The House of Rothschild

by Ferguson, Niall

  Bond issuance was not the Rothschilds’ sole business. They also discounted commercial bills, acted as bullion brokers, dealt in foreign exchange, engaged directly in commodity trade, dabbled in insurance and even offered private banking services to an elite of indivual clients. Their role in the gold and silver markets was important: it was the Rothschilds’ role as “lender of last resort to the lender of last resort” that prevented a suspension of convertibility by the Bank of England in 1825. But it was the bond market which came first. Moreover, buying and selling in the various secondary markets for bonds was almost as important a source of profit as issuance: this was the principal form of speculation in which the brothers engaged.

  It was partly the multinational character of their operations that distinguished the Rothschilds from their competitors. While Nathan’s eldest brother Amschel continued the original family business in Frankfurt, his youngest brother James established himself in Paris. Later in the 1820s. Salomon and Carl established subsidiaries of the Frankfurt house in Vienna and Naples. The five houses formed a unique partnership, acting jointly in big transactions, pooling profits and sharing costs. Regular and detailed correspondence overcame the obstacle of geographical separation. The partners met together only every few years, when changing circumstances necessitated modification of their contractual agreement.

  This multinational structure gave the Rothschilds several important advantages. First, it enabled them to engage in arbitrage, exploiting price differences between, say, the London and Paris markets. Secondly, they could bail one another out in the event of liquidity or solvency squeezes. Never—not even in 1848—did financial crises strike everywhere in Europe simultaneously and with equal severity. When Britain suffered in 1825, James could bail out Nathan. When Paris collapsed in 1830, Nathan could reciprocate. There is no doubt that the Vienna house would have gone bankrupt in 1848 if it had been an independent entity. Only the willingness of the other houses to write off substantial sums allowed Salomon’s son Anselm to restore it.

  By rapidly accumulating capital—the Rothschilds did not distribute profits, contenting themselves with a low interest on their individual partnership shares—they were soon able to conduct such operations on an unparalleled scale. They were certainly the biggest bank in the world; by 1825 ten times the size of their nearest rivals, Baring Brothers. This in turn allowed them to modify their business strategy. After the early years of high risk and high returns, they were now able to content themselves with lower profitability without compromising their position of market dominance. Indeed, this shift away from profit maximization helps to explain the Rothschild partnership’s longevity as a firm. Time and again they would encounter competitors—Jacques Laffitte was the classic example of the restoration period—who gained on them during market upswings by taking bigger risks, only to come unstuck when the cycle dipped.

  With riches came status. In the eyes of contemporaries, the Rothschilds personified new money: they were Jews, they were ill educated, they were coarse—yet within a few years they had accumulated net paper wealth worth far more than most aristocratic estates. Outwardly, the arrivistes seemed to crave acceptance by the old elites. As if to expunge the memory of the days when (as Carl recalled) “we all slept in one little attic room,” they bought the smartest of town houses in streets like Piccadilly and the rue Laffitte and, later, their first country houses at Gunnersbury, Ferrieres and Schillersdorf. They filled them with seventeenth-century Dutch paintings and eighteenth-century French furniture. They hosted lavish dinners and glittering balls. They sought titles and other honors: plain Jacob Rothschild became Monsieur le Baron James de Rothschild, Austrian consul general in Paris, chevalier of the Legion of Honour. They brought up their sons as gentlemen, giving them tastes for pleasures that had been unknown in the ghetto: horses, hunting and fine art. Their daughters had their piano lessons from Chopin. Men of letters—notably Disraeli, Heine, Balzac—sought patronage from these new Medicis, only to caricature them in their work.

  Yet the Rothschilds privately viewed their own social ascent with cynicism. Titles and honors were “part of the racket,” helpful in giving the brothers access to the corridors of power. Playing host was an uncomfortable duty, to the same end: much of it was corporate hospitality, as we would now say. Even the gentrification of the next generation was superficial: their sons’ real education was still in the “counting house.”

  The Rothschilds’ most important reservation about social assimilation was religious. Unlike many other wealthy European Jews, who opted to convert to Christianity in the 1820s, the Rothschilds remained firmly attached to the religion of their forefathers. Though the extent of their individual religiosity varied—while Amschel was strict in his observance, James was very lax—the brothers shared the view that their worldly success was intimately bound up with their Judaism. As James put it, religion meant “everything. Our good fortune and our blessings depend upon it.” When Nathan’s daughter Hannah Mayer converted to Christianity in order to marry Henry Fitzroy in 1839, she was ostracized by nearly all her relatives, including her own mother.

  The corollary of the Rothschilds’ belief that fidelity to Judaism was integral to their worldly success was the interest they took in the fate of their “poorer co religionists.” This commitment to the wider Jewish community extended beyond traditional charitable donations to embrace systematic political lobbying for Jewish emancipation. The practice that Mayer Amschel had established in the Napoleonic period, of using Rothschild money to secure or defend the civil and political rights of Jews, continued more or less uninterruptedly throughout the century. When the Jews of Damascus were falsely accused of “ritual murder” in 1840, the Rothschilds orchestrated a successful campaign to end their persecution. This was only the most celebrated of many cases. Rothschild loans to the pope were also used as a lever to improve the lot of the Jews in the papal states. Ironically, the English Rothschilds’ efforts closer to home were less successful. Nathan and his wife Hannah had first become involved in the campaign to end Jewish exclusion from Parliament as early as 1829. By the time of Nathan’s death seven years later, nothing had been achieved. It was left to his son Lionel to lead the campaign for Anglo-Jewish emancipation: the subject of this volume’s opening chapter.

  Nevertheless, the Rothschilds’ sense of identification with the wider Jewish community was not unqualified. Not only their wealth but their genealogy set them apart from the rest of European Jewry. For the Rothschilds pursued a strategy of endogamy-marrying not just within their own faith but within their own immediate kinship group. Only a Rothschild would do for a Rothschild, it seemed: of twenty-one marriages involving descendants of Mayer Amschel between 1824 and 1877, no fewer than fifteen were between his direct descendants. Typical was the marriage of Nathan’s son Lionel to Carl’s daughter Charlotte in 1836, an arranged and not very happy match. The main rationale behind this strategy was to fortify the cohesion of the financial partnership. It certainly did this, though to modern eyes the family tree of the period looks fraught with genetic risk. Cousin marriages ensured that the family’s capital was not dispersed. Like the strict rule that excluded daughters and sons-in-law from the partnership’s hallowed books, and the repetition of Mayer Amschel’s imprecations to maintain fraternal unity, it was one of the devices that prevented the Rothschilds from going the way of Thomas Mann’s decadent Buddenbrooks. Of course, other dynasties behaved in similar ways. Cousin marriage was relatively common in Jewish business families. Nor was it confined to Jews: British Quakers practiced it too. Indeed, even Europe’s royal families used cousin marriage to cement their political relationships. Yet the Rothschilds practiced endogamy to a degree not even the Saxe-Coburgs could match. It was this that prompted Heinrich Heine to call them “the exceptional family.” Indeed, other Jews came to regard the Rothschilds as a kind of Hebrew royal family: the “Kings of the Jews” as well as the “Jews of the Kings.”

  The revolution of 1830 revealed two
important things. First, the Rothschilds were not tied to the Holy Alliance but were perfectly willing to offer their financial services to liberal and even revolutionary regimes. If anything—once he had got over the initially severe shock of the revolution—James found it easier to do business with the “bourgeois monarchy” of Louis Philippe. Equally congenial was the new Belgian state, especially when it (like Greece) accepted a “tame” German prince as its monarch—one who was already a Rothschild client—and subordinated itself to collective international regulation by the great powers. The second point was that the Rothschilds had a strong interest in seeing the great powers reach such arrangements and believed that here too financial leverage could be exerted.

  The outbreak of revolution had caused a major slump in the price of French rentes (the perpetual bonds that were to France what consols were to Britain). The slump had taken James almost wholly by surprise, plunging his balance sheet into the red. But what made the European financial markets so volatile in the early 1830s—and delayed the recovery of the rente even after a more or less stable parliamentary monarchy had been established—was the fear that, as in the 1790s, a French revolution would engender a European war. It was this fear as much as anything else which caused the financial contagion of the period, pushing up bond yields even in countries unaffected by revolution.

  At various times in the early 1830s war threatened to break out over Belgium, Poland or Italy. The Rothschilds were now well enough connected to act as peace brokers on each occasion. Their uniquely fast communications network—which relied principally on private couriers to-ing and fro-ing with copies of letters—was by now also being used by the leading statesmen of the continent as an express postal service. This gave the family one form of power: knowledge. James saw Louis Philippe, heard his views, wrote them down in his letter to Salomon, who went to see Metternich, and passed them on. The process then repeated itself in reverse, with Metternich’s reply reaching Louis Philippe via at least two Rothschilds. Needless to say, the messengers could subtly alter the messages along the way; or the news could be acted upon in the stock exchanges before being passed on.

  At the same time, the Rothschilds’ dominance of the international bond market gave them a second form of power. Because any state that seriously contemplated going to war would have to borrow money to do so, the Rothschilds discerned the possibility that they could exercise a veto: no peace, no cash. Or as the Austrian diplomat Count Prokesch von Osten said in December 1830: “It is all a question of ways and means and what Rothschild says is decisive, and he won’t give any money for war.”

  It did not quite work so neatly. Though contemporaries were enchanted by the idea that the Rothschilds could keep the European peace merely by threatening to ration credit, in reality there were other reasons why war did not break out in the 1830s. Still, at certain times the Rothschilds were able to wield political power by financial means. Metternich’s bellicosity was, if not thwarted, at least dampened by Salomon’s explicit refusal to support a new loan in 1832. And the creation of Greece and Belgium as new states was literally underwritten by Rothschild finance in the form of loans guaranteed by the great powers and floated by the Rothschilds.

  By the time of Nathan’s untimely and painful death in 1836, the Rothschilds had therefore established a formidable business with unrivaled resources and geographical reach. They were able to extend that reach even further by using agents and affiliated banks not only in other European markets but also all over the world, from Weisweiller in Madrid to Gasser in St. Petersburg to Belmont in New York. Their power fascinated contemporaries, not least because of their so recent lowly origins. An American observer portrayed the five brothers “peering above kings, rising higher than emperors, and holding a whole continent in the hollow of their hands”: “the Rothschilds govern a Christian world ... Not a cabinet moves without their advice ... Baron Rothschild ... holds the keys of peace or war.” This was exaggeration, but not fantasy. Yet this huge and powerful organization remained at its core a family firm. It was run as a private—indeed, strictly secret—partnership, with its main business the management of the family’s own capital.

  There was no loss of entrepreneurial momentum as the third generation joined the partnership, though the relations between the five houses did become slightly more confederal. To some degree, James carried on where Nathan left off, as primus inter pares. He too was a masterful man, indefatigably devoted to business, as addicted to the bread and butter of bill broking and arbitrage as to the big bond issues that delivered the fattest profits. His longevity kept the ethos of the Frankfurt ghetto alive in the firm well into the 1860s. Yet James was never able to dominate the other houses as Nathan had done. Though one of Nathan’s own sons—Nat—became his chafing adlatus in Paris, the others were never under his thumb. Lionel in particular proved as successful a businessman as his father, though his manner was sotto voce where Nathan had been explosive. Salomon’s son Anselm also proved a man of strong will. Nor could James really control his older brothers: Salomon in particular tended to pay more heed to the interests of the Austrian government and the other Vienna banks than his partners liked.

  In some ways, this shift from monarchy to oligarchy within the family was advantageous : it allowed the Rothschilds to respond to the new financial opportunities of the mid-century more flexibly than Nathan might have allowed. For example, Salomon, James and Amschel were able to play leading roles in railway finance in Austria, France and Germany, which their brother had conspicuously omitted to do in England.

  Nathan had been inclined to extend the practices of the 1820s into the 1830s. As the finances of the major European states stabilized, he looked for new clients farther afield: in Spain, Portugal and the United States. But to become “master of the finances” of Belgium was one thing; to repeat the process in Iberia or America quite another. Political instability in both Spain and Portugal led to embarrassing defaults on Rothschild-issued bonds. In the United States the problem was the decentralization of fiscal and monetary institutions. The Rothschilds hoped the federal government would prove a good source of business, but it tended to leave the business of foreign borrowing to the states. Likewise, they expected the Bank of the United States to evolve into an American Bank of England. Instead, politically undermined and financially mismanaged, it went bust in 1839. The Rothschilds’ failure to establish a strong foothold in the United States—they had little confidence in their self-appointed agent on Wall Street—proved to be the single biggest strategic mistake in their history.

  Such reverses in the familiar field of government finance made diversification logical. Thus the decision to acquire control over the European mercury market was partly a response to the risks of governmental default. By controlling a tangible asset like the Almadén mines, then the world’s biggest, the Rothschilds could finance the Spanish government with minimal risk, advancing money against consignments of mercury. The involvement in mercury mining made sense doubly because of the use of mercury in silver refining. Already experienced bullion brokers before 1815, the Rothschilds branched into minting too.

  Railway finance was the most exciting new line, however. In most European countries, the state played some role in railway building, either directly financing construction (as in Russia or Belgium) or subsidising it (as in France and some German states). This meant that issuing shares or bonds for railway companies was not so very different from issuing government bonds—except that the volatility of railway shares was much greater. To begin with, the Rothschilds sought to play a purely financial role. But they were drawn inevitably into closer involvement by the long lags between a rail company’s flotation and the actual opening of its lines, not to mention the payment of dividends on its shares. By the 1840s, Lionel’s brothers Anthony and Nat were spending a substantial proportion of their time supervising their uncle James’s French railway interests. It was a sign of the third generation’s greater aversion to risk that Nat strongly criticized J
ames’s “love” of lines like the Nord and the Lombard and, when accidents happened (as at Fampoux in 1846), Nat saw his fears fulfilled. James was nevertheless right: capital gains on continental railway shares in the course of the nineteenth century were the principal reason the French house subsequently outgrew the English. By the middle of the century, the Rothschilds were already well on the way to. building a highly profitable pan-European railway network.

  In one respect, however, Nat’s fears were justified. Unlike the management of government debts, the management of railways directly and tangibly affected the lives of ordinary people. The Rothschilds’ involvement in railways therefore exposed them to unprecedented public criticism. Radical and (for the first time) socialist writers began to portray them in a new and lurid light: as exploiters of “the people,” pursuing capital gains and profits at the expense of taxpayers and ordinary travelers. There had been press attacks on the Rothschilds before; but in the 1820s and 1830s they had mainly stood accused of financing political reaction, or (by business rivals) of sharp commercial practice. In the 1840s, hostility to wealth fused with hostility to Jews: anticapitalism and anti-Semitism complemented one another. The Rothschilds provided the perfect target.

  Along with inflammatory polemics, the depressed economic conditions of the mid-1840s were intimations of political instability. Unlike 1830, the revolution of 1848 could be seen coming from afar. The Rothschilds were not blind to its approach, yet underestimated the magnitude of the crisis. The problem was that economic stagnation increased government deficits by reducing tax revenues; in the short term, that meant new business for the Rothschilds, which they could not resist. Both Salomon and James undertook major loans on the very eve of the insurrections. With the spread of revolution eastward from Paris, Salomon’s industrial and railway bonds and shares simply became impossible to sell, and his contractual obligations to the Austrian state equally impossible to fulfill. James was only able to ride out the storm by negotiating major changes to his most recent loan contract with the new and financially naive government.