The House of Rothschild (20 page)

It made life easier, of course, that an old rival—Barings—had the misfortune to be banker to the losing side. In 1850, it had seemed a setback when the Russian government entrusted a new £5.5 million loan to Baring. Heavily oversubscribed, it had opened at a 2 per cent premium and left Joshua Bates and Thomas Baring with a commission of £105,000.
²
But two years later, as diplomatic relations deteriorated, Barings found itself in an exposed position, denounced by Palmerston in the Commons as the Tsar’s “agent” and widely (though erroneously) believed to have participated in the 1854 Russian war loan.
³

Source: Mitchell,
European historical statistics
, pp. 734f.

This helps to explain the near monopoly enjoyed by Rothschilds over British war finance. As Chancellor when the war began, Gladstone had pledged himself with characteristic rigour against “the system of raising funds necessary for war by loans,” on the grounds that it “practise[d] wholesale systematic deception upon the people.” Britain was still burdened by a substantial debt left over from the Napoleonic Wars: as Lionel had said, the national debt on the eve of war stood at around £782 million, and although in relation to gross national product the debt burden was steadily falling (from 250 per cent in 1820 to around 115 per cent in 1854), contemporary politicians were unaware of this. Gladstone therefore proposed to finance the war by increasing income tax—first from 7d in the pound to 10/2d, finally to 14d—and some consumption taxes. It was not enough, however, and by the time he resigned from office (to be replaced by Sir George Lewis), the government had run up a £6.2 million deficit for the year 1854 (financed by the sale of treasury bills) and faced a shortfall nearly four times as large in the following year. Lewis imposed a further £5.5 million of new taxation, but the 1855 deficit remained £22.7 million. The government had no alternative but to turn to the City; with Barings under a cloud, that could only mean New Court.

In 1855 the London house took the whole of a loan worth £16 million. In February the following year—by which time the war was, of course, over—it submitted the only tender for another loan of £5 million; and in May it secured a final tranche of £5 million. In both the 1855 loans, Lionel at first offered fractionally less than the minimum set by the Chancellor, but had no hesitation in accepting the government’s terms. It is hard to say how meaningful this bargaining was: the terms agreed were only slightly higher than the current market yield on consols, so there was no question of unjustifiable profits being made by the bank. Lionel was probably seeking as much to strike a patriotic posture as to make a profit, with a view to strengthening the case for his own admission to Parliament. On the other hand, the 1856 loans were heavily oversubscribed (by a factor of nearly six in February and eight in May). Palmerston saw this as a sign of City confidence in the government; it might equally well have been proof that the Chancellor was being over-generous in the aftermath of victory.

In France the revival of Rothschild influence over public finance actually predated the war. On March 14, 1852, Napoleon announced a large conversion operation, intended to cut the cost of debt service by reducing the interest due on the greater part of the national debt from 5 to 4.5 per cent.
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Investors had twenty days to choose between accepting the new 4.5 per cents or redeeming the 5 per cents for cash. The move was justified by the government in macroeconomic terms as part of a strategy to lower interest rates and boost business activity. However, faced with a sudden slump in the price of 5 per cents (from 103 to 99 in just ten days) and fearing that an unexpectedly high number of bondholders would demand the redemption of their rentes rather than conversion, the new Finance Minister Jean Bineau was forced to turn to the bankers. It was Hottinguer and de Rothschild Frères rather than the Pereires who took the largest share in the subsequent support operation, whereby the banks bought up 5 per cents to push the price back above par; and the Banque de France which facilitated their purchases by extending its discounting facilities against rentes. The manoeuvre achieved its object, and the great majority of rentiers accepted the new bonds.

Two years later, when France and Britain issued their ultimatum to Russia to withdraw from the Danubian principalities, James naturally expected to be called on once again by the French Treasury. On March 4, 1854, he told Prince Albert’s brother Ernest II, Duke of Saxe-Coburg-Gotha, “that for a war with Russia any sum was at command; he would furnish at once ‘as many millions as were desired’.” By now, however, the Credit Mobilier had entered the lists, and when the government three days later announced its intention to borrow 250 million francs, a contest between the two seemed inevitable. Mires later claimed the credit for persuading Bineau and Napoleon to sell the bonds directly by public subscription; perhaps he did. Yet he exaggerated when he claimed that this and the subsequent 500 million franc war loan of 1855 had “liberated the French government from a tyranny incompatible with the dignity of a dynasty born of universal suffrage.” For by April 1855, with another 750 million francs needed, the new Finance Minister Pierre Magne had to inform Napoleon that the domestic market was reaching saturation point. As a result, a substantial share of the 1855 loan was issued in London, and Napoleon elected to revert to the French government’s traditional banker there. Although the Credit Mobilier took a substantial share of this issue, the Rothschilds were once again in charge: while the Paris house handled some 60 million francs, the London house received subscriptions totalling 208.5 million.

The Rothschilds’ role in assisting the Banque de France in the post-war monetary crisis—in part a consequence of the government’s short-term borrowing from the Banque during the war—merely underlined James’s ascendancy. Writing in April 1856, James could not conceal his glee at the regime’s difficulties: “The Emperor is excessively displeased to see that the birth of a prince and the conclusion of peace are not having a better effect on public credit, and that it might be said that he has been forced to make peace for want of money.” Indeed, the money market was so tight that, if James were to make a business trip to Brussels, people might say that he was taking all his capital there. Not for the last time, James was subtly mocking the regime’s financial dependence on him.

. The other combatant power to whom the Rothschilds lent money was Turkey. Here too there was competition, though this is understandable as the Rothschilds had not hitherto established a serious financial relationship with the Porte (with the exception of the Greek indemnity payment). The first Turkish war loan of 1854 was taken by Goldschmidt, Bischoffsheim (a minor City house, Palmer, MacKillop & Dent, also seems to have been involved, though James somewhat paranoiacally suspected the long arm of the Credit Mobilier). It was a failure. Attracted by descriptions of Turkey’s copper mines and perhaps thinking of Turkey as Nathan had previously thought of Spain, James therefore resolved to take over. In Horaz Landau, who had been sent as the Rothschild agent to Constantinople shortly before the Crimean War, he chose an able negotiator; when the Turks found themselves in need of more funds in 1855 the Rothschilds were ready and waiting.

In February 1855, during a temporary lull in the fighting, Landau began skilfully to weave his way between the Sultan’s minister Fuad Pasha and the Western diplomats, proposing a new loan, this time guaranteed by France and Britain, while at the same time drip-feeding short-term advances to the government—a classic Rothschild tactic. In August the London house was able to inform Landau that a £5 million loan to Turkey had been secured with an Anglo-French guarantee, thus allowing much more generous terms to be offered than would otherwise have been possible. No sooner was the war over than Alphonse was despatched to Constantinople to discuss the possibility of establishing a new bank there, once again encountering competition from a minor English house (this time Layards). However, the onset of the 1857 economic crisis—combined with a realisation that the risks involved in Turkish finance were greater than had initially been anticipated—led to something of a retreat from Constantinople in the succeeding years.
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Although Landau continued to agree to small advances, the idea that “the national bank of Turkey [might] become a branch of the House of Rothschild” (as
The Times
put it in 1857) was shelved.

Austria did not fire a shot in the Crimean War. She had to make substantial military preparations, however, if only to back up her tougher diplomatic communications to Russia regarding the Danubian principalities; and because of the fragility of her financial and monetary system in the wake of 1848-9, the effect was roughly equivalent to that of outright war on the French economy (if not greater). As tables 2a and 2b show, Austrian bonds were actually worse affected by the war than French; and Austrian expenditure rose by only slightly less, despite the policy of non-intervention. This was the first act in a “tragedy” of financial weakness which in many ways provides the key to the disasters which befell Austria in the decade after 1857. Past and present military expenditure weighed heavily on the Austrian budget, so that defence spending and debt service accounted for 60-80 per cent of the total. Although attempts were made to economise, fresh military crises invariably nullified these. Taxes were raised and state assets were sold; still the government had to borrow to meet its outgoings. When it borrowed short from the National Bank, the exchange rate—decoupled from silver in 1848—depreciated: between mid-1853 and mid-1854 the gulden fell from 9 per cent below par to 36 per cent below. When the government borrowed long from a frail bond market, the effect was to crowd out private investment. Between 1848 and 1865 the total funded public debt rose from 1.1 billion gulden to 2.5 billion, an average annual increase of around 80 million, but with disruptive peaks as in the mid-1850s. Constantly haemorrhaging fiscal and monetary policy thus combined to constrain economic growth, so that the tax base stagnated and the downward spiral continued.

Could anything have been done to remedy this? In November 1851 the Austrian Finance Minister Krauss wrote a letter to James “in which he lamented a good deal and demanded his counsel, requesting him to shed some light on the situation.” On being shown this letter, Apponyi urged James “not just to shed some light, but to take a torch, as only you can, and try to rid us of all our monetary wastepaper.” James and his partners tried. Though the Rothschilds might justifiably have closed down the Vienna house after 1848, instead Anselm set about rebuilding what his father had built only to destroy. It was a thankless task, the more so as Anselm’s wife refused to settle in a city she disliked intensely. A rather lonely figure, he at first went through the motions of following in his father’s footsteps: going to see the returned Metternich, making public donations to causes favoured by the Emperor—even siding with Austrian foreign policy in a half-hearted sort of way. But Anselm was haunted by the memory of his father’s downfall, and all his efforts to shore up Austrian finances were, one senses, premised on a sense of inevitable failure. When he called on Metternich in December 1853, Anselm’s mood was bleak:

Still, there were successes which kept alive the tradition of Rothschild influence at Vienna, albeit in shadowy form. In 1852 the London and Frankfurt house jointly issued Austrian 5 per cents worth £3.5 million for Baumgartner. In April 1854, faced with a run on the currency, the government turned once again to Anselm, who managed to persuade the other houses to participate in a further credit of 34 million gulden, though nearly half of this was provided by Fould.

In short, the bond issues generated directly or indirectly by the Crimean War were largely handled by the Rothschilds. Table 2c (which only gives the figures for the London house) provides an overview.