The House of Rothschild (80 page)

Plainly, the Rothschilds had substantial financial leverage over Brazil. When the government suspended service on its existing bonds in 1898, the London house effectively dictated the terms of the necessary rescheduling (which essentially postponed all sinking fund payments until 1911). The new Funding Loan issued by Rothschilds to consolidate the state’s various obligations was secured, Ottoman fashion, on the customs receipts and the government was compelled to pursue a rigorous programme of retrenchment, spelt out in a stern letter from New Court to the President-Elect Campos-Salles, which was published in
The Times
for all to read. This policy led to a rapid appreciation of the currency (the milreis) from 7/4d to 16d in 1913, a trend which intensified the already acute crisis in the coffee industry by pushing up Brazilian costs as world market prices were falling.

However, there were limits to the amount of control which could be exercised through such informal imperialism. For one thing, growing competition in the international capital market inevitably began to erode the dominance which the Rothschilds had enjoyed for most of the nineteenth century over Brazilian external finance. By 1906 the Rothschild position was under attack in both Chile (from the Speyers and Deutsche Bank) and Brazil (from Schröders). When in 1905 the state of São Paulo sought financial assistance for a coffee-stockpiling scheme which it was hoped would shore up the falling price of the state’s main product, Alfred dismissed the “valorisation” scheme out of hand as “an artificial & mad speculation” which would end in disaster. Natty was equally dubious about the federal government’s simultaneous effort to regulate the milreis-sterling exchange rate by creating a new Caixa de Conversão. However, Schröders and Kleinworts put together a syndicate of New York, Hamburg and Le Havre coffee merchants and proceeded to buy up no fewer than 8 million bags between the autumn of 1906 and May 1908—equivalent to more than half annual world consumption. When Schröders sought to enlist Natty’s support for the £15 million loan needed to liquidate the syndicate’s advances to São Paulo, Natty’s immediate response was blunt: “Certainly not for that damned swindle.” Had he persisted in his refusal, Schröders would have been dangerously exposed: without Rothschild backing, there could be no guarantee from the Brazilian federal government, and without that the loan might well have failed, leaving Schröders with a sixth of its capital in advances to São Paulo and nothing but coffee beans as collateral. Natty chose to draw a somewhat Jesuitical distinction between directly financing the valorisation scheme and lending to the Brazilian state (even if it then used the money to pay for the valorisation scheme). Having made Schröders squirm, he finally agreed to take a share in the loan, but his instinct that such schemes were unlikely to have an enduring success was right. In 1910 competition from the East Indies caused a sharp collapse in the price of rubber which no amount of stockpiling could cushion and the resulting foreign exchange crisis overwhelmed the Caixa de Conversão. The effect of the crisis was to puncture the already declining market for Brazilian bonds, leaving 94 per cent of the £11 million loan issued by Rothschilds in 1913 with the underwriters. A new loan was about to be agreed, which would have been conditional on foreign control of the Banco de Brasil, when war broke out in Europe in 1914.

Informal imperialism—by definition—generally lacked the ultimate sanction of government intervention. It was a very different thing, as French investors found in 1888-9, to put money into a canal in Panama as opposed to one in Egypt, where French influence had been considerable, even if ultimately subordinate to that of Britain. The choice in Latin America seemed to be between American control or no control. When the Brazilian government appeared to be contemplating the annexation of Trinidad in 1895, for example, Natty urged Salisbury’s principal private secretary Schomberg McDonnell to make diplomatic representations in order that Brazil should submit her claims to arbitration. McDonnell told Salisbury “that it was for the Rothschilds to prove . . . the policy of withdrawing and that, if they could effect this, the main difficulty in the way of arbitration would be removed ... There is no doubt the Rothschilds can do this; but they naturally want to make us do it.” In practice, that meant that it was up to Natty whether he wished to cable the Brazilian Minister of Finance on the subject; as far as the government was concerned, Brazil was literally the Rothschilds’ affair. The limits of the British bankers’ influence became manifest when not only Brazil but also Argentina and Chile began to spend substantial sums on their navies. Despite warnings of “financial ruin,” it proved impossible to arrest the Latin American arms race—not least because British shipbuilders were the recipients of lucrative orders as a consequence of it. As Natty rather ingenuously remarked when seeking to rein in Brazilian railway building, “it is always a delicate matter to question the policy of a government.”

The enormous levels of capital export from Britain which characterised the late nineteenth and early twentieth centuries were to some extent facilitated by the development of a global monetary system: first the bimetallic (silver and gold) system and then, from the mid-1870s, the gold standard, which fixed the exchange rates of most major currencies in terms of gold and hence tied them to sterling, the world’s reserve currency. Until recently, the role the Rothschilds played in this process has generally been understated and often misunderstood.

It has traditionally been assumed that the Rothschilds were firm proponents of the transition from bimetallism to the gold standard. Indeed, to American Populists, the Rothschilds personified the “international gold ring” which they believed was behind the demonetisation of silver. It is easy to see why this was. They still had their refining and broking business;
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and, as we shall see, their interests in gold mining grew rapidly in the last two decades of the century. Moreover, many of the bond issues handled by the Rothschilds in this period were linked to the recipients’ adoption of the gold standard. This was most obvious in the case of the United States, where they and their agent August Belmont played a major role in financing the resumption of specie payments (which had been suspended during the Civil War).

In July 1874 the London house, in partnership with the New York banker Joseph Seligman, agreed to underwrite a US bond issue worth $45 million of 5 per cents with a six-month option on $123 million. When this proved unsuccessful, Junius Morgan’s group and the First National Bank of New York was brought into the syndicate for a second issue of $25 million, of which the Rothschilds took 55 per cent. Altogether, N. M. Rothschild was involved in issuing no less than £267 million in US bonds in London and New York between 1873 and 1877. These loans were designed not only to stabilise American finances but also to enable the US to adopt the gold standard in the foreseeable future. However, when the 45th Congress met in October 1877, a bill was drawn up which would have restored the “free” coinage of silver and its status as legal tender—a measure which Belmont furiously denounced as “open theft” and “blind and dishonest frenzy.” Only when it was stipulated that silver would be allowed to circulate in strictly limited quantities and would not be used to pay off the interest due on outstanding bonds did the Rothschilds relent. The Secretary of the Treasury John Sherman then negotiated a new loan of $50 million in gold coin through Belmont in 1877 which allowed the adoption of the gold standard to go ahead at the beginning of 1879. This was accompanied by a further bond issue, though this time Junius Morgan’s ambitious son Pierpont sought to exclude the Rothschilds, to the irritation of Lionel and Natty who (as he told Herman Hoskier of Brown, Shipley & Co.) refused “to join any American Syndicate and be at their mercy or command, and would only take it up if we were given the lead to work it our own way with a group of friends around us.”
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Continuing doubts about the American commitment to gold may help to explain why the Rothschilds played such a small role in the great boom in American railway shares and bonds of the post-Civil War era.
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The issue was still politically open as late as March 1893, when Grover Cleveland attempted to raise a $50-60 million gold loan to maintain convertibility at a time of rapidly diminishing US gold reserves. Though Morgans were willing to act jointly, Natty, Alfred and Leo hesitated: Alfred remained “greatly opposed” even after Cleveland secured the repeal of the Sherman Silver Purchase Act which had continued to give silver a limited circulation. Finally, an agreement was reached which proved highly lucrative (a tribute, perhaps, to the brothers’ negotiating skills, rather than proof of the Morgan view that they were excessively cautious). $62.3 million of US 4 per cent bonds were taken by the bankers at 104.5 and sold to eager investors for 112.25 (the price later rose to 119). Tales of profits of $6 million being made in the space of twenty-two minutes were grist to the Populist mill, of course, and helped ensure that William Jennings Bryan rather than Cleveland was chosen as the Democrats’ presidential candidate in 1896. However, Bryan’s defeat by the Republican William McKinley set the seal on the American transition to gold.

The American stabilisation was part of a wider process. In 1868 only Britain and a number of its economic dependencies—Portugal, Egypt, Canada, Chile and Australia—had been on the gold standard. France and the other members of the Latin Monetary Union, Russia, Persia and some Latin American states had been on the bimetalliç system; most of the rest of the world, including most of central Europe, had been on the silver standard. Forty years later, only China, Persia and a handful of Central American countries were still on silver. The gold standard was, in effect, the global monetary system, though in practice a number of Asian economies had a gold exchange standard (with local currencies convertible into sterling rather than actual gold) and a number of “Latin” economies in Europe and America did not maintain convertibility at all. In a number of major European states—Germany (1871-3), France (1878) and Russia (1897)—the Rothschilds played a key role in facilitating the monetary transition, though in Italy Hambros rather over-ambitiously stole a march in 1881-2. Thereafter, the London and Paris houses acted as vital auxiliaries to their respective central banks, sending specie across the Channel in large quantities at times of crisis in one or other market. This in itself was a profitable business. At the same time, the gold standard ensured that foreign bonds denominated in gold-based currencies were proof against exchange rate fluctuations and therefore marketable to more cautious investors, who might otherwise cling to consols and “home rails.” Monetary integration encouraged the growth of the international bond market because convertibility “signalled a country’s commitment to sound budgets, balanced external payments and sustainable volumes of foreign borrowing.” It was thus good for the Rothschilds’ main business.

It is not to be wondered at, then, that the English Rothschilds were often heard to defend bullionist orthodoxy in the renewed bimetallist debates of the early 1890s. For example, Alfred “strongly opposed ... any radical change as regards the metallic circulation of Great Britain” in a private report he wrote for the Governor of the Bank of England in 1886; and four years later Natty firmly opposed Goschen’s proposal to introduce a one-pound note, a reform which in fact represented an innocent modernisation of the 1844 system and a sensible response to the growing demands on the Bank of England. When Gladstone and his Chancellor of the Exchequer Harcourt were casting round for a suitable British delegate to veto American bimetallist plans at the International Monetary Conference held at Brussels in 1892, Alfred thus seemed the ideal choice. As Harcourt put it,

Alfred duly assured Harcourt that he “could have found no stauncher supporter of Monometallism than myself” and that he was “strenuously devoted towards maintaining our financial supremacy to which England owes her overwhelming mercantile supremacy.”

Yet Alfred proved incapable of sticking for long to his allotted role as “sane man.” In November he surprised everyone (not least his fellow delegate Bertram Currie) by coming up with his own compromise plan. Though mocked by his enemies in the City and Treasury and probably doomed to fail given the highly polarised mood at the conference, this was in many ways a reasonable attempt to reconcile the bullionists and bimetallists by raising and maintaining the price of silver through a five-year international purchasing agreement without actually giving silver equal status with gold. Had it been adopted, Alfred argued, “time would have been given to the South African mines to prove whether their yearly output would have been sufficient to satisfy the additional demand of the whole world, and time would have been given to India to introduce a gold standard with a gold currency.”
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In the eyes of the “brutal monometallist” Currie, however, this was far from being the “Monometallism with honour” or “euthanasia of Bimetallism” which Harcourt had urged them to bring home; indeed, Alfred’s project had won qualified support from some bimetallists at the conference, though not enough to become a practical proposition.

Moreover, when the issue resurfaced in 1897, there were rumours that Natty too had softened his stance under the influence of Arthur Balfour, who harboured bimetallist urges. He declined to sign a City memorandum against bimetallism circulated by Currie and signed by most of the other leading merchant banks. And, rather to the embarrassment of the new Chancellor Sir Michael Hicks Beach, he was once again willing to contemplate limited concessions to the silver bugs: the reopening of the Indian mints, the conversion of a fifth of the Bank of England’s reserve into silver and the raising of the legal tender limit for silver from £2 to £4 (as opposed to the American bimetallists’ target of £10).