Part 13 (1/2)

Quite apart from floating bonds for medium-sized German states, the Frankfurt house also made good profits from loans to minor German princes such as Prince von Bentheim-Tecklenburg and Prince Viktor zu Isenburg (to name just two), as well as to major aristocratic landowners like Count Hugo Henckel von Donnersmarck. In many ways this represented a continuation of business dating back to the time of Mayer Amschel. What was novel in the 1840s was the extension of such business to the non-German parts of the Habsburg Empire. Between 1843 and 1845 loans to the value of 12.3 million gulden were issued by Salomon and his Vienna a.s.sociates to a group of Austro-Hungarian n.o.blemen notable for the size of their estates and the extent of their political influence, all but one of whom-the Habsburg Archduke Karl Ludwig-were Hungarian. Much the largest loan, to Prince Paul Esterhazy, was, of course, far from being the first Rothschild loan to that powerful family. But the sudden spate of loans to other eminent Hungarians is striking. The likes of Count Moric Sandor, Count Joseph Hunyady and Count Lajos Szechenyi, eldest brother of the multi-talented Magyar reformer Istvran Szechenyi, were at the apex of Hungarian society. In principle, these transactions were little different from the lending facilities provided by West End banks like Coutts & Co. to the English aristocracy. (Indeed, Esterhazy had a close counterpart in the Duke of Buckingham, another land-rich but cash-poor grandee.) But this new involvement with the Magyar elite was to prove a source of political as well as financial embarra.s.sment to the Rothschilds when, just a few years later, Hungary was plunged into a secessionist war with Austria.

In Italy, the Rothschilds pursued the same strategy of diversification. They continued to play a leading role in the finances of the Bourbon regime in the Two Sicilies, though James and his nephews worried that local bankers would sooner or later challenge Carl's dominant position there. Here, as in Spain, there was a s.h.i.+ft away from conventional bond issues in the 1830s. For example, the state-owned Sicilian sulphur mines were considered as a possible source of guaranteed revenue against which advances might be made to the government. Another possibility raised was that of a lottery loan, an idea which James disliked because such loans had been prohibited on the Paris bourse. It is evident from their private correspondence that the Rothschilds had a low opinion of the Neapolitan government (which was to be famously excoriated by Gladstone in 1850). On the other hand, they had no scruples about continuing to do business with ”His Macaroni Majesty.” ”Your Finance Minister is not a man you can reliably count on,” James told Carl after a visit to Naples in 1839. ”He is a real blackguard. He is afraid to speak with the King and if one wants to accomplish anything at all in Naples, the only man who can do so is the King himself and [sic] the Minister of the Interior, who is a very smart fellow.”

Relations with the Papacy had a similar character: a fundamental contempt for the Roman government was no barrier to a profitable business relations.h.i.+p. As in the case of Naples, the mid-1830s saw attempts by rivals to break the monopolistic position over Papal finances which the Rothschilds had established after 1830. These were successfully seen off, and the management of the Papal debt remained firmly and profitably in the hands of their Roman partner Torlonia. This gave the Rothschilds a degree of leverage over the Papal government: on at least two occasions Salomon protested through Metternich against ill-treatment of the Jewish community of Rome, reinforcing the widespread belief that (in the words of Alfred de Vigny) ”A Jew now reigns over the Pope and Christianity.” However, this aspect of the relations.h.i.+p should not be exaggerated: the primary concern was profit from, not reform of, the Papal regime.

It proved rather more difficult to establish financial relations with the state which was to pose the most successful challenge to Habsburg power in Italy: the Kingdom of Piedmont-Sardinia. In 1834 the Paris house was invited by the government in Turin to bid for the management of a 1 million loan it was proposing to make. From the outset the compet.i.tion for the business was fierce and Lionel was sent to Turin in an attempt to clinch the deal. The correspondence between him and his uncle James during this mission sheds light not only on Rothschild negotiating techniques but also on the difficulties of dealing with an essentially absolutist regime. Finding the Piedmontese Finance Minister impossibly obtuse, Lionel sought to strike a behind-the-scenes deal with his secretary, but was unable to overcome the King's preconceptions about how the loan should be arranged. ”If,” James advised, our compet.i.tors come to you (for in no case must you go to them yourself ) come to you (for in no case must you go to them yourself ), saying that they are disposed to understand with you [sic] for the Loan, we beg you will receive their overtures and to make a contract with them, conceding to them a fourth or the half of the affair, to be disposed of as they like . . . but in this case the business must be done by you in our sole name our sole name; for you were the first on the spot, and in no case can it suit us to be in the background or to join our name to another.

However, if they did not accept such a proposal, Lionel should improve his offer, for ”we are disposed to take the business if not at any price, at least at a price that will make them pay dear for it if they go beyond us . . . If the business be in the least feasible, do it, even if it should give no profit whatever, even if it were necessary to lose 2 or 3 hundred thousand francs to prove to those gent[leme]n. that we are not afraid of a sacrifice when we want to baffle them If the business be in the least feasible, do it, even if it should give no profit whatever, even if it were necessary to lose 2 or 3 hundred thousand francs to prove to those gent[leme]n. that we are not afraid of a sacrifice when we want to baffle them.” James carefully outlined how Lionel should deal with the government in order to outbid the compet.i.tion: Your princ.i.p.al object [he wrote] must be to do well to captivate the minister, and so clearly to prove to him that it is [in] his interest to contract with us rather than with another, never giving him your last word, and to show yourself in such dispositions that he can conclude nothing with the others without having enabled you to cover their offers-and when you must come to the last word last word you must insist that it shall in fact be the last, and that your offer shall be accepted immediately and without reserve. you must insist that it shall in fact be the last, and that your offer shall be accepted immediately and without reserve.If however these gentlemen are clever enough to place themselves in an equal or better position than yours in this respect . . . your plan must be to make them pay as dear for it as possible, and to abandon the field to them only when you have sown so many difficulties & thorns in it that they can gather nothing but weeds. In such case we will be easily consoled . . . there are cases when victory costs more than a prudent retreat . . .

This gives an indication of the way James himself would have operated had he himself been in Turin; and perhaps he might have succeeded. But the inexperienced Lionel was ultimately outmanoeuvred-or rather outbid-by what he called the ”Bande Noire” of French bankers led by Hagermann. It was not until 1843 that renewed attempts were made to do business with Turin and relations remained embryonic before 1848.

This expansion into new areas explains why, by the early 1840s, many observers had begun to see the Rothschilds as more than merely allies of the European states: they now appeared to have acquired a unique power of their own which was independent of the great powers and nearly universal. In his essay ”Rothschild and the Finances of Europe” (1844), Alexandre Weill-one of many writers of Jewish origin who were fascinated by the Rothschild phenomenon-made the point succinctly: while ”Rothschild” had needed the states to become ”Rothschild,” he now no longer needed them. In 1842, the liberal historian Jules Michelet declared in his journal that James knew ”Europe prince by prince, and the bourse courtier by courtier” (see the epigraph to this chapter). This was barely an exaggeration. Leaving aside the two outstanding Rothschild failures-Portugal and the United States-and the exceptional case of Spain, where control of the country's mercury mines took precedence over the floating of loans, the list of states for which the Rothschilds raised money in the decade or so before 1848 is impressively long. Conservative states borrowed to avoid parliamentary influence over financial policy, often the necessary corollary of tax reforms. More progressive states borrowed to pay for public works, notably railways, when the private sector seemed unable or unwilling to fund investment. Few did not at least contemplate employing the Rothschilds as bankers and underwriters. The benefits of this widening of the financial net were obvious. The risks would only become apparent in 1848.

”Absolument le Maitre des Finances de Ce Pays”: Belgium.

Perhaps the best example of Rothschild strategy in the pre-1848 period is their involvement in the finances of the newly created Kingdom of Belgium. James and his brothers had moved swiftly to establish a financial foothold in Brussels in the wake of the Belgian secession from Dutch rule in 1830, providing the new government with a lifeline of credit in the first three stormy years of its existence. In the period of relative tranquillity between mid-1833 and 1838, James energetically sought to defend and develop the position of dominance he and the Societe Generale had established in Brussels. A variety of transactions helped to sustain Rothschild interest-above all, state loans to finance Leopold I's policy of economic development, the centrepiece of which was the building of a railway network.

In directly involving itself in railway (and ca.n.a.l) construction, the Belgian government was to some extent breaking with the established British practice whereby the financing of railways was at first left more or less entirely to the private sector. But it was a precedent which other powers would soon follow. What the Belgians had appreciated was the strategic significance of possessing a railway network-an insight which owed much to their strained relations with Holland and, in particular, the need to avoid dependence on the established network of ca.n.a.ls and rivers in the Low Countries which the Dutch controlled. From the Rothschild point of view, there were obvious advantages to such a policy: it always struck them as less risky to issue state bonds than private railway shares. More importantly, the development of the Belgian railway system dovetailed neatly with plans for a railway link between Paris and Belgium in which James had already expressed an interest. On the other hand, the Belgian strategy of industrial development would have made little sense if it had not been accompanied by a parallel development of the country's own banking system. Having created three new inst.i.tutions in partners.h.i.+p with the Societe Generale (the Societe de Commerce de Bruxelles, the Societe nationale pour entre-prises industrielles et commerciales and the Banque fonciere), James had done his best to maintain his dominant position. But the Banque de Belgique (founded in 1835 with largely French capital) was a genuine rival and James had to decide whether to resist the challenge to his position or to join forces with it. In the boom years of the mid-1830s, the Paris house worked closely with the Societe Generale in floating a succession of Belgian mining companies on the Paris bourse. But in the sphere of government finance, as the inconclusive negotiations over a conversion operation in 1837 revealed, even the Societe Generale had to be regarded as a rival as much as an ally. Intimate though their relations were with King Leopold, the Rothschilds were never able to rest on their laurels as the financiers of independence, especially in view of the suspicion with which they were viewed by sections of the Belgian parliament and press. Moreover, the possibility could not be ruled out that the Belgian government might one day seek to make military use of its railway network, or indeed of the money it was borrowing to pay for it. The government spent roughly three times what it spent on railways during the 1830s on building up an army.

All these conflicting factors had to be taken into consideration when the Dutch-Belgian question returned to the European diplomatic agenda in 1838-9. In essence, the question now arose whether or not the Belgian government would abide by the terms of the 1832 articles and evacuate Luxembourg and Limburg, in return for a Dutch recognition of Belgian independence. Quite apart from the territorial sacrifice, the 1832 articles entailed a financial sacrifice, because they envisaged a roughly equal division of the pre-1830 Dutch debt between the two states. It so happened that the resumption of negotiations coincided with a new Belgian proposal for a 36 million franc loan (and a parallel Dutch request), giving the Rothschilds more than usual diplomatic leverage. Despite the small sum involved, James was extremely eager to secure this new loan, partly because he expected it to be relatively easy to float, but mainly because it would be the first major Rothschild bond issue since Nathan's death. It was a chance, in other words, for him to a.s.sert not only the Rothschilds' continuing dominance of the bond market, but also his own leaders.h.i.+p within the firm. If the terms were right, he declared in May 1838, ”I will immediately say yes, despite all the political problems, because there won't be any war. Belgium will have to yield and the world is so keen to do business that one really has to hurry.” The Belgians might huff and puff, James reasoned, but without French support they could do little.

Momentarily, when Prussia occupied Luxembourg in order to force the Belgian government into submission, James hesitated: ”the sound of cannon fire” had its usual effect on the Paris bourse. But, when it appeared that even this would not provoke a French intervention on the side of Brussels, he went ahead swiftly with the loan, aiming to issue it as quickly as possible in London, Paris and Brussels, before there could be any deterioration in the diplomatic position. Although the bonds proved slightly less easy to market than James had antic.i.p.ated, the issue went ahead smoothly. The fact that the Belgian coal bubble also burst in 1838 may have strengthened James's position, as the sudden slump in industrial shares very nearly broke the Banque de Belgique and put even the Societe Generale itself under pressure. Now it was James who stepped in to bail the two banks out.

James was right to antic.i.p.ate that the negotiations might sooner or later run into difficulties, though fortunately for him this did not happen until the new Belgian bonds had largely been placed. There was considerable political opposition in Belgium (and in France) to the reimposition of the 1832 settlement. Yet the fact remained that the Belgians lacked the wherewithal to resist, for, although the bonds for the new loan had by now been sold, the Rothschilds had not yet finished paying over the money raised. To make the position unambiguously clear, in December 1838 James requested that a clause be inserted in the loan agreement to the effect ”that if war were to break out or if any disputes were to arise then we would be at liberty to annul our contract.” Somewhat optimistically, the Belgians continued to negotiate with the Rothschilds in the hope of securing additional funds in the form of an advance against treasury bills. ”Well, the Belgians are a.s.ses,” James commented on hearing reports of military preparations in Brussels. ”I am not at all pleased to see all the troop concentrations, and they are quite capable of turning a joke into a serious affair, although as long as the major powers are opposed to war, they can't do anything.” The request for an advance was turned down flat. Playing, as usual, on Metternich's hostility to ”revolutionary” regimes, Salomon (who was in Paris during the crisis) sent Apponyi a copy of his instructions to Richtenberger, the Rothschilds' agent in Brussels: We do not in the least resent the fact that the [Belgian] Government is somewhat angry at our refusal with regard to the Treasury Bills. It is not at all a bad thing that these gentlemen should realise that they may count on us only as long as they mean to follow a policy of wisdom and moderation. We have certainly given sufficient proof of our intention to support and help the Belgian Government but our goodwill necessarily stops short of the point of providing the rod with which we are to be beaten, that is to say, providing the money wanted to make a war which would destroy the credit that we are applying all our energies and resources to maintain. You may tell these gentlemen what I have written freely and frankly and without mincing words.

Lest there be any doubt in Austria about Rothschild policy, he followed this letter up with another to his Vienna office ”for Prince Metternich's information” detailing Richtenberger's conversations with the Belgian government: They won't get a farthing from me until they give way, and before I go away I shall leave similar instructions with my brother James . . . I hope that Belgium will now sign the twenty-four articles especially as they lack the ”nervus rerum” and as long as the articles are not accepted the Belgian Government will not get a halfpenny from us, although they have been begging for money for months. Difficult though I [have] found it to keep on refusing, I shall feel compensated, should Belgium yield and peace be restored, by the reflection that I shall have done my best to contribute to such a result.

It was, of course, as much the lack of a pro-Belgian government in Paris as the lack of 4 million francs from the Rothschilds which obliged the Belgians to give way. Still, the leverage which the Rothschilds were able to exert in Brussels had been considerable. Moreover, it seemed to present a perfect opportunity to consolidate Rothschild dominance in Belgian finance. Even before the treaty had been signed, James was urging his nephews that ”a Belgian security is always marketable and I would suggest that one of you . . . should go to Brussels to make the acquaintance of the new Minister in order to establish a close relations.h.i.+p with him and to tell him that you are [now] prepared to make all the loans and to receive treasury bills”-something which had previously been refused. What James now aimed at was nothing less than a monopoly. As he put it bluntly: ”[T]he arrangement of the Belgian question is going to be followed by a need for money and this will be a moment we ought to exploit in order to make ourselves the absolute masters of the finances of this country.” Even by Rothschild standards, this was strong stuff; but in many ways the position subsequently achieved was not far short of mastery over the government's borrowing, even if it had to be shared with the Societe Generale. In early 1840, when James travelled to Brussels to discuss the terms of a new loan of 60-80 million francs, he found the government ”very well disposed”: ”I left all the people there exceedingly pleased with my visit, and I lectured them about how to put themselves on a better footing, at least for a while. They are content enough to let us guide them, now that I have pointed out to them all the mistakes they have made in attempting to act without us.”

After protracted discussions, a loan was duly agreed in November, and another (for 28.6 million francs) followed two years later. Whether to pay its indemnity to Holland or to embark on new railroad projects, the Belgian government seemed addicted to borrowing, and its reliance on the Rothschilds to find buyers for its bonds was almost complete. Typically, when James fell out with a Belgian minister in 1842, he requested Lionel ”to go to Windsor on Sunday to see the King of the Belgians”: Constantin has written a letter which you will receive in due time explaining how matters stand at Brussels & you will be able to tell the King if . . . the present minister remains there will be no market anywhere for Belgn Bonds & no possibility of undertaking a large financial operation, you must be careful not to speak against [the minister] but only let his Majesty find out yr opinion.

Altogether, Belgium raised five major loans between 1830 and 1844 with a combined nominal value of close to 300 million francs; almost all had been underwritten by the Rothschilds.

Nor was it only Belgian finance which the Rothschilds now sought to control. In October 1840 Anselm visited the Hague, where the Dutch government was demanding the payment of a capital sum from the Belgians (as opposed to the annuity of 5 million francs they had agreed to pay in 1839). When the Dutch blamed their deficit on the fact that the Belgians were delaying these payments, Anselm obliged with a modest advance. Two years later, when an agreement was reached with Belgium to capitalise the money in the form of bonds, it was the Rothschilds who then offered to cash them (at a substantial discount) for the Dutch government. It was entirely typical of the Rothschilds to act on behalf of both parties in such an international transfer.

In both Belgium and Holland, there was considerable opposition to the role played by the Rothschilds in public finances. For example, the Rothschilds were closely identified with the French government's abortive scheme for a customs union with Belgium. Protectionists in Brussels detected a sinister French plan for economic annexation, though there is in fact no evidence that the Rothschilds supported the scheme. Anselm feared similar attacks by the liberal press in Holland when the possibility was raised of a conversion of the Belgian bonds given to Holland in 1841. The Dutch Finance Minister, he complained, was as well disposed for us [sic] as can [be], but he is so much under the influence of the public opinion & the newspapers which say that he is sold to us, that really the man has not the courage to contract with us, altho he is very well aware that no other one has the means, the credit, the influence we dispose of & has the power to raise so much the public credit of the country as we might possibly do it . . . Really the Man is so terrified by every stupid Article in the news papers saying that he has sold himself to us, that he told me, ”I wish most sincerely to do alone with you, if only I could save my reputation of an honest man or prove to others that they are in the impossibility [sic] of doing so well as you.”

The Minister was right to worry; three months later he was forced to tender his resignation in the face of opposition pressure.

Although Anselm was able to retain Rothschild control over the transfer transfer of the 40 million guilders still owed by Belgium to Holland, both the Dutch and Belgian governments now sought to emanc.i.p.ate themselves from the Rothschilds in their capacity as underwriters by selling Belgian bonds by public subscription. Needless to say, the Rothschilds viewed this development with extreme hostility, fearing a precedent which (like the British income tax) other governments might follow. Nat was characteristically fatalist: ”I fear folks have become too clever everywhere & governments will not pay commission when they can manage without.” ”If the govt. succeeds,” he told his brothers gloomily, ”which is most probable, they will be able to do without us at present & in future-We can not oppose them openly.” But his uncle James never gave up business without a fight. ”The Baron wishes the thing not to succeed,” Nat reported, ”& consequently avoids helping the minister thro”-cer tainly it is against our interest that the Government should make open loans & if we can prevent them so doing it is our duty to act accordingly.” of the 40 million guilders still owed by Belgium to Holland, both the Dutch and Belgian governments now sought to emanc.i.p.ate themselves from the Rothschilds in their capacity as underwriters by selling Belgian bonds by public subscription. Needless to say, the Rothschilds viewed this development with extreme hostility, fearing a precedent which (like the British income tax) other governments might follow. Nat was characteristically fatalist: ”I fear folks have become too clever everywhere & governments will not pay commission when they can manage without.” ”If the govt. succeeds,” he told his brothers gloomily, ”which is most probable, they will be able to do without us at present & in future-We can not oppose them openly.” But his uncle James never gave up business without a fight. ”The Baron wishes the thing not to succeed,” Nat reported, ”& consequently avoids helping the minister thro”-cer tainly it is against our interest that the Government should make open loans & if we can prevent them so doing it is our duty to act accordingly.”

It would seem that James's aggressive view prevailed. ”The Belgian Finance Minister will not find it a very easy job to get rid of his loan by subscription,” Nat wrote some days later. ”I think he will be obliged to have recourse to us after all which will very much delight us all-Try & make Belg[iu]m flat by selling a few 1840 or 1842 bonds for the J[oint] A[ccount], it will be a good thing if they write to Brussels from every where that the market is flat.” This was a cla.s.sic Rothschild tactic-selling off bonds to embarra.s.s a recalcitrant government. The aim was to force the Belgian government to return to Rothschilds, cap in hand. This appears to have had its effect; for, although the public sale of the Belgian 4.5 per cents went ahead, it was not long before the government once again had to turn to Rothschilds. Meanwhile, Anselm's indefatigable negotiations in the Hague had won over the new Dutch Finance Minister to the view that Rothschilds should after all handle the sale of the 6 million Belgian 2.5 per cents he wished to realise. In 1845 the Belgian government returned contritely to the Rothschild fold and James was able to exact tough conditions for relatively modest advances in 1846 and 1847. Without Rothschild, reported the French amba.s.sador in Brussels, the Belgian government had ”realised that it would be impossible for it to find a penny on any bourse, domestic or foreign.” This was only a slight exaggeration. To all intents and purposes, the Rothschild monopoly on Belgian public finance was complete-though the abortive attempt to sell bonds directly to the public was an intimation of how that monopoly might be challenged in the future.

Roads to Damascus.

In many ways the most important aspect of the Belgian crisis of 1838-9 had been its impact in France. Along with its alleged foreign policy failures in Spain and Switzerland, the Orleanist regime's unwillingness to stand up for Belgian interests was widely criticised as appeas.e.m.e.nt of France's old enemies, conservative Austria and perfidious England. Ever since the revolution of 1830, the Rothschilds had fretted about the possibility of a French return to the old combination of internal radicalism and external aggression which had set Europe ablaze in the 1790s. When yet another international crisis-this time in the Middle East-confronted France with diplomatic isolation, that possibility threatened to become a reality. This was the first of many ”Eastern Crises” the Rothschilds would have to weather. Its outcome-the fall of the bellicose Thiers government and the diplomatic humiliation of France-marked one of the high points of their political power.

In fact, James had never really stopped worrying that international developments might lead to a change of government in Paris. ”Rentes will fall because Thiers is in favour of a policy of intervention [in Spain],” he warned when it was rumoured that the latter might be about to return to government in April 1837, recalling his efforts to send troops across the Pyrenees the previous year. Indeed, the very thought of another Thiers ministry was enough to convince James of the need to ”get out of the [French] funds, for the end will not be good.” ”A good ministry,” according to James's definition, was essentially one which would pursue pacific policies abroad and balance the budget at home: he liked the Mole ministry which ultimately emerged that April precisely because it was ”weak.” When Mole survived the elections held the following November, James regarded them as having ”gone well”; and he urged the government ”to stay united and convince themselves that they are strong and powerful,” promising ”firm and steadfast support” when Thiers mounted a new challenge in December 1838.

The Rothschilds were nervous when Mole's position finally crumbled following the elections of March 1839, fearing a ministry ”composed of the Thiers party” and the doctrinaire doctrinaire liberals. ”It is a very bad thing according to my opinion,” wrote Anthony uneasily, ”and the King is obliged to give way & to do everything as Thiers wishes-I a.s.sure you that we become a little frightened.” As it turned out, Thiers' insistence on a more aggressive foreign policy was still too much for Louis Philippe to accept and another moderate government was formed by Marshal Soult. But this proved short-lived, and on March 1, 1840, Thiers was at last back in office. His seemingly irresistible rise made James pessimistic: liberals. ”It is a very bad thing according to my opinion,” wrote Anthony uneasily, ”and the King is obliged to give way & to do everything as Thiers wishes-I a.s.sure you that we become a little frightened.” As it turned out, Thiers' insistence on a more aggressive foreign policy was still too much for Louis Philippe to accept and another moderate government was formed by Marshal Soult. But this proved short-lived, and on March 1, 1840, Thiers was at last back in office. His seemingly irresistible rise made James pessimistic: After a new Ministry has been formed no one gives this matter any further thought, especially so during the summer, but in the long run I am very sorry to say that France will only be able to extricate herself from her current predicament by means of war. As long as Louis Philippe, may G.o.d preserve him, remains [on the throne] I think that peace will be maintained but his son, I believe, will have no option but to wage war. Well, be that as it may my dear nephews, I intend to remain faithful to my previously voiced opinion slowly but surely to sell our 3 per cent rentes . . . It is a disgrace that no Ministry can be formed and whoever may eventually head the Ministry . . . we can expect to see the various Parties in the Chamber at each other's throats, but if the securities suffer a fall then one can buy again because in France the people are just like in Spain, one day they fight each other and the next day they are good friends again.