The House of Rothschild

by Ferguson, Niall

  This delay inevitably slowed down the winding up of the old Barings’ partnership which, as Alphonse pointed out, was the key to “the whole question”: “[I]t is not enough to have prevented a momentary suspension of the house of Baring,” he wrote on December 29, “worse has yet to be forestalled by the liquidation of the ... affairs that have caused the embarrassment.” In April 1893, with the sale of Barings’ assets proceeding more slowly than expected, the bankers’ guarantee had to be extended (albeit on a reduced scale) to November the following year. Although Cecil Baring remarked that Natty was “very humane” when a new company—Baring Estate Co.—was set up to liquidate the remaining Argentine bonds, there is no doubt that the Rothschilds resented the continuing claim on their resources which the Barings guarantee entailed. It was only in 1894 that the reconstituted Barings finally repaid the advances made by the guarantors.

  All this helps to explain why Natty’s standing in official circles was enhanced by the Barings crisis. It was not just that Revelstoke was brought low; the Rothschilds themselves had played a pivotal role in averting a potentially acute financial crisis. Before the crisis, Edward Hamilton had been rather disdainful of the Rothschilds. In April 1889, at the time of a minor Treasury operation in exchequer bills, he had written in his diary: “Though I always think it well to keep clear of them in the East End I actually lunched in New Court.” When the Liberals came back in, however, Natty was closely consulted by the new Chancellor Harcourt on the complex question of stock exchange stamp duties. Ten years later, on the eve of the next Liberal government, Hamilton named Natty—along with Ernest Cassel and the second Lord Revelstoke—as one of the “first counsellors” and “representative [City] men” to whom any new Chancellor of the Exchequer should be introduced.

  What had happened in 1890 was that a bank which, according to the formal rules of the financial market, should have failed was bailed out by a collective intervention initiated by the Bank of England, underwritten at the critical juncture by the government and paid for by a broad coalition of other City houses under the leadership of Currie and Rothschild. For the government and hence the taxpayer, it was a cheap solution: cheaper, at any rate, than sending a gunboat or an invasion force, as might conceivably have been done if Argentina had been a Middle Eastern defaulter. The price the banks paid was low too: it amounted to little more than the cost of tying up money in advances to Barings’ creditors, which was much less than the cost of letting Barings fail. Yet one question remains: why did the Rothschilds themselves not also go the way of Barings? For in many ways they were as heavily engaged in Latin American finance. Comparing Barings’ experience with that of the Rothschilds in Brazil helps to clarify the relative costs and benefits of informal empire.

  On November 1890 Natty had told Salisbury that he “was quite indifferent ... he had no liabilities.” This was sheer bluff. In reality, the Rothschilds had been grap pling for some time with their own Latin American debt crisis. We have already seen how Lionel revived the old Rothschild connection with Brazil in the 1860s. There was a lull in Brazilian government borrowing in the 1870s after the end of the Paraguayan War—the only major issue was a £5.3 million loan in 1875—but the 1880s saw a fresh bout of activity in which once again the Rothschilds acted as the government’s sole issuing agent in London. Altogether, the Rothschilds were responsible for Brazilian government bond issues totalling £37 million between 1883 and 1889, as well as £320,000 for the Bahia-San Francisco railway company. In addition to helping consolidate the existing floating debt and convert earlier bonds to a lower rate of interest, this money was used to finance interest payments to existing railway companies and to subsidise shipping companies, so that it was at least partly being used for developmental and especially infrastructural investment. All seemed to be proceeding well—slavery was abolished in 1888 and the currency regained its gold parity the following year—when the Emperor Pedro was overthrown by a republican revolution backed by the army. This appears to have taken the Rothschilds completely by surprise. As in Argentina, there was a run on the currency and a slump in the overseas quotation of Brazilian bonds. By 1893 the country was in a state of civil war, with both the navy and monarchists in the south of the country defying the new government. Signs of stabilisation in 1895 were illusory: in 1896-7 a new revolt flared up among the peasants of the north-east.

  Why did this not lead to a Rothschild crisis in parallel to the Barings crisis? One obvious answer is that in absolute terms the London house lost “only” around £740,000 between 1890 and 1893. This was partly because the Rothschilds did not hold large quantities of Brazilian bonds themselves: in 1886, for example, they accounted for just 2.4 per cent of the London house’s total assets. Secondly, as mentioned above, the Rothschilds maintained a far higher ratio of capital to liabilities than the Barings: even at its lowest point in the period (1890) it was still 19.5 per cent. They were therefore better placed to cope with crises of the sort which happened in 1889. Finally, and perhaps most obviously, the capital of the London house was £5.9 million in 1890, compared with £2.9 million for Barings, to say nothing of the capital of the other Rothschild houses. The losses they suffered were therefore relatively much smaller.

  Rothschilds were not Barings; nor was Brazil Argentina. Despite the political instability of the decade after 1889, it was not in fact until 1898 that the government declared a moratorium on its external debt. The ability of the government to maintain debt service until this point had surprised Alphonse, but it was really not so remarkable. Compared with many other major debtor states of the period, Brazil was not highly geared: even at its peak in 1898-9, total public debt was just 400 per cent of tax revenue. Interest and amortisation of the external debt generally consumed a relatively small percentage of total government expenditure: the average figure of 10.5 per cent for the years 1890-99 was markedly lower than comparable figures for other borrowing states. In fact, it was not until after the 1898-1900 stabilisation that a real debt problem began to develop. Between 1890 and 1914, the London house issued a staggering £83 million of Brazilian public sector bonds and a further £5.8 million of private sector securities. In addition, Natty and his brothers became heavily involved in a parallel expansion in Chilean borrowing, issuing Chilean bonds worth £33 million between 1886 and 1914. These accumulations of debt far exceeded the economic growth which these countries were capable of achieving, even with world demand rising for their staple exports (coffee and rubber in the case of Brazil, guano and copper in Chile). Between 1890 and 1913, the total Brazilian debt (in sterling) rose by a factor of 3.5; real gross domestic product grew just 2.7 times. Moreover, the rapid expansion of coffee production in the state of São Paulo—it quadrupled between 1870 and 1900—led to a crisis of excess supply.

  Plainly, the Rothschilds had substantial financial leverage over Brazil. When the government suspended service on its existing bonds in 1898, the London house effectively dictated the terms of the necessary rescheduling (which essentially postponed all sinking fund payments until 1911). The new Funding Loan issued by Rothschilds to consolidate the state’s various obligations was secured, Ottoman fashion, on the customs receipts and the government was compelled to pursue a rigorous programme of retrenchment, spelt out in a stern letter from New Court to the President-Elect Campos-Salles, which was published in The Times for all to read. This policy led to a rapid appreciation of the currency (the milreis) from 7/4d to 16d in 1913, a trend which intensified the already acute crisis in the coffee industry by pushing up Brazilian costs as world market prices were falling.

  However, there were limits to the amount of control which could be exercised through such informal imperialism. For one thing, growing competition in the international capital market inevitably began to erode the dominance which the Rothschilds had enjoyed for most of the nineteenth century over Brazilian external finance. By 1906 the Rothschild position was under attack in both Chile (from the Speyers and Deutsche Bank) and Brazil (from Schröders). W
hen in 1905 the state of São Paulo sought financial assistance for a coffee-stockpiling scheme which it was hoped would shore up the falling price of the state’s main product, Alfred dismissed the “valorisation” scheme out of hand as “an artificial & mad speculation” which would end in disaster. Natty was equally dubious about the federal government’s simultaneous effort to regulate the milreis-sterling exchange rate by creating a new Caixa de Conversão. However, Schröders and Kleinworts put together a syndicate of New York, Hamburg and Le Havre coffee merchants and proceeded to buy up no fewer than 8 million bags between the autumn of 1906 and May 1908—equivalent to more than half annual world consumption. When Schröders sought to enlist Natty’s support for the £15 million loan needed to liquidate the syndicate’s advances to São Paulo, Natty’s immediate response was blunt: “Certainly not for that damned swindle.” Had he persisted in his refusal, Schröders would have been dangerously exposed: without Rothschild backing, there could be no guarantee from the Brazilian federal government, and without that the loan might well have failed, leaving Schröders with a sixth of its capital in advances to São Paulo and nothing but coffee beans as collateral. Natty chose to draw a somewhat Jesuitical distinction between directly financing the valorisation scheme and lending to the Brazilian state (even if it then used the money to pay for the valorisation scheme). Having made Schröders squirm, he finally agreed to take a share in the loan, but his instinct that such schemes were unlikely to have an enduring success was right. In 1910 competition from the East Indies caused a sharp collapse in the price of rubber which no amount of stockpiling could cushion and the resulting foreign exchange crisis overwhelmed the Caixa de Conversão. The effect of the crisis was to puncture the already declining market for Brazilian bonds, leaving 94 per cent of the £11 million loan issued by Rothschilds in 1913 with the underwriters. A new loan was about to be agreed, which would have been conditional on foreign control of the Banco de Brasil, when war broke out in Europe in 1914.

  Informal imperialism—by definition—generally lacked the ultimate sanction of government intervention. It was a very different thing, as French investors found in 1888-9, to put money into a canal in Panama as opposed to one in Egypt, where French influence had been considerable, even if ultimately subordinate to that of Britain. The choice in Latin America seemed to be between American control or no control. When the Brazilian government appeared to be contemplating the annexation of Trinidad in 1895, for example, Natty urged Salisbury’s principal private secretary Schomberg McDonnell to make diplomatic representations in order that Brazil should submit her claims to arbitration. McDonnell told Salisbury “that it was for the Rothschilds to prove . . . the policy of withdrawing and that, if they could effect this, the main difficulty in the way of arbitration would be removed ... There is no doubt the Rothschilds can do this; but they naturally want to make us do it.” In practice, that meant that it was up to Natty whether he wished to cable the Brazilian Minister of Finance on the subject; as far as the government was concerned, Brazil was literally the Rothschilds’ affair. The limits of the British bankers’ influence became manifest when not only Brazil but also Argentina and Chile began to spend substantial sums on their navies. Despite warnings of “financial ruin,” it proved impossible to arrest the Latin American arms race—not least because British shipbuilders were the recipients of lucrative orders as a consequence of it. As Natty rather ingenuously remarked when seeking to rein in Brazilian railway building, “it is always a delicate matter to question the policy of a government.”

  “Staunch Monometallists”

  The enormous levels of capital export from Britain which characterised the late nineteenth and early twentieth centuries were to some extent facilitated by the development of a global monetary system: first the bimetallic (silver and gold) system and then, from the mid-1870s, the gold standard, which fixed the exchange rates of most major currencies in terms of gold and hence tied them to sterling, the world’s reserve currency. Until recently, the role the Rothschilds played in this process has generally been understated and often misunderstood.

  It has traditionally been assumed that the Rothschilds were firm proponents of the transition from bimetallism to the gold standard. Indeed, to American Populists, the Rothschilds personified the “international gold ring” which they believed was behind the demonetisation of silver. It is easy to see why this was. They still had their refining and broking business;4 and, as we shall see, their interests in gold mining grew rapidly in the last two decades of the century. Moreover, many of the bond issues handled by the Rothschilds in this period were linked to the recipients’ adoption of the gold standard. This was most obvious in the case of the United States, where they and their agent August Belmont played a major role in financing the resumption of specie payments (which had been suspended during the Civil War).

  In July 1874 the London house, in partnership with the New York banker Joseph Seligman, agreed to underwrite a US bond issue worth $45 million of 5 per cents with a six-month option on $123 million. When this proved unsuccessful, Junius Morgan’s group and the First National Bank of New York was brought into the syndicate for a second issue of $25 million, of which the Rothschilds took 55 per cent. Altogether, N. M. Rothschild was involved in issuing no less than £267 million in US bonds in London and New York between 1873 and 1877. These loans were designed not only to stabilise American finances but also to enable the US to adopt the gold standard in the foreseeable future. However, when the 45th Congress met in October 1877, a bill was drawn up which would have restored the “free” coinage of silver and its status as legal tender—a measure which Belmont furiously denounced as “open theft” and “blind and dishonest frenzy.” Only when it was stipulated that silver would be allowed to circulate in strictly limited quantities and would not be used to pay off the interest due on outstanding bonds did the Rothschilds relent. The Secretary of the Treasury John Sherman then negotiated a new loan of $50 million in gold coin through Belmont in 1877 which allowed the adoption of the gold standard to go ahead at the beginning of 1879. This was accompanied by a further bond issue, though this time Junius Morgan’s ambitious son Pierpont sought to exclude the Rothschilds, to the irritation of Lionel and Natty who (as he told Herman Hoskier of Brown, Shipley & Co.) refused “to join any American Syndicate and be at their mercy or command, and would only take it up if we were given the lead to work it our own way with a group of friends around us.”5 Continuing doubts about the American commitment to gold may help to explain why the Rothschilds played such a small role in the great boom in American railway shares and bonds of the post-Civil War era.6

  The issue was still politically open as late as March 1893, when Grover Cleveland attempted to raise a $50-60 million gold loan to maintain convertibility at a time of rapidly diminishing US gold reserves. Though Morgans were willing to act jointly, Natty, Alfred and Leo hesitated: Alfred remained “greatly opposed” even after Cleveland secured the repeal of the Sherman Silver Purchase Act which had continued to give silver a limited circulation. Finally, an agreement was reached which proved highly lucrative (a tribute, perhaps, to the brothers’ negotiating skills, rather than proof of the Morgan view that they were excessively cautious). $62.3 million of US 4 per cent bonds were taken by the bankers at 104.5 and sold to eager investors for 112.25 (the price later rose to 119). Tales of profits of $6 million being made in the space of twenty-two minutes were grist to the Populist mill, of course, and helped ensure that William Jennings Bryan rather than Cleveland was chosen as the Democrats’ presidential candidate in 1896. However, Bryan’s defeat by the Republican William McKinley set the seal on the American transition to gold.

  The American stabilisation was part of a wider process. In 1868 only Britain and a number of its economic dependencies—Portugal, Egypt, Canada, Chile and Australia—had been on the gold standard. France and the other members of the Latin Monetary Union, Russia, Persia and some Latin American states had been on the bimetalliç system;
most of the rest of the world, including most of central Europe, had been on the silver standard. Forty years later, only China, Persia and a handful of Central American countries were still on silver. The gold standard was, in effect, the global monetary system, though in practice a number of Asian economies had a gold exchange standard (with local currencies convertible into sterling rather than actual gold) and a number of “Latin” economies in Europe and America did not maintain convertibility at all. In a number of major European states—Germany (1871-3), France (1878) and Russia (1897)—the Rothschilds played a key role in facilitating the monetary transition, though in Italy Hambros rather over-ambitiously stole a march in 1881-2. Thereafter, the London and Paris houses acted as vital auxiliaries to their respective central banks, sending specie across the Channel in large quantities at times of crisis in one or other market. This in itself was a profitable business. At the same time, the gold standard ensured that foreign bonds denominated in gold-based currencies were proof against exchange rate fluctuations and therefore marketable to more cautious investors, who might otherwise cling to consols and “home rails.” Monetary integration encouraged the growth of the international bond market because convertibility “signalled a country’s commitment to sound budgets, balanced external payments and sustainable volumes of foreign borrowing.” It was thus good for the Rothschilds’ main business.

  It is not to be wondered at, then, that the English Rothschilds were often heard to defend bullionist orthodoxy in the renewed bimetallist debates of the early 1890s. For example, Alfred “strongly opposed ... any radical change as regards the metallic circulation of Great Britain” in a private report he wrote for the Governor of the Bank of England in 1886; and four years later Natty firmly opposed Goschen’s proposal to introduce a one-pound note, a reform which in fact represented an innocent modernisation of the 1844 system and a sensible response to the growing demands on the Bank of England. When Gladstone and his Chancellor of the Exchequer Harcourt were casting round for a suitable British delegate to veto American bimetallist plans at the International Monetary Conference held at Brussels in 1892, Alfred thus seemed the ideal choice. As Harcourt put it,The name of Rothschild will carry a weight which no other could command in the monetary world.—I have not the advantage of knowing Alfred’s opinions on these subjects, but I take it for granted that he is a good staunch monometallist (What Mr Gladstone calls a “sane man‘) who will uphold to the death the single gold standard ...