It is tempting to agree with this verdict. In many ways, the Rothschilds of the Edwardian era did succumb to the “militarisation of the bourgeoisie” which historians have for so long denounced as a cause of the war. Prior to the fourth generation, the Rothschilds had been anything but keen soldiers. Natty, however, had been commissioned a cornet in the Bucks Yeomanry in 1863 and was later promoted to the rank of lieutenant (1871) and captain (1884). His son followed in his footsteps and reached the rank of major in 1903. In his capacity as Lord Lieutenant of Buckinghamshire, Natty continued to take an interest in the army, welcoming back men of the Oxfordshire Light Infantry who had served in the Boer War with a laudatory speech and free tobacco. Soldiers in the 2nd Life Guards fighting under Kitchener in Egypt were also the grateful recipients of “Rothschild’s soothing weed.” More important, Natty was a supporter of army reform and a keen proponent of increases in the strength of the Royal Navy. “[T]he strengthening of the Navy is always popular amongst all classes,” he assured his French relations in 1908; a year later he spoke publicly in favour of building eight dreadnoughts at a large meeting at the Guildhall also addressed by Arthur Balfour.
There is no doubt that the Rothschilds had their own economic interests in the rearmament. In 1888 the London house issued shares worth £225,000 for the Naval Construction and Armaments Company and subsequently issued £1.9 million of shares and debentures to finance the merger of the Maxim Gun Company with the Nordenfelt Guns and Ammunition Company. This was one of the first deals Rothschilds did with Ernest Cassel and marked the start of a prolonged period of direct involvement; Natty retained a substantial shareholding in the new Maxim-Nordenfelt company and exerted a direct influence over the firm’s management. The wider significance of this lies in the fact that Maxim-Nordenfelt’s flagship product was the lethal automatic gun, used to devastating effect against opponents of British imperial expansion from the Sudan to Matabeleland, and famously cited by Hilaire Belloc as the key to European hegemony.1 Similarly, when Cassel and Rothschilds also financed the Vickers brothers’ takeover of the company (along with the Naval Construction and Armaments Company) in 1897, they were responding to an increase in British naval construction which was rooted in imperial policy. Natty had grasped early on the importance of increased naval construction: in 1888 he had sought to lure the future First Sea Lord “Jacky” Fisher—then still a captain but head of the Ordnance and Torpedo Department—away from the navy to join Whitworths. He remained an enthusiast for naval construction even when it was obvious that the costs were likely to lead to higher taxes.
The Austrian Rothschilds also had an interest in the arms industry. In addition to their railway interests, they retained a substantial stake in the Witkowitz ironworks, which became an important supplier of iron and steel to the Austrian navy and later of bullets to the Austrian army—though it is revealing that the director of the ironworks Paul Kupelweiser felt Albert had “not the slightest interest in the industrial installations that his house possesses. He seems rather to consider them as a disagreeable duty.” When Kupelweiser asked for 400,000 gulden to invest in plant to produce armour plating, Albert replied that “for 400,000 gulden he preferred to buy himself a [country] property.” By going into partnership with Max von Gutmann in this and other industrial ventures in which the Vienna house had a stake, Albert evidently wished to delegate the responsibility for them. Nevertheless, the fact of his continuing involvement is as noteworthy as his personal lack of enthusiasm. If late-nineteenth-century imperialism had its “military—industrial complex” the Rothschilds were unquestionably part of it.
Yet there is a paradox: namely, that the growth of military expenditure had political consequences which were less than congenial to the wealthy elite of which the Rothschilds were members.
Prior to around 1890, the cost of empire-building had been relatively low. Expeditions like the one sent to Egypt by Gladstone in 1882 had been run on a shoe-string. The military budgets of the great powers were not much higher in the early 1890s than they had been in the early 1870s. As table 13a shows, that changed in the two decades before 1914. Taking Britain, France and Russia together, total military expenditure (expressed in sterling terms) increased by 57 per cent. For Germany and Austria together, the increase was even higher—around 160 per cent.
Even allowing for the substantial economic growth experienced by most economies in this period, this represented a perceptible increase in the “military burden” for all the great powers. As table 13b shows, defence expenditure also increased in relation to the economy as a whole in Britain, France, Russia, Germany and Italy from between 2 and 3 per cent of net national product in the period before 1893 to between 3 and 5 per cent by 1913. Austria-Hungary is the exception because the highly decentralised system of dualism kept the “common” Austro-Hungarian defence budget at a relatively low level.
Table 13a: Military expenditures of the great powers, 1890-1913 (£ million).
Source: Hobson, Wary Titan, pp. 464f.
Table 13b: Defence expenditure as a percentage of net national product, 1873-1913.
Source: as table 13a.
Financing these increased expenditures was one of the central political problems of the period. Symbolically, it was rising military spending which precipitated both Randolph Churchill’s resignation as Chancellor in 1886 and Gladstone’s as Prime Minister in 1894. They were among the first of many political casualties of the new military-financial complex.
The problem of how to pay for rising military costs was compounded by the rising cost of government as a whole. At both the national and local level—as well as at the regional level in federal systems like the German and Austrian—the 1890s saw the end the “nightwatchman state” era, which had been characterised in most European countries by a contraction in the size of the state relative to the economy. Whether to appease politically powerful (or potentially dangerous) social groups or to increase “national efficiency,” governments began to spend increasing amounts on urban infrastructure, education, provision for the sick, poor and elderly. Though by modern standards the amounts involved were still small, the increases in expenditure were generally ahead of aggregate economic growth. There were two ways in which this increased expenditure could be met, and each had profound political implications.
One way of raising public revenue was, of course, by putting up taxation: the great question was whether this should be indirect taxation (principally in the form of customs and excise duties on articles of consumption from bread to beer) or direct (for example, a tax on higher incomes or inheritances). In Britain, where the break with protectionism had been more decisive than elsewhere, taxes on imported food were rejected by the electorate, despite the efforts of Chamberlain and others to give tariffs an imperialist rationale. This inevitably put the onus on the rich, and that, needless to say, included the exceptionally wealthy Rothschilds. The key to Natty’s political marginalisation in the period after around 1905 lies here. On the one hand, he was a keen proponent of increased naval expenditure; on the other, he was reluctant to pay for it. In March 1909 he spelt out this ultimately untenable position in a speech to the Institute of Directors and the Naval and Military Defence Committee of the London Chamber of Commerce:At the present time we were threatened with a great increase of taxation. He [Natty] did not know if the revenue would come up to expectation, but a large expenditure had been incurred, and he supposed a good deal more would be be necessary, because all would agree that the Fleet must be maintained in the highest state of efficiency. (Cheers). That being the case, heavier burdens would be thrown on the entire community, and an institute of this kind might be able to say a few words to the Chancellor of the Exchequer with the object of preventing the incidence of taxation from disturbing the commercial arrangements of the country more than was necessary. (Cheers).
A month later, he told a large City audience at the Guildhall “to pledge their support to the Government in any financial arrangements that m
ight be necessary to maintain our naval supremacy”; yet he failed to spell out which arrangements he had in mind. Natty knew full well that “the two absorbent questions ... namely the Budget and the Navy estimates,” were “closely allied”; but he underestimated the political and constitutional implications of this alliance.
In Germany, by contrast, where the Reich was conventionally restricted to financing itself (and hence the German army and navy) exclusively from indirect taxes, the tendency was for tariffs to rise; but working-class dissatisfaction with the combination of “dear bread” and “militarism” was so successfully exploited by the Social Democratic Party (SPD) that the government was soon forced to contemplate introducing property taxes at the Reich level. Here again, Natty misread the implications of increased “militarism.” In 1907 he interpreted Prince Bülow’s election victory over the SPD as a victory for what the strategy historians have dubbed “social imperialism”:The elections which took place in Germany at the end of the last week are a striking example of how national sentiments and imperialistic tendencies have more than anything else contributed to the rout of socialistic ideas, in all probability the Kaiser and his favourite henchman Prince Bülow will go ahead with their Welt-Politik, will rattle the sword in the scabbard, will incur fresh military and naval expenditure on a grand scale, expenditure which no doubt will be felt in England and in France and must in the state of European finance defer the realisation of many socialistic dreams.
In reality, the 1907 result was an ephemeral victory obtained by uniting the so-called “bourgeois” parties in the wake of the successful war against the Herero in South-West Africa. By the time of the next general election in 1912, that unity had crumbled precisely because of disagreements about the funding of military expenditure. Contrary to the assumptions of many on the German right, spending more on the army and navy tended to strengthen the position of the Social Democrats by focusing voters’ attention on the regressive way in which defence spending was financed.
The other way of paying for the rising costs of domestic and foreign policy was, of course, by borrowing. As table 13c shows, this was an option favoured in some countries more than in others. Both Germany and Russia borrowed heavily in the period after 1890, roughly doubling their national debts in the period to 1913; however, when adjustment is made for the depreciation of the rouble in sterling terms, the debt burden in the Russian case rose by just two-thirds, a significantly smaller increase. In absolute terms, France borrowed a lot too, though from a starting point of higher indebtedness than Germany (hence the lower percentage increase). Britain was unusual among the great powers in reducing the level of her national debt between 1887 and 1913. This achievement is all the more impressive when one remembers that the cost of the Boer War drove up government borrowing—by £132 million in total—in the years between 1900 and 1903.
Table 13c: National debts in millions of national currencies (and sterling), 1887-1913.
Sources: Schremmer, “Public finance,” p. 398; Mitchell, British historical statistics, pp. 402f; Hoffmann et al, Wachstum, pp. 789f.; Apostol, Bernatzky and Michelson, Russian public finances, pp. 234, 239.
These were not unsustainable burdens at a time of unprecedented economic growth. Indeed, in all four cases total debt tended to fall in relation to net national product, as table 13d shows. By modern standards, only France had a high ratio of debt to net national product and the tendency was for the burden to diminish.
Table 13d: National debt as a percentage of net national product, 1887-1913.
Sources: as table 13c and Hobson, “Wary Titan,” pp. 505f.
Nevertheless, contemporaries were disturbed by the absolute increase in government borrowing. This was because of the decline in bond prices—or rise in yields (see table 13e)—which manifested itself after around 1890.
The principal cause of this decline was in fact the acceleration of inflation, a monetary phenomenon caused by the increase in gold production and, more important, the rapid development of banking intermediation, which was increasing the use of paper money and cashless transaction methods (especially inter-bank clearing). Contemporaries, however, interpreted rising bond yields as a form of market protest against lax fiscal policies. This was only really true in so far as public sector bond issues were tending to push up the cost of borrowing across the board by “crowding out” or competing with private sector claims on the capital market. Nevertheless, the accusation of fiscal incontinence was repeatedly levelled at most governments—even the British—by critics on both the left and right. Table 13f shows that rising yields were a universal phenomenon; of more interest, however, is the fact that there were pronounced differences or “spreads” between the yields on the various countries’ bonds. These yield spreads genuinely did express market assessments not just of fiscal policy but more generally of political stability and foreign policy, given the traditionally close correlations between the perils of revolution, war and insolvency. Perhaps predictably, because of the experience of 1904-5 and her more general problems of economic and political “backwardness,” Russia was regarded as the biggest credit risk among the great powers. More surprising is the wide differential between German yields and those for British and French bonds, which were remarkably similar. This cannot be explained in terms of the greater demands by the German private sector on the Berlin capital market, as these are London prices (and in any case investors were generally choosing between different governments’ bonds, not between industrial securities or bonds). It seems investors shared the view of the better-informed political observers of the time that Wilhelmine Germany was financially less strong than its Western rivals.
Table 13e: Major European bond prices, c. 1896—1914.
Source: Economist (weekly closing prices).
Table 13f: Bond yields of the major powers, 1911-1914.
Source: Economist (average monthly London prices).
“Too Much Lord Rothschild”
By the turn of the century, the Rothschild identification with the Conservative party was more or less complete. Dorothy Pinto (who later married Edmond’s son James) recalled how “as a child I thought Lord Rothschild lived at the Foreign Office, because from my schoolroom window I used to watch his carriage standing outside every afternoon—while in reality of course he was closeted with Arthur Balfour.” The two men had their differences, to be sure: in 1901, for example, Natty wrote to complain about a speech Balfour had made in the Commons which had made inaccurate criticisms of De Beers, and they seem to have disagreed on the question of immigration controls. But for most of Balfour’s three-year term as Prime Minister they worked closely together.
There was a danger to this proximity. As Edward Hamilton commented, even before Salisbury retired in July 1902 Natty had “become so strong a party man, he will now be ‘out of it’ whenever the other side comes in.” This was astute. In the past, the Rothschilds had been adept at maintaining lines of communication with both government and Opposition. By the early 1900s, however, a new generation of Liberals had come to the fore with whom Natty and his brothers had virtually no social or political contact. Had Rosebery retained the Liberal leadership, there would have been no problem, but after his resignation as Prime Minister in 1895, and as Liberal leader the following year, his influence waned. As president of the imperialist Liberal League, he was profoundly out of sympathy with the more Radical “New” Liberal wing of the party which filled the majority of ministerial posts when the party regained power in 1906. By that time Rosebery had left the party altogether, having denounced both the Anglo-French entente and Irish Home Rule the year before. As the husband of Hannah’s daughter Peggy, Rosebery’s son-in-law the Earl of Crewe was naturally part of the broader Rothschild familial circle, but there is little evidence that he was politically close to Natty. True, it was a matter of course that Herbert Asquith, the new Chancellor, was invited to dine with the Lords Rothschild and Revelstoke at the Lord Mayor’s annual dinner. But neither Asquith nor t
he City grandees had any illusions about their deep differences of opinion. As Natty put it, “the City Magnates who were present ... came to the very easy conclusion that Mr Asquith did not understand much about business. The frigid way in which his remarks were listened to will, I hope, be a damper to some of his rash & enthusiastic advisers.” He and his brothers were not wholly excluded from the corridors of power; but their views, frigid or otherwise, carried little weight. Once, the Rothschilds had mixed with politicians regardless of party allegiance in order to obtain the best possible political intelligence and to influence financial and foreign policy. Now Natty was himself a politician, making remarkably frequent public speeches and donating substantial sums to the Tory party machine. He had become so overtly partisan that he was effectively cut off from both intelligence and influence under a Liberal administration.
The House of Rothschild Page 73