated an issue of 6,000 new shares. It was therefore not the Rothschilds but the Oppenheims and Bethmanns who took the lead in private railway building in south-west Germany, though Amschel was happy to participate as a sleeping partner. It was Oppenheim who led the Rhineland consortium, taking around 25 per cent of its 3 million thaler capital, compared with a combined Paris and Frankfurt Rothschild holding of just a fortieth; similarly, it was the Bethmanns who led the £200,000 Taunusbahn consortium. By comparison with these activities, there were easier profits to be made from issuing the Baden government’s railway bonds, though this business also had to be shared with others; or acting as the agent for British locomotive exporters, notably George Stephenson. By the mid-1840s the Frankfurt house was confining itself to floating state bonds earmarked for railways (for example, for Hesse-Kassel in 1845), turning down private schemes like the Leipzig-Frankfurt line proposed the same year. When Anthony visited Frankfurt in 1844, he was impressed by the “tremendous speculation” in railway shares, but viewed the phenomenon with a marked detachment.

  Political fragmentation (and entrepreneurial differences) also explain the very limited involvement of the Rothschilds in Italian railway building before 1848. Although there is some evidence that the London and Paris houses bought shares in the Milanese railway line built in the mid-1830s, this interest soon waned. The following year approaches to James by an Italian company planning a line between Florence and Leghorn were politely rebuffed. As James put it, “We have enough railways of our own [in France] without embarking on those of Italy as well.” Schemes for railways in the Two Sicilies and the Papal states were discussed in the 1840s, but—despite Metternich’s (somewhat unexpected) encouragement in the latter case—did not get far beyond the drawing board.

  “The Chief Rabbi of the Rive Droite”

  When he felt like flattering James, Heine sometimes gave the impression that he had been the fons et origo of the French railway network.3 “Herr von Rothschild alone discovered Emile Pereire, the Pontifex Maximus of railways, and he immediately made him his chief engineer . . .” It was really the other way round: Pereire “discovered” Rothschild, in the sense that he persuaded James to commit his enormous financial resources to railways. It was an unlikely partnership, which reflected James’s susceptibility to clever men of letters as much as his financial acumen. True, Emile and his younger brother Isaac were Jews, like James; but there the resemblances ended. Where James was an immigrant from Germany, the Pereires were Sephardic Jews whose grandfather had left Spain and settled in Bordeaux. Moreover, where James had no explicit political or philosophical allegiances, the Pereires were disciples of comte Henri de Saint-Simon, the utopian prophet of a technocratic, corpo ratist industrial society in which the “productive” classes would displace the idle and rule benignly under the influence of a “new Christianity.”

  For such men, partnership with the Rothschilds represented a perilous compromise, if not a Faustian pact: the Pereires’ friend Prosper Enfantin hesitated to become associated with “the damned soul of a Rothschild.” Yet Emile Pereire was enough of a realist to grasp the indispensability of Rothschild financial support if he really was to write his projects “on the earth” rather than just on the pages of papers like the National. Between them, he and his brother could muster no more than 30,000 francs. Yet their pilot project—a railway from Paris to Pecq in the elegant suburb of Saint-Germain—would cost, they estimated, more than a hundred times as much to construct. As Emile put it in May 1835, “The involvement of the Rothschild bank in the railway from Paris to Saint-Germain is not only of great importance for this particular venture; it will necessarily have a determining influence on the later realisation of all the great industrial undertakings.”

  Wisely, the Pereires did not pin all their hopes on James. Having secured political backing from Emile Legrand, the Director-General of the Ponts et Chaussées (in effect, the Department of Transport) and the more sceptical Thiers (who dismissed the railway as a “toy”), they approached Adolphe d’Eichthal and Auguste Thurneyssen for the 200,000 francs needed to secure the initial concession, and then recruited J. C. Davillier as well as James to act as shareholders. In fact, d’Eichthal had as big a stake as James—23.5 per cent of the original 5 million franc capital. As an advertisement for investment in future railways, the Saint-Germain line was a qualified success. The twelve mile track cost a good deal more to build than had been anticipated (11 million francs instead of 3.9 million) and the volume of passenger traffic fluctuated much more than had been anticipated, soaring on summer Sundays and plummeting on winter weekdays. On the other hand it was completed and opened ahead of schedule in August 1837, and in the first three years of its operation the Pereires succeeded in reducing running costs from 52 to 44 per cent of gross receipts, ensuring that the shareholders were not disappointed. James was a convert. As he wrote to his nephew Anthony in June 1836, after himself taking the train through Belgium on his way to Frankfurt:

  I would recommend that we don’t sell any St-Germain shares for the time being, because I believe that there will be a substantial rise in these. I am absolutely convinced that people in France simply have no idea how easy it is to travel by such means . . . I want to tell you, the cheaper one sets the price, the more passengers there will be, and the greater will be the profit one stands to make. Having seen what has been happening in Antwerp, I am more and more convinced that this is a lucrative and successful enterprise. I am certain that in twenty years’ time there won’t be a single Postmaster left in the world, and people will only travel by train . . . I am in love with the railway.

  The Pereires always conceived of the Saint-Germain line as the nucleus of a much larger railway system. Their hope was to concentrate as much of the traffic into and out of Paris as they could through the Saint-Germain line and into the terminus station they built at the Gare Saint-Lazare. At the same time, they always hoped to avoid financial dependence on any single banker. This was easily attained as French railways were financed from an early stage by consortiums, reinforcing a tendency towards the formation of loose business “groups” which had already manifested itself on the Paris bond market. However, the project of a Pereire-led monopoly on rail traffic in and out of Paris inevitably aroused both financial competition and political opposition. Thus, when the brothers embarked on the next phase of their programme—a line between Paris and Versailles, running along the right bank of the Seine—the move did not go unchallenged. The “Rive Droite” was a financial as well as a geographical extension of the original Saint-Germain line: de Rothschild Frères were the largest shareholder with just under a third of the 11 million franc capital; the other major shareholders were once again d’Eichthal, Davillier and Thurneyssen, with an additional 16 per cent being provided by the house of J. Lefebvre & Cie.

  At first James was optimistic about his investment. Shares in both the Saint-Germain and the Rive Droite soared: the former reaching a high of 950, compared with an issue price of 500 francs. “Profit smiles,” wrote James gleefully as he sold a couple of hundred. “[To] go from 500 to 950 is quite nice.” However, he was disturbed to hear that “that miserable Fould is organising a subscription for our railway on which we have been labouring for such a long time.” After “a campaign of intrigues” in the Chamber of Deputies, the Fould brothers and their partners secured a rival concession to build a parallel line to Versailles
along the left bank of the Seine. “Well, this will ruin everything,” James lamented, “and one can’t do anything any more in this world.” The absurdity of the ensuing rivalry was not lost on contemporaries. Heine ridiculed “the Chief Rabbi of the Rive Droite, Baron Rothschild” and “the Chief Rabbi of the Rive Gauche”:

  For the French Jews, as for the French as a whole, gold is the god of our times and industry the prevailing religion. In this respect, it is possible to divide the Jews of this country into two sects: the sect of the Right Bank and the sect of the Left Bank. These names refer to the two railways which lead to Versailles, the one along the right bank of the Seine, the other along the left bank, which are run by two famous rabbis of finance, who rub each other up the wrong way as much as Rabbi Sham mai and Rabbi Hillel in the ancient city of Babylon.

  For the investors concerned, however, it was no laughing matter. There was not enough traffic between Paris and Versailles to justify the existence of two lines, and the actual returns and dividends on the shares of the new companies were correspondingly meagre (especially as there were cost overruns during construction).4 The Saint-Germain shares also began to be affected by the rising cost of expanding the line’s capacity to accommodate the increased traffic not only of the Versailles line but of other proposed branches, which necessitated a series of three loans from its bankers totalling around 10 million francs. More generally, the proliferation of new industrial companies was beginning to exhaust the market’s appetite for new shares: as James warned grimly in September 1837, “One of these days it will start to stink . . . because too many shares are arriving on the scene.” A sudden slump in the market almost exactly a year later forced the rival Versailles lines to discuss some kind of merger, the prime objective of which, as far as James was concerned, was to scrap the Rive Gauche altogether with a view to boosting the shares of the Rive Droite. In the end the Rothschild company effectively took over the Fould company and both were later absorbed into the Ouest line in 1851.

  These problems help explain the difficulties which beset the next phase of the Pereires’ activity. From an early stage they had envisaged much longer railway lines than the initial connections to Saint-Germain and Versailles. Of the various plans they considered, the most ambitious was for a railway connection between France and Belgium, where the first state-financed lines were already operating. This project had substantial political appeal to the French government, which, as we have seen, was keen to assert its influence over its newly independent neighbour. It also appealed greatly to James, who had been impressed by the Belgian lines he had used on his way to Frankfurt, as well as attracting the interest of British railway entrepreneurs like George Stephenson and the Belgium-based John Cockerill. However, the Société Générale—which would have been the obvious financial partner for the Rothschilds—was lukewarm in its response. After much prevarication, the governor of the Société Générale, Méeus, indicated that he “did not want his name to be associated with the Belgian railway,” as it would be “too risky” and he put “honour before everything, money second.” For his part, James took the view from an early stage that “if [Méeus] is not prepared to . . . join then we will have to stay away from the project for we don’t want to make enemies of them.” But it was not only Méeus who had reservations about the project. James also came under pressure from the Frankfurt house to drop it: the proposed line was, as Anselm put it, just “too long.”

  Although it was partly due to the diplomatic crisis over Belgium of 1838-9, the stalling of the plan for a Paris-Brussels connection primarily reflected the lack of confidence of continental bankers in their own ability to finance major railway lines without state assistance (or perhaps their desire to get their hands on subsidies). As early as December 1836 James was toying with the idea of some kind of state subvention to make the proposed Northern Line (or “Nord” for short) more attractive to investors. “It is a difficult business,” he told his nephews in London, “because the bankers here [in Paris] are not inclined to support it. Don’t you think that it [would be] possible to sell a great deal in London if the French Government [were] to guarantee an interest payment at 3 per cent?” James could see the difficulties with such an arrangement, however. “If we had chosen to go for the interest,” he reported a few days later, “then every scoundrel would have appeared on the scene and would have made plans and would have placed obstacles in our path. Secondly, I believe that the [government’s] credit might have suffered terribly as a result of such a move because every other département would have demanded the same terms.” On the other hand, he discerned that the Nord would never be built without some sort of state support. The alternative method of subsidy he contemplated at this time was a straightforward “gift” of a third of its estimated cost: “We calculate the cost of the Railway to be 75 million and the Government will give 25 million without expecting to receive anything in return as encouragement for the boys.” Without a subsidy, James argued, it would be impossible to sell enough shares to the public, no matter how “crazy about railways” they were; or rather the shares would be sold, but would not rise by the 15 or 20 per cent which investors were coming to expect. This, however, seems to have been unacceptable to Méeus. It may also be that, as Léon Faucher suspected, the French government was wary of such involvement. James regarded “Legrand, whose assistance we much require . . . [as] no great friend of ours.”

  Up until this point, the government had confined itself to devising bold schemes for a national network of major lines radiating outwards from Paris. For example, the Molé ministry in May 1837 had envisaged six principal railways linking Paris to Belgium in the north, Orléans in the south, Rouen in the north-west and Mulhouse in the east, with separate links to Lyon and Marseille in the far south. A year later, Legrand envisaged a total of nine major lines, adding links to Nantes and Bordeaux in the west and south-west as well as a link from Lyon to Basle. However, there was opposition to the planned system of concessions, and such plans remained no more than suggestions until the 1840s. This left the private sector more or less to its own devices.

  James soon formed the view that “the various railways have to be viewed as cousins of each other and when [the share price of] one rises the others will then follow.” However, there was a tendency for more than one “family” of railway financiers to emerge. For example, James was happy to lend financial support to Paulin Talabot, the driving force behind the Grand-Combe line, which aimed to link the coal mines of the Grande Combe (near Alès) to Beaucaire and ultimately Marseille. A visit to the Midi in 1838 seems to have convinced him that the area would be ideal for railway development, and he had no objection to advancing 6 million francs to keep the project afloat in late 1839. By contrast, he was more wary of the route to Bordeaux, and limited his involvement to a small shareholding in the company set up to build the line from Paris to Orléans—a wise decision, as the company folded in August 1839. The concession was subsequently granted to an Anglo-French partnership of Charles Laffitte and the English financier Edward Blount, which also won the concession to link Paris and Boulogne via Amiens. Despite the fact that the Orléans line was obliged to use the Saint-Lazare terminus controlled by the Saint-Germain company, a fierce rivalry soon developed between the Laffitte-Blount group and the Rothschild group.

  The 1839 crisis increased James’s desire to involve the state in the financing of railways, if only to bolster the performance of Saint-Germain and Rive Droite shares. Here, as with international affairs, his bullying of French politicians was unabashed. “In the event that the Government is not prepared to do anything with regard to the Rive Droite,” he told his nephews in June 1839, “then I will see to it that it is attacked in all the newspapers.” Two months later he went further:

  If they are indeed making things very difficult for you then you should tell them that I wrote you that I am resigning from my position as administrator [of the Rive Droite company] and at the same time I will be announcing in the news
paper that due to the implacable opposition of the present Ministry we have been forced to relinquish our position and to assure the general public that as long as the Ministry of Commerce remains in the hands of the current incumbents we will completely withdraw from doing any business in the industrials. If you put this to Marshal Soult then I can promise you that M. Dufour will change his attitude. If you can’t gain someone’s friendship then you have to make them fear you.

  As these remarks suggest, James’s influence over sections of the French press was an important weapon in his railway policy.

  It was the question of the line to Belgium, however, which was to become the most notorious example of French governmental subservience to Rothschild financial power. Even before the various diplomatic storms of 1839 and 1840 had died away, James returned to the idea of a Northern railway more convinced than ever that it would be “a good piece of business.” The idea he now advanced to ministers was that the government should guarantee to pay the interest on railway bonds (4 per cent) for a specified period—a suggestion of Emile Pereire’s designed to appeal to the more cautious investors who regarded private sector shares as too risky. Now the government proved more receptive. The principle enunciated in Legrand’s law of 1842 was that the state would purchase the rights of way and construct the railways and buildings, leasing the lines to the railway companies, who would provide the rolling stock and run trains for specified periods. What this meant in practice, however, took years to resolve, especially in the case of the Belgian line.

  In James’s eyes, the route north from Paris to Lille and Valenciennes promised to be the most profitable of all the main French lines because it would link the French market not only to Belgium but (via branch lines to Calais and Dunkirk) to England; the prospect of a government subsidy made it “a golden business opportunity.” But precisely for that reason there was bound to be political opposition to giving the Rothschilds the concession. “Well now, my dear Nat,” complained James when it seemed that the government was going to deny him, “the business with our railways is not working out at all. The whole world is against us. People say we are a monopoly and that we want all the railways for they can see that it would not be possible to build the Belgian [railway] without us.” James was right. Although the two sides failed to reach a final agreement until 1845, the government ultimately seemed to have no alternative but to deal with the Rothschilds. A crucial factor was the government’s own need to borrow precisely in order to finance the Legrand plan. James’s near-monopoly on issues of rentes gave him an invaluable lever in the negotiations leading to the award of the Nord concession. As he commented with satisfaction in December 1842: “If we get the loan then we are masters over the railways. The Finance Minister said to me today, ‘I won’t do anything without you and the whole Ministry shares my views. The railway from Belgium will be offered to you in preference to anyone else.’ ”