In addition to this traditional bond market business, the Rothschilds maintained their pre-war interests in mining. Their influence as the principal shareholders in Rio Tinto became even greater as the firm expanded its interests from copper and pyrite to embrace sulphur-recovery, cinder-treatment and silica gel, and its geographical range from Spain to Belgium, Rhodesia and the Americas.10 Key members of the board such as Lord Milner, Sir Arthur Steel-Maitland (the managing director of the Company in 1920) and Sir Auckland Geddes (who succeeded Milner as chairman in 1925) worked closely with New Court as the firm tried to cope with the volatility of the inter-war raw-materials markets. In South Africa the London and Paris houses together remained major shareholders in De Beers, though increasingly its direction was determined by Ernest Oppenheimer’s Anglo American Corporation (founded in 1917), which had acquired an even larger stake than the Rothschilds. The only reverse was in Spain, where the Almadén mines were nationalised in 1929; but that had ceased to be a major source of revenue even before the war.
All this business hardly constituted immobility. The firm’s familiar circle of stockbrokers—Cazenove, Messels, Panmure Gordon and Sebags—were kept occupied, as were the firm’s lawyers. The trouble was that activity was not always matched by profitability. For when the world economy plunged into the great deflation of 1929—32—with prices, production and employment levels falling by unprecedented amounts—the areas of greatest Rothschild involvement were among the worst affected.
It is arguable, of course, that this greatest crisis of the capitalist system was caused by “structural” factors beyond the control of bankers and politicians alike. The legacy of the First World War was one of over-capacity and distorted markets for many staple agricultural and industrial products. But there can be no doubt that misguided fiscal and monetary policies—allied with the impossible tangle of international war debts and reparations obligations—did much to exacerbate and perpetuate the slump. In the early 1920s, too many countries sought to evade difficult political choices by running excessive public sector deficits and financing them with the help of the printing press: inflation and hyperinflation were the results, and in their wake financial instability as investors (especially bondholders) demanded higher yields to compensate them for the risk of more inflation. Austria was one of the states which experienced high post-war inflation. In the aftermath, the Vienna house had a hand in stabilising the new schilling, thwarting the efforts of inflation enthusiasts like the financier and industrialist Camilio Castiglione; but it is probable that, like virtually every Central European bank in the 1920s, its post-inflation balance sheet was long on deposits and short on reserves. From the mid-1920s onwards, the prevalent policy error was a fixation with unsustainable exchange rates, as governments sought vainly to imitate the gold standard system of the pre-1914 period, ignoring the absence of many of the essential preconditions for its earlier success. The result was that, especially after 1929, politicians sought to balance budgets and tighten monetary policy in the teeth of recession, subordinating all other policy objectives to the maintenance of gold equivalence.
There is no question that the Rothschilds had a hand in this, though the error was so widespread as to constitute a near-universal “conventional wisdom.” Perhaps the London house’s continuing importance in the international gold market was a factor. When the war-time ban on gold exports from London was lifted, N. M. Rothschild took on the role of intermediary between the bullion market and the Bank of England, to which the South African mine companies agreed to ship all their gold (roughly half of world output). The system adopted was that N. M. Rothschild advanced £3 17s 9d per standard ounce to the producers on receipt of the refined gold and then sold it at “the best price obtainable, giving the London market and the bullion brokers a chance to bid,” pooling any premium and remitting it to the mines every six months. Thus was born the so-called “Fix,” whereby the world market price for gold was set every morning at 11 a.m.—beginning on September 12, 1919—following an auction conducted at New Court.11 The choice of venue reflected the London house’s dual role: as refiners and agents for the South African producers (the biggest seller).12 It thus played a pivotal role in the stabilisation of the Indian and British currencies after the war.
Yet it is hard to believe that this was the only reason the Rothschilds adhered to the reconstituted gold exchange standard. Ultimately, they liked gold for the same reason that the rest of the City liked gold: they feared that, if the pound were allowed to float, London would see its central role as the world’s financial capital pass irrevocably to New York. Nor was their faith in the gold standard unthinking: in 1931 Walter argued—rightly—that the breakdown of the system in the Great Depression had “nothing to do with the rights or wrongs of Capitalism or Socialism, but ... is owing to the greed of [certain] countries for gold. What they have succeeded in doing is to injure their own trade by withdrawing the means of barter from the rest of the world.” This was fair comment: the biggest difference between the pre-1914 gold standard and the gold exchange system of the 1920s was that two of the most important players—the United States and France—bent the rules by “sterilising” additions to their reserves in order to avoid domestic inflation. Without central bank co-operation, the system could not survive.
Compared with Britain, France compromised. So long as French tax-payers persisted in believing that the budget would be balanced by reparations which the Germans were determined not to pay, there was no chance of restoring the franc to its pre-war exchange rate. Indeed, it was only after protracted debate that the currency was pegged at 20 per cent of its old external value in 1928. This was a compromise which Edouard vehemently and vainly opposed in his capacity as one of the twelve regents of the Banque de France. In the summer of 1924 he was openly critical of the Left Cartel government led by Edouard Herriot for what he saw as its soft line towards striking railway workers—an important preoccupation for de Rothschild Frères in their role as major Nord shareholders. Early the following year, with the franc depreciating rapidly, he led a delegation from the Banque to discuss the currency question with Herriot. Though Edouard tactfully laid part of the blame for the weakness of the franc on “the clerical right and Communist extremists,” he was also critical of excessive public sector pay settlements and called for a coalition of the Left Cartel with the more right-wing National Bloc it had replaced, with the aim of balancing the budget. However, the appointment of Emile Moreau as Governor of the Banque in June 1926 led to a diminution of Rothschild influence, for, while Edouard continued to dream of a return to pre-war parity, Moreau more realistically argued for stabilisation at something closer to the existing rate. This division came close to outright conflict the following spring. Edouard had a powerful supporter in the industrialist François de Wendel as well as leverage when the French government sought to raise money in London in 1927, but he was asking the politically impossible. Even a new government led by Poincaré and empowered to balance the budget by decree could do no more than peg the franc at 25.52 to the dollar. Under Poin care, the 3 per cent rente rose from 48.25 francs to 67.60; by contrast, Rothschild influence declined.
Edouard’s position was not strengthened by the chequered political career of his cousin Maurice (Edmond’s second son). In 1919 Maurice had been elected to the Chamber of Deputies on Clemenceau’s National Bloc ticket for the constituency of Hautes-Pyrénées. From the outset he had made the most of his family background, using the slogan “My name is my platform” on election posters and, in order to secure the clerical vote, shamelessly assuring the clergy at Lourdes that he would “organise special trains for pilgrims, and on political and religious matters [press for] freedom of teaching in religious schools [and] the recall of teaching nuns.” “Governments can do nothing,” a local priest was given to understand, “without his family. The Rothschilds are, thanks to their banks, the finance ministry—the real one, the one that we can’t do without.” These tactics evidently worked in
1919, but five years later they could not avert defeat at the hands of Herriot’s Left Cartel. Undaunted, Maurice changed his political allegiance, accepting an invitation from the socialist newspaper owner Louis Cluzel to stand in a by-election for the Hautes-Alpes constituency. He won; but this time his electioneering methods were challenged. In a report to the Chamber, he was accused of spending 1.6 million francs (around £15,000) in order to secure victory, paying 5,000 francs to one small town to enable it to buy uniforms for its fire brigade, and even sending out 200 letters each containing twenty francs to individual voters. A motion calling for the election to be annulled was only narrowly defeated by 180 to 178, but when a committee of enquiry concluded that Maurice’s contributions had been essentially charitable and therefore legitimate its report was resoundingly rejected (by 209 votes to 86). The election had to be re-run and although Maurice won (as he did again in April 1928) his reputation—and by association that of his family—had scarcely been enhanced. Venal parliaments and gold-hoarding central banks bear at least some of the blame for the 1929-32 world crisis; the French Rothschilds were represented in both.
The Crash
It is usual, though slightly misleading, to regard Wall Street’s “Black Thursday”—October 24, 1929—as marking the start of the Great Depression. In fact, there had been signs of declining economic activity in Europe for over a year. On the other hand, it is hard to overstate the knock-on effects of the unprecedented collapse of the American stock market, which wiped $30 billion off stocks worth $80 billion in the space of a month and drove the Dow Jones Industrials index from its peak of 381 on September 1929 to a final trough of 50 in May 1932. This asset-price deflation led to immense flows of American capital out of Europe. This in turn led to a generalised monetary contraction which central banks and governments worsened by trying to hang on to their gold exchange rates. One way of doing this was to increase interest rates; another was to cut public spending or put up taxes; a third was to raise tariffs in an effort to reduce imports. The principal effect of such policies was to push up unemployment to undreamt-of heights, as firms laid off workers, investors fled into liquidity, consumers tightened their belts and international trade dried up. This in turn generated a political reaction—sometimes violent—against the whole complex of institutions which seemed to be to blame.
For the Rothschilds, the first great crisis of the Depression came in Brazil. As commodity prices slid further in the global deflation, the government turned once again to the London house for assistance. Armed with the now familiar list of conditions, Stephany and Palin were despatched to Rio in February 1930, but their negotiations were undercut by the coup of Getulio Vargas—among the first of many shifts to dictatorship triggered by the Depression. The following year the Treasury sent Sir Otto Niemeyer in the hope of imposing some kind of stabilisation package on the new regime, but in September Vargas suspended payments on foreign debt, following the precedents set in 1898 and 1914. Now the most that could be done was to negotiate some kind of rescheduling agreement. After protracted conferences with the Council of Foreign Bondholders, an agreement was reached with Vargas in March 1932 which secured preferential treatment for the oldest and best-secured loans. It was not until 1934, however, that a complete restructuring of the Brazilian debt was arranged with the principal foreign banks (the Rothschilds, Paribas and Dillon Read). By issuing new bonds, the government was able to pay around £6-8 million annually between 1932 and 1937, though it was not until 1962 that all the sterling bonds were finally liquidated. It was a similar story in Chile, where a new Compania de Salitre de Chile (COSACH) was set up in 1931 to rationalise the nitrate industry on the basis of a loan worth £2 million issued jointly by N. M. Rothschild, Barings, Schröders and Morgan Grenfell. The scheme was doomed to fail as exports continued to decline. In January 1933 COSACH was liquidated and a moratorium on debt service announced. It took twenty years before an agreement was reached between the bondholders and the new Chilean Nitrate and Iodine Sales Corporation.
It was in Europe, however, that the worst blow fell. On May 11, 1931, Creditanstalt officials showed the Austrian government the bank’s annual balance sheet for 1930, which it was due to publish a few days later. It revealed losses of 140 million schillings (around £4 million) compared with paid up capital of 125 million schillings. Given that its balance sheet was as large as total central government expenditure, these were horrific figures; and as they were four months old the actual losses were probably closer to 160 million schillings. Under Austrian law, a bank whose losses exceeded half its capital had no option but to close down. The prospect for the Vienna house, which held around 16.7 million schillings of the Creditanstalt’s capital, was therefore grim. It was not much better for the 130 foreign banks (including de Rothschild Frères) who between them accounted for more than a third of its liabilities. However, the Austrian government was fearful that the collapse of the Creditanstalt would devastate between 60 and 80 per cent of Austrian industry (an exaggerated figure—in terms of capital, probably no more than 14 per cent of Austrian limited companies would have been affected). It was also pointed out that most of the losses were attributable to the merger with the Bodencreditanstalt which the government itself had insisted on. Accordingly, it was decided to replenish the Creditanstalt’s capital with 100 million schillings in return for a 33 per cent shareholding. As part of the rescue package, the Paris house lent the Creditanstalt a further 136 million francs for six years.13
Yet this did not suffice to avert a financial panic which quickly spread from Vienna to Hungary, Germany and throughout the entire European economy. The National Bank did its utmost to keep the Austrian banking system liquid by discounting bills, but it was slow to raise its discount rate and public confidence spiralled downwards: memories of hyperinflation ten years before inclined Austrians to assume that the schilling would soon go the way of the crown before it, and there was a general flight into foreign currency and goods. Because of diplomatic complications, it took three weeks to organise a £3 million loan to the National Bank from the Bank of International Settlements and when this was exhausted the Austrians had to rely on a short-term loan of £4.3 million from the Bank of England. In July a similar crisis struck the Darmstädter und Nationalbank in Germany. In September a run on the Bank of England ended the pound’s brief return to the gold standard.
The Creditanstalt crisis thus quickly became part of a general breakdown of the post-war monetary system. From the Rothschilds’ point of view, however, it represented the final break between the Vienna house and the London house. When Lionel became chairman of a hastily constituted Austrian Creditanstalt Committee, set up to represent the foreign depositors and shareholders, he declared that to put any more money into the still haemorrhaging bank would be “inexpedient.” Given the close links between the Creditanstalt and the Vienna house, this amounted to a refusal to bail Louis out. By 1933 the Paris Rothschilds were inclined to take the same view. Edmond advised Edouard that it would be “dangerous” even to look at the Vienna house’s accounts “because it suggests involvement or support from the Paris house.” His argument shows that the memories of 1848 had not faded:What is happening in the Vienna bank does not concern us. We advanced funds, it’s a question of honour for Vienna to reimburse them ... This matter of honour in our families has always been the overriding point of view. One need only recall the sale of the silverware [in 1848]. The Vienna house is not our business and in sum, as one of the heads of the Paris house, I do not wish to give them any money, not a penny more.
Edmond at least had no desire to “sell the silverware” a second time. Louis therefore had little option but to turn once again to the Austrian government. In September 1933 he finally wound up his involvement in the Creditanstalt, which now effectively became a state-controlled concern, absorbing the Wiener Bank-Verein and part of the Niederösterreichische-Escompte-Gesellschaft.
There is little doubt that the Creditanstalt crisis was the single most ser
ious blow to the Rothschilds’ position of the post-war period, biting deep into the capital of all three houses. Yet it is worth adding that the impact of the 1929-31 crash could have been worse. They were fortunate too that their involvement with the Swedish financier Ivan Kreuger—whose financial empire was literally based on matches—was not greater. In 1929 the London house had joined forces with the Boston bank of Lee, Higginson & Co. to issue shares for Kreuger totalling $10 million. Three years later, the Swede committed suicide and his empire collapsed, taking Lee, Higginson down with it. At least the Rothschild houses survived the slump. The same could not be said of the bank which had been acquired by Max von Goldschmidt-Rothschild and his sons Albert and Erich in 1920. Goldschmidt-Rothschild & Co. (formerly A. Falkenberger) was handed over to the Reichs-Kredit-Gesellschaft in 1932—one of the lesser casualties of the German banking crisis.
Under these circumstances it is not wholly surprising that the London house sought to increase its involvement in domestic corporate finance, especially as the British economy enjoyed a modest but nevertheless real recovery after the 1931 devaluation. Before 1914 N. M. Rothschild had been hesitant to involve itself in the domestic economy, and it was not until 1928 that this changed with a succession of issues of debenture stock—in partnership with Barings and Schröders—for various London underground railway companies. Two years later, the London National Property Co. raised £2 million through Rothschilds to finance the purchase of Shell-Mex House in the Strand, which it then let to the Shell Transport and Trading Co., and a year later the Woolworths retail chain was persuaded by Philip Hill to issue £9.36 million shares through New Court. Other early corporate clients included the brewers Charrington & Co.
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