The House of Rothschild (106 page)

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.

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.
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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:

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 serious 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.

These were ventures into unfamiliar terrain for a bank which had been almost exclusively concerned with overseas business for more than a century, and inevitably there were teething troubles. News of the London National Property issue leaked into the press, occasioning an ugly confrontation between Stephany and the veteran City editor of the
Financial News,
whom he accused of “picking up rumours in railway lavatories.” Although heavily oversubscribed, the Woolworths share offer was nearly wrecked by a minor City panic the weekend before the lists closed. With the letters of acceptance still waiting to be sent out, last-minute withdrawals began to pour in on the Monday morning. Staff had to work all night behind locked doors, completing and sending out acceptance letters before any more subscribers could pull out. Of course, by comparison with the Paris house, with its extensive investments in railways and electricity companies, the London house remained a minor force in the world of domestic corporate finance. But an important step had been taken in a direction which would prove vital to its recovery after 1945.

The extent of the Rothschilds’ relative decline in the inter-war period should not therefore be overstated. The generation of Rothschilds who grew up in those years detected no waning of the family’s wealth: indeed, the mores of the previous century were preserved as if in aspic. Guy and his sister Jacqueline had one English nanny each, though the two women disliked one another so intensely that they refused even to lunch together. The children thus grew up in a bizarre isolation not only from their parents, whom they lunched with once a week, but also from one another. They were isolated from the outside world too. As a schoolboy, Guy was driven to and from the
lycée
by one of his father’s chauffeurs with a footman to provide additional protection. Much of his time was spent not in Paris but at one or other of the family’s country houses. Each year the entire household progressed from Ferrières (November to January) to Cannes (February or March) and then on to Chantilly (Easter and July to September). Similarly, Edmund’s youth was divided between the house his father leased at 18 Kensington Palace Gardens and his 2,500 acre estate at Exbury in Hampshire. Here and on the other great family estates, their parents pursued their expensive pastimes much as their grandparents had done before them. While Lionel indulged his passion for horticulture with the aid of up to 400 gardeners at Exbury, Edouard had his beloved racehorses at Chantilly. Maurice’s wife Noémie meanwhile moved with the times by building an Alpine sports complex at Megève. As they came into their money, therefore, the younger Rothschilds felt no embarrassment about consuming conspicuously. For Guy, the 1930s meant golf, American cars, dancing at Biarritz and baccarat at Deauville. Philippe built himself a seaside villa at Arcachon, the better to entertain other men’s wives, and helped his father to squander yet more money by building his own theatre in the rue Pigalle (a suitably louche location).
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Yet there were signs that the grandeur was beginning to fade. In 1922, Jimmy had rather unexpectedly inherited Waddesdon when Ferdinand’s unmarried sister Alice died; but when Harold Nicolson stayed there in July 1939 he was unimpressed (as he complained to Vita Sackville-West):