Public Finance and the Crimean War
For decades, the Rothschilds had regarded a major European war as the greatest of all dangers to their own financial position—worse even than a revolution. In March 1854 war came. Implausibly, the Crimean War had its origins in a dispute between Catholic and Orthodox monks about the so-called Holy Places in Jerusalem. In reality, it was a revival of the old question about how much power Russia should exercise over the waning Ottoman Empire—in particular, the Danubian principalities of Moldavia and Wallachia—and the Black Sea. This time, in contrast to 1840, France and Britain united: the former in order to break up the Holy Alliance, the latter for no reason other than to give the Tsar a beating, which a liberal public felt he deserved for his conduct in suppressing the Hungarian revolution in 1849. The Tsar, who five years before had been the arbiter of Central Europe, found himself deserted by the other members of the Holy Alliance: Austria flirted with the Western powers and all but joined in the war, Prussia continued her policy of impotence and irrelevance. Piedmont jumped on the anti-Russian bandwagon in the belief that any war would weaken the Austrian position in Italy.
Considering how quickly the Russians gave into the demands of this coalition, it was a strangely prolonged war. The first serious military action came in the summer of 1853 when the Tsar ordered troops into the Danubian principalities and the British and French navies approached the Dardanelles. By the time fighting broke out between Russia and Turkey in October, the Russians had effectively dropped their overblown claim to be sole protectors of Christians in the Ottoman Empire; so France and Britain had to go to war over the principalities and the Black Sea. But in June 1854, the Tsar promised the Austrians that he would evacuate the principalities ; the war could then only be about the Black Sea. It was therefore to revise the 1841 Straits convention “in the interests of the Balance of Power of Europe” that French and British troops landed at the Crimea, with the practical objective of capturing Sevastopol. As early as November 1854, the Russian government agreed to this point (again for fear of Austria joining in) but because France and Britain had still to decide what it actually meant, the war dragged inconclusively on. Attempts to find a negotiated agreement following Nicholas I’s death in March 1855 foundered. Instead, the Russians rashly decided to resist any restrictions on their naval power in the Black Sea, goading the Western powers to finish the war off. Sevastopol fell on September 8; the French suggested some new war aims; and finally at the Congress of Paris (February-April 1856) the crisis was concluded. The Black Sea was neutralised; Russia lost a chunk of Bessarabia (modern Moldova); and France and Britain agreed to guarantee the future independence of Turkey. In practice, these terms would last as long as Russia took to recover from her defeat—about twenty years, as it turned out, for it had been a traumatic and costly exposure of the Tsarist system’s administrative deficiencies. The most enduring achievement of the victors was the creation of Rumania by the fusion of the Danubian principalities, which was achieved in 1859—something they had not set out to achieve.
The precise causes and significance of the Crimean War did not concern the Rothschilds much. Why should they? A dispute between Roman and Greek monks over Christian relics held no interest for the builders of the Jerusalem Jewish hospital. Nor did they have any railway interests in the Danubian principalities. As for the international status of the Black Sea, the London house had already taken a conscious decision not to involve itself in grain exports from Odessa for purely economic reasons. What mattered was that a war—any war—between the great powers was bound to have a disruptive effect on the international financial markets. And so it did, as table 2a shows.
Table 2a: The financial impact of the Crimean War.
Sources: Spectator, Heyn, “Private banking and industrialisation,” pp. 358-72.
To diplomatic observers, the Rothschilds looked worried, and understandably so. Their correspondent in St Petersburg had reassured them in June 1853 there would be no war, and had been believed. When the British Foreign Minister Clarendon saw Lionel on September 27—shortly after the government’s instructions to Admiral Dundas to pass the Straits had been leaked—he told him “he never remember[ed] such a day” in the City. In January 1854, with the Western navies finally entering the Black Sea, Hübner found James “completely demoralised.” Amschel gave the same impression. When Bismarck heard the news of the Russian ambassador’s recall from Paris in February 1854, he “considered whom I could best frighten thereby. My eye fell on [Amschel] Rothschild. He turned as white as chalk when I gave him the news to read. His first remark was, ‘If only I had known it this morning’; his second, ‘Will you do a little business with me tomorrow?’ I declined the offer in a friendly way, thanking him and left him to his agitated reflections.” John Bright, one of the most vociferous opponents of the war in London, heard Lionel remark gravely on March 31 that “a country with £800,000,000 of debt should have considered much and seriously before it involved itself in another war.”
Yet far from weakening the Rothschilds’ position, the Crimean War had precisely the opposite effect in that it emphatically reasserted the Rothschild houses’ primacy in the field of public finance. Indeed, it demonstrated that the Rothschilds had for years been exaggerating the financial dangers of war. In reality, wars—and especially short wars of the sort which characterised the period from 1854 to 1871—created financial opportunities which they, with their distinctive multinational structure, were especially well placed to exploit. Even for those powers which did not directly fight in it, the Crimean War increased military expenditure above the level of revenues available from taxation (see table 2b), and therefore forced all concerned—even parsimonious Britain—to go to the bond market. Although their rivals, including the Credit Mobilier, tried, none could challenge the Rothschilds’ traditional pre-eminence in that market.
It made life easier, of course, that an old rival—Barings—had the misfortune to be banker to the losing side. In 1850, it had seemed a setback when the Russian government entrusted a new £5.5 million loan to Baring. Heavily oversubscribed, it had opened at a 2 per cent premium and left Joshua Bates and Thomas Baring with a commission of £105,000.2 But two years later, as diplomatic relations deteriorated, Barings found itself in an exposed position, denounced by Palmerston in the Commons as the Tsar’s “agent” and widely (though erroneously) believed to have participated in the 1854 Russian war loan.3
Table 2b: Increases in public spending, 1852-1855 (millions of national currencies).
Source: Mitchell, European historical statistics, pp. 734f.
This helps to explain the near monopoly enjoyed by Rothschilds over British war finance. As Chancellor when the war began, Gladstone had pledged himself with characteristic rigour against “the system of raising funds necessary for war by loans,” on the grounds that it “practise[d] wholesale systematic deception upon the people.” Britain was still burdened by a substantial debt left over from the Napoleonic Wars: as Lionel had said, the national debt on the eve of war stood at around £782 million, and although in relation to gross national product the debt burden was steadily falling (from 250 per cent in 1820 to around 115 per cent in 1854), contemporary politicians were unaware of this. Gladstone therefore proposed to finance the war by increasing income tax—first from 7d in the pound to 10/2d, finally to 14d—and some consumption taxes. It was not enough, however, and by the time he resigned from office (to be replaced by Sir George Lewis), the government had run up a £6.2 million deficit for the year 1854 (financed by the sale of treasury bills) and faced a shortfall nearly four times as large in the following year. Lewis imposed a further £5.5 million of new taxation, but the 1855 deficit remained £22.7 million. The government had no alternative but to turn to the City; with Barings under a cloud, that could only mean New Court.
In 1855 the London house took the whole of a loan worth £16 million. In February the following year—by which time the war was, of course, over—it submitted the only
tender for another loan of £5 million; and in May it secured a final tranche of £5 million. In both the 1855 loans, Lionel at first offered fractionally less than the minimum set by the Chancellor, but had no hesitation in accepting the government’s terms. It is hard to say how meaningful this bargaining was: the terms agreed were only slightly higher than the current market yield on consols, so there was no question of unjustifiable profits being made by the bank. Lionel was probably seeking as much to strike a patriotic posture as to make a profit, with a view to strengthening the case for his own admission to Parliament. On the other hand, the 1856 loans were heavily oversubscribed (by a factor of nearly six in February and eight in May). Palmerston saw this as a sign of City confidence in the government; it might equally well have been proof that the Chancellor was being over-generous in the aftermath of victory.
In France the revival of Rothschild influence over public finance actually predated the war. On March 14, 1852, Napoleon announced a large conversion operation, intended to cut the cost of debt service by reducing the interest due on the greater part of the national debt from 5 to 4.5 per cent.4 Investors had twenty days to choose between accepting the new 4.5 per cents or redeeming the 5 per cents for cash. The move was justified by the government in macroeconomic terms as part of a strategy to lower interest rates and boost business activity. However, faced with a sudden slump in the price of 5 per cents (from 103 to 99 in just ten days) and fearing that an unexpectedly high number of bondholders would demand the redemption of their rentes rather than conversion, the new Finance Minister Jean Bineau was forced to turn to the bankers. It was Hottinguer and de Rothschild Frères rather than the Pereires who took the largest share in the subsequent support operation, whereby the banks bought up 5 per cents to push the price back above par; and the Banque de France which facilitated their purchases by extending its discounting facilities against rentes. The manoeuvre achieved its object, and the great majority of rentiers accepted the new bonds.
Two years later, when France and Britain issued their ultimatum to Russia to withdraw from the Danubian principalities, James naturally expected to be called on once again by the French Treasury. On March 4, 1854, he told Prince Albert’s brother Ernest II, Duke of Saxe-Coburg-Gotha, “that for a war with Russia any sum was at command; he would furnish at once ‘as many millions as were desired’.” By now, however, the Credit Mobilier had entered the lists, and when the government three days later announced its intention to borrow 250 million francs, a contest between the two seemed inevitable. Mires later claimed the credit for persuading Bineau and Napoleon to sell the bonds directly by public subscription; perhaps he did. Yet he exaggerated when he claimed that this and the subsequent 500 million franc war loan of 1855 had “liberated the French government from a tyranny incompatible with the dignity of a dynasty born of universal suffrage.” For by April 1855, with another 750 million francs needed, the new Finance Minister Pierre Magne had to inform Napoleon that the domestic market was reaching saturation point. As a result, a substantial share of the 1855 loan was issued in London, and Napoleon elected to revert to the French government’s traditional banker there. Although the Credit Mobilier took a substantial share of this issue, the Rothschilds were once again in charge: while the Paris house handled some 60 million francs, the London house received subscriptions totalling 208.5 million.
The Rothschilds’ role in assisting the Banque de France in the post-war monetary crisis—in part a consequence of the government’s short-term borrowing from the Banque during the war—merely underlined James’s ascendancy. Writing in April 1856, James could not conceal his glee at the regime’s difficulties: “The Emperor is excessively displeased to see that the birth of a prince and the conclusion of peace are not having a better effect on public credit, and that it might be said that he has been forced to make peace for want of money.” Indeed, the money market was so tight that, if James were to make a business trip to Brussels, people might say that he was taking all his capital there. Not for the last time, James was subtly mocking the regime’s financial dependence on him.
. The other combatant power to whom the Rothschilds lent money was Turkey. Here too there was competition, though this is understandable as the Rothschilds had not hitherto established a serious financial relationship with the Porte (with the exception of the Greek indemnity payment). The first Turkish war loan of 1854 was taken by Goldschmidt, Bischoffsheim (a minor City house, Palmer, MacKillop & Dent, also seems to have been involved, though James somewhat paranoiacally suspected the long arm of the Credit Mobilier). It was a failure. Attracted by descriptions of Turkey’s copper mines and perhaps thinking of Turkey as Nathan had previously thought of Spain, James therefore resolved to take over. In Horaz Landau, who had been sent as the Rothschild agent to Constantinople shortly before the Crimean War, he chose an able negotiator; when the Turks found themselves in need of more funds in 1855 the Rothschilds were ready and waiting.
In February 1855, during a temporary lull in the fighting, Landau began skilfully to weave his way between the Sultan’s minister Fuad Pasha and the Western diplomats, proposing a new loan, this time guaranteed by France and Britain, while at the same time drip-feeding short-term advances to the government—a classic Rothschild tactic. In August the London house was able to inform Landau that a £5 million loan to Turkey had been secured with an Anglo-French guarantee, thus allowing much more generous terms to be offered than would otherwise have been possible. No sooner was the war over than Alphonse was despatched to Constantinople to discuss the possibility of establishing a new bank there, once again encountering competition from a minor English house (this time Layards). However, the onset of the 1857 economic crisis—combined with a realisation that the risks involved in Turkish finance were greater than had initially been anticipated—led to something of a retreat from Constantinople in the succeeding years.5 Although Landau continued to agree to small advances, the idea that “the national bank of Turkey [might] become a branch of the House of Rothschild” (as The Times put it in 1857) was shelved.
Austria did not fire a shot in the Crimean War. She had to make substantial military preparations, however, if only to back up her tougher diplomatic communications to Russia regarding the Danubian principalities; and because of the fragility of her financial and monetary system in the wake of 1848-9, the effect was roughly equivalent to that of outright war on the French economy (if not greater). As tables 2a and 2b show, Austrian bonds were actually worse affected by the war than French; and Austrian expenditure rose by only slightly less, despite the policy of non-intervention. This was the first act in a “tragedy” of financial weakness which in many ways provides the key to the disasters which befell Austria in the decade after 1857. Past and present military expenditure weighed heavily on the Austrian budget, so that defence spending and debt service accounted for 60-80 per cent of the total. Although attempts were made to economise, fresh military crises invariably nullified these. Taxes were raised and state assets were sold; still the government had to borrow to meet its outgoings. When it borrowed short from the National Bank, the exchange rate—decoupled from silver in 1848—depreciated: between mid-1853 and mid-1854 the gulden fell from 9 per cent below par to 36 per cent below. When the government borrowed long from a frail bond market, the effect was to crowd out private investment. Between 1848 and 1865 the total funded public debt rose from 1.1 billion gulden to 2.5 billion, an average annual increase of around 80 million, but with disruptive peaks as in the mid-1850s. Constantly haemorrhaging fiscal and monetary policy thus combined to constrain economic growth, so that the tax base stagnated and the downward spiral continued.
Could anything have been done to remedy this? In November 1851 the Austrian Finance Minister Krauss wrote a letter to James “in which he lamented a good deal and demanded his counsel, requesting him to shed some light on the situation.” On being shown this letter, Apponyi urged James “not just to shed some light, but to take a torch, as only you can, and try to r
id us of all our monetary wastepaper.” James and his partners tried. Though the Rothschilds might justifiably have closed down the Vienna house after 1848, instead Anselm set about rebuilding what his father had built only to destroy. It was a thankless task, the more so as Anselm’s wife refused to settle in a city she disliked intensely. A rather lonely figure, he at first went through the motions of following in his father’s footsteps: going to see the returned Metternich, making public donations to causes favoured by the Emperor—even siding with Austrian foreign policy in a half-hearted sort of way. But Anselm was haunted by the memory of his father’s downfall, and all his efforts to shore up Austrian finances were, one senses, premised on a sense of inevitable failure. When he called on Metternich in December 1853, Anselm’s mood was bleak:Austria’s financial condition, he stated ... was inevitably approaching a crisis, unless we hit upon the right method of avoiding it ... Rothschild declared that he had expected better things of Herr Baumgartner [Krauss’s successor as Finance Minister], but that Baumgartner had no sense of reality and was not equal to his task ... The conversation at this stage was interrupted by a visit from the Nuncio. Rothschild took his leave and as I went with him to the door he said to me, “You mark my words, we are on the eve of a crisis; if something is not done to avert it, it will be upon us before the new year!”
The House of Rothschild Page 15