The House of Rothschild

by Ferguson, Niall

  The crisis of 1907 was the most serious financial crisis before 1914 itself and it revealed the economic dimension to the Anglo-French entente. Nor did such co operation end as market conditions eased. In July 1908, for example, the Banque de France bought consols worth over £1 million through New Court. Later the same year, the Bank of England consulted Natty about the possibility of large scale withdrawals of gold from the London market by French banks. It was a matter of routine that, when the London money market tightened again in late 1909, the Rothschilds discussed the possibility of yet another swap of bills for French gold.

  At the height of the 1907 crisis, Natty wrote an uncharacteristically long and reflective letter to his Paris relatives in which he spelt out the functioning of the gold standard as he understood it, and the crucial role performed by the Anglo-French relationship. The key, he argued, was that “the whole trade of the world is carried on by bills on London.” There were always “running on London between £300 and £400 Millions of drafts, of which probably more than half are for foreign account.” According to the classical theory, “When the Bank is obliged to raise the rate of discount owing to an efflux of gold ... the rate of exchange rises automatically and gold comes back to the Bank of England.” But this had profound implications for the rest of the world—and particularly the Banque de France. The conclusion Natty drew was one with which modern historians of the gold standard would agree—namely that central bank co-operation was essential to the stability of the system:Our excellent brother in law Alphonse used often to talk this question over with me ... He was always afraid that unless the Bank of France and others acted generously on these occasions the exchange on London would rise to such a height that large quantities of gold in circulation would find its [sic] way to London and that that would create greater inconvenience and would be far worse than any step which the Bank of France or other great institutions thought right in a moment of crisis to take. I have troubled you with these details as I wish to impress on you as far as I can how intimately and of necessity all countries are bound together.

  In other words, the world’s principal creditor economies, France and Britain were “bound together” by a common interest in monetary stability. The Rothschild contribution to this system was all the more important if, as Natty believed, the Bank of England was failing to build up its gold reserves to a level commensurate with its global role. He and his French cousins thus continued to see themselves as auxiliaries to their respective central banks; even if they themselves were no longer, as they had been in the past, the lenders to the lenders of resort.

  The Anglo-Russian Antagonism

  Yet it would be quite wrong to conclude that the final political and military consummation of the Anglo-French entente in 1914 was in some sense economically determined. These financial considerations undoubtedly helped to elevate the Anglo-French relationship above the Anglo-German relationship in British eyes; but that was far from meaning a defensive alliance, guaranteeing British intervention in the case of a continental war. In fact, prior to August 2, 1914, there was never any guarantee that Britain would support France militarily if war broke out (though the Foreign Secretary Sir Edward Grey gave personal assurances which encouraged the French to expect such support). In June 1908 Natty himself felt obliged to point out to his Paris cousins that “there was no question of alliance, offensive or defensive .. . and nothing would be so unwise as to make use of that word.” To be sure, he was “equally certain that an unwarranted attack by Germany on France would arouse sympathies and feeling which no government could withstand”; but he insisted that “Germany [had] no idea of an unwarranted attack.”

  This raises an important point. Historians usually talk as if Germany’s relatively rapid economic growth before 1914 implied an equal growth of German international power. Informed contemporaries knew better. The combination of a decentralised federal system and a relatively democratic imperial parliament meant that the Reich found it extremely difficult to finance its increased armaments expenditure after 1897 by raising taxes. This helps explain the relatively high level of German government borrowing in the pre-war period, though in fact much of the borrowing was undertaken by the federal states and local authorities to finance non-military expenditures. The high level of public sector borrowing in itself put a strain on the German capital market; the fact that it coincided with very high levels of private sector investment (mainly to finance the rapid growth of the electrical engineering and chemical sectors) compounded the difficulty. The resulting upward pressure on German interest rates—most apparent in the rising yields on German bonds—was widely seen by contemporaries as a sign of German financial weakness.

  By now, Natty was no longer sympathetic towards “the German octopus” (or “Deutschland über alles,” as he sometimes called it). He was, he told his cousins in April 1907, “no admirer of German statesmanship and I am never enamoured of their policy, nor do I trust what they choose to call Weltpolitik.” He was especially hostile to the efforts of Admiral Tirpitz to narrow the naval gap between Britain and Germany. Yet he was quick to discern the limits of German power. “There is no doubt,” he observed, “that the foreign policy of Germany has resulted in her isolation and also that there has been a comparative failure of securing by political means what is euphemistically called commercial and industrial enterprise and which would be better designated under the term financial concessions [overseas].” Moreover, he knew perfectly well that the Germans could not afford a prolonged naval race, and this financial weakness made the “scaremongering” notion of a German threat to British security seem fundamentally implausible. “[T]he German Government is very hard up,” noted Natty in April 1906, as yet another Reich loan was put on the market. Nor did he overlook the difficulties experienced by the Reichsbank during 1907, which were in many ways more serious than anything experienced in London. “Germans are scientific and symmetrical in everything,” he wrote (with more than a hint of irony), “and their Bank act has been held up to the admiration of the world by those speculators who grumble at high rates of interest here as a marvel of scientific simplicity and elasticity.” But although “elastic conditions [had] enabled them to inflate their currency ... the length of their [tether?] has been reached as the German Government has Treasury Bonds and Treasury Notes to issue.” Natty was especially struck by the German need to sell bonds on foreign capital markets, an expedient which neither Britain nor France had to resort to in peace-time.

  Of course, the Rothschilds saw that financial constraints might positively encourage the German government to pursue an aggressive foreign policy, because by “rattl[ing] the sword in the scabbard” the Kaiser and Bülow hoped to “defer the realisation of many socialistic dreams.” Yet such sabre-rattling could only “incur fresh military and naval expenditure on a grand scale” and thus worsen the internal position. This explains why Alfred renewed his old links to the German court when the Kaiser visited England in December 1907. As Natty observed shrewdly, “it is hardly likely that the German Emperor will want to be quarrelsome ... [when] he has his hands full with all his socialists.” The impression of an over-stretched Reich was promptly confirmed by a huge Prussian bond issue in April 1908 and by the Reich budget, which showed “a large deficit ... due to an ambitious naval programme, to the necessity of increasing the pay of all their civil servants, and to what they practically call ‘miscalculations’ in their old age pension scheme.” Small wonder the Rothschilds, like the Warburgs in Hamburg, expected the German government to seek some sort of agreement limiting naval construction. The second Moroccan crisis in 1911—when the German government sent the Panther to Agadir—underlined the vulnerability of the Berlin market to withdrawals of foreign capital. To the bankers, Germany seemed weak, not strong.

  Nor could it be taken for granted that a Liberal government would ever be able to bring itself to fight on the same side as Russia in a war. Here too the Rothschilds sought to resist the tendency for Europe to divid
e into “armed camps” by opposing the idea of an Anglo-Russian entente. Perhaps if the 1905 revolution had led to an enduring liberalisation of Russia, their attitude might have been different. The French socialist leader Jaurès hoped that the Rothschilds would use their financial power to force Russia down the road of parliamentarisation, recalling how “in 1848 the Rothschilds, as creditors of the King of Prussia, had imposed on him the budgetary control of a Landtag and the granting of a constitution for the sake of their loans.” Natty did indeed express the hope in January 1906 that “wise counsels will prevail at St. Petersburg & that a liberal regime may be instituted.” But the Rothschilds were sceptical when the post-revolutionary government approached the Paris house in the hope of securing financial assistance in exchange for promises of reform. In the hope of overcoming the English partners’ hostility, an informal approach was made by one Dr Brandt, a minor figure at the Russian embassy in London (whom Natty described as “an ugly hump-backed Russian Jew, evidently full of his own importance”) who “came here in order to explain to us the position of Russian Jews & to point out to us how their fate might be ameliorated”:The Jew, said Dr Brandt, is an object of horror & detestation to everyone in Russia. The Emperor & the Court hate him, hatred which is shared by Witte & the Ministers, the Russian people loathe him, & the Duma, which is about to be elected, will reflect the wishes of the Court & the opinion of the Russian people. You cannot emigrate 5 millions of Russian Jews, & if you do not do something, you may have, & probably will have a “Red letter” Saturday, a second Saint Barthélémy, & nearly the whole Jewish Russian population sacrificed to the fury & orthodoxy of the holy Russian people. As far as I understood him, the remedy is a very simple one. Make a big loan for Russia, & something may be done for the Jews!

  But Natty had heard this tale too many times before: “I told him not precisely in the words that I am using to you, but words to the same effect: that he was putting the cart before the horse, namely, that when the Russian Jew has liberty & equal rights, Russian finance would improve & the Treasury difficulties would be considerably less.”

  It was the same story when the somewhat more plausible figure of Arthur Raffalovich called on Alfred the following month:He said that 6 months ago his Master, Mr de Witte & the Emperor, were anxious, most anxious to ameliorate the fate of the Jewish population in Russia, but that now public opinion in Russia was excited and the Emperor & the Imperial Family, as well as the Ministers, were both hurt & grieved at the fact that the Russian Jews had attempted to defy a just & paternal government, that the Hebrew population were the authors of the Socialistic & Revolutionary movement, & that when everything was quieting down in Russia, they alone of his numerous subjects had refrained from sending congratulatory addresses expressing their loyalty & devotion to the Throne & their love for the country that treats them so well! He naturally supposed that we wished to ameliorate the fate of our coreligionists, and that there was only one way of doing so, namely, by our consenting to place ourselves at the head of an International Syndicate who would be prepared to accommodate the Czar with untold millions, anything between £60 to £120,000,000! Should we agree to the proposal, he gave us his word of honour that those reforms we have at heart would be immediately effected, & on our answer, the fate of our coreligionists depended, and the responsibility lay with us, & not with the governing power at St Petersburg.

  Again Natty was unbending. Similar promises had been made when the Paris house had arranged large loans for Vyshnegradsky, but had not been kept. Nor had Witte given Edmond and Edouard any reason to believe in a real change of policy in St Petersburg when they had last seen him in Paris. “[T]aking all the circumstances into consideration,” Natty replied, “we could & would not help Russia in her need until she had done for our co-religionists that which would make them happy & contented subjects of the Czar & prosperous citizens of the Russian Empire.” He added for good measure that “it was absurd to suppose that the Jewish population hated the Czar. A large number of alien emigrants only [prayed?] to go home & dwell in their own country ... & I also told him that when the Cesarewitch was born, strange to say, in the ghettos of London & New York, the health of the Czar was drunk, and blessings invoked on the new born babe.” This was Raffalovich’s cue to produce a draft message to be sent back to Russia which Natty “slightly altered, as I. was particularly desirous that he should only lay stress on the Jewish Question.” A final approach by a Russian purporting to speak on behalf of “our co-religionists” was dismissed out of hand:[W]e should not think of associating ourselves with it until the fate of our co-religionists in that country was assured. We know from very good sources that that their present position is as bad as it has ever been; & probably much worse. The Jewish population live in dread of fresh outrages at any moment, & particularly when our Passover holiday occurs. The Liberal Party in Russia are also very anxious & the prospect of a huge Loan being made in Paris or Berlin fills them with dismay. They think that the money, which is often called the “sinews of war,” will be in this case a fresh emblem of oppression.

  “We can have no direct or financial interest in the Russian Loan” was Natty’s last word.

  Perhaps as a way reinforcing his case for consumption in the rue Laffitte, Natty also added a financial objection: he suspected that Russia was heading for a financial crisis and might even have to abandon the convertibility of the rouble. The difficulty with this was, as he himself conceded, “that there are a great many people in the world who look at Russian finance with very different eyes from what we do. A friend of mine who was staying with me on Sunday, who is a prominent Radical in this country ... told me on Sunday that the Russian Government were rapidly getting the better of all their troubles & disorder. He acknowledged that their finances were at present in an awful state; but, with a chuckle, he said, time & the resources of the country will bring them through.” Both Revelstoke and Morgan had been in St Petersburg before the revolution broke out in 1905 and it was predictable that once order was restored they would resume negotiations for a Russian loan. With the blessing of both Asquith and Grey, they arranged to place £13 million of a massive £89 million Russian bond issue on the London market. The main source of financial support for Russia remained France, of course: as Natty might have realised, French banks and bondholders had already put too much into Russia to risk the collapse of the currency and the devaluation of their own investments. But in Berlin too there were eager takers, led by Mendelssohn. To make matters worse, it was widely reported in the financial press that the Rothschilds had covertly subscribed to the loan.15

  Natty sometimes maintained that he opposed lending to Russia on “purely financial” grounds, quite apart from his religious scruples. He was firmly convinced that the new Russian loan would fail outright or that those who subscribed to it would soon lose out as a result of “renewed discontent [and] rioting which may be sporadic in various places but which will become general.” The political situation in Russia, he warned, remained “in a very critical and parlous state” and he predicted “periodic outbreaks of dynamite outrages, of bomb throwing and assassination.” He even went so far as to compare the election of the first Duma to the calling of the Estates General in 1789. Although in the medium term Natty was right to foresee another and much bigger Russian revolution, it might be thought that, at least in the short term, there was an element of wishful thinking in all this; even as he made the pessimistic argument, Natty could not conceal his envy of the “very magnificent profit” which he assumed Barings were making. Yet it soon became evident that the Rothschilds had been justified in refusing the loan on purely financial grounds: although it was relatively firm to begin with, by July the price of the new bonds had slumped and Revelstoke was left holding a large parcel at a loss. “As we have been wise enough to eschew Russian finance for some considerable time,” Natty was able to gloat, “& lucky enough not to be inveigled by false promises into taking any part in the Russian Loan, the fall in Russian securit
ies only affects us indirectly & only so far as [it] may have a considerable effect on the price of other securities.—We are naturally more affected by the fate of our unfortunate co-religionists in Russia & by the barbarities which are again being practised.”

  Nevetheless, the persistent political instability of Russia did not mean, as Natty fervently hoped, that “all these beautiful detailed accounts in the papers, of understandings between England and Russia are myths & inventions.” In June 1906, as news reached London of more “hideous slaughter” of Russian Jews, Natty went to see the Foreign Secretary to “ask him if international action cannot be taken, & on this ground, [that] the continuance of this monstrous policy will send fugitives in hundreds if not in thousands to countries where they are not wanted, & where there are already many seeking work.” But Grey was evidently not much moved by this argument; he attached a good deal more significance to strengthening the diplomatic links between Britain, France and Russia which he regarded as essential if German ambitions were to be kept in check. The most he was prepared to offer Natty was “unofficial & verbal communications to be made to the effect that a recurrence of these outrages would alienate public opinion & prevent the good feeling which ought to exist between the two countries.” Although Natty was pleased to see that “my friend” seemed “very nervous about the future of Russia,” this was self-delusion. Grey was already much too firmly committed to the policy of Anglo-Russian entente to be distracted by the plight of the Russian Jews.