The House of Rothschild (95 page)

Source: Hobson, Wary Titan, pp. 464f.

Source: as table 13a.

Financing these increased expenditures was one of the central political problems of the period. Symbolically, it was rising military spending which precipitated both Randolph Churchill’s resignation as Chancellor in 1886 and Gladstone’s as Prime Minister in 1894. They were among the first of many political casualties of the new military-financial complex.

The problem of how to pay for rising military costs was compounded by the rising cost of government as a whole. At both the national and local level—as well as at the regional level in federal systems like the German and Austrian—the 1890s saw the end the “nightwatchman state” era, which had been characterised in most European countries by a contraction in the size of the state relative to the economy. Whether to appease politically powerful (or potentially dangerous) social groups or to increase “national efficiency,” governments began to spend increasing amounts on urban infrastructure, education, provision for the sick, poor and elderly. Though by modern standards the amounts involved were still small, the increases in expenditure were generally ahead of aggregate economic growth. There were two ways in which this increased expenditure could be met, and each had profound political implications.

One way of raising public revenue was, of course, by putting up taxation: the great question was whether this should be indirect taxation (principally in the form of customs and excise duties on articles of consumption from bread to beer) or direct (for example, a tax on higher incomes or inheritances). In Britain, where the break with protectionism had been more decisive than elsewhere, taxes on imported food were rejected by the electorate, despite the efforts of Chamberlain and others to give tariffs an imperialist rationale. This inevitably put the onus on the rich, and that, needless to say, included the exceptionally wealthy Rothschilds. The key to Natty’s political marginalisation in the period after around 1905 lies here. On the one hand, he was a keen proponent of increased naval expenditure; on the other, he was reluctant to pay for it. In March 1909 he spelt out this ultimately untenable position in a speech to the Institute of Directors and the Naval and Military Defence Committee of the London Chamber of Commerce:

A month later, he told a large City audience at the Guildhall “to pledge their support to the Government in any financial arrangements that might be necessary to maintain our naval supremacy”; yet he failed to spell out which arrangements he had in mind. Natty knew full well that “the two absorbent questions ... namely the Budget and the Navy estimates,” were “closely allied”; but he underestimated the political and constitutional implications of this alliance.

In Germany, by contrast, where the Reich was conventionally restricted to financing itself (and hence the German army and navy) exclusively from indirect taxes, the tendency was for tariffs to rise; but working-class dissatisfaction with the combination of “dear bread” and “militarism” was so successfully exploited by the Social Democratic Party (SPD) that the government was soon forced to contemplate introducing property taxes at the Reich level. Here again, Natty misread the implications of increased “militarism.” In 1907 he interpreted Prince Bülow’s election victory over the SPD as a victory for what the strategy historians have dubbed “social imperialism”:

In reality, the 1907 result was an ephemeral victory obtained by uniting the so-called “bourgeois” parties in the wake of the successful war against the Herero in South-West Africa. By the time of the next general election in 1912, that unity had crumbled precisely because of disagreements about the funding of military expenditure. Contrary to the assumptions of many on the German right, spending more on the army and navy tended to strengthen the position of the Social Democrats by focusing voters’ attention on the regressive way in which defence spending was financed.

The other way of paying for the rising costs of domestic and foreign policy was, of course, by borrowing. As table 13c shows, this was an option favoured in some countries more than in others. Both Germany and Russia borrowed heavily in the period after 1890, roughly doubling their national debts in the period to 1913; however, when adjustment is made for the depreciation of the rouble in sterling terms, the debt burden in the Russian case rose by just two-thirds, a significantly smaller increase. In absolute terms, France borrowed a lot too, though from a starting point of higher indebtedness than Germany (hence the lower percentage increase). Britain was unusual among the great powers in reducing the level of her national debt between 1887 and 1913. This achievement is all the more impressive when one remembers that the cost of the Boer War drove up government borrowing—by £132 million in total—in the years between 1900 and 1903.

Sources: Schremmer, “Public finance,” p. 398; Mitchell,
British historical statistics,
pp. 402f; Hoffmann
et al, Wachstum,
pp. 789f.; Apostol, Bernatzky and Michelson,
Russian public finances,
pp. 234, 239.

These were not unsustainable burdens at a time of unprecedented economic growth. Indeed, in all four cases total debt tended to fall in relation to net national product, as table 13d shows. By modern standards, only France had a high ratio of debt to net national product and the tendency was for the burden to diminish.

Sources: as table 13c and Hobson, “Wary Titan,” pp. 505f.

Nevertheless, contemporaries were disturbed by the absolute increase in government borrowing. This was because of the decline in bond prices—or rise in yields (see table 13e)—which manifested itself after around 1890.

The principal cause of this decline was in fact the acceleration of inflation, a monetary phenomenon caused by the increase in gold production and, more important, the rapid development of banking intermediation, which was increasing the use of paper money and cashless transaction methods (especially inter-bank clearing). Contemporaries, however, interpreted rising bond yields as a form of market protest against lax fiscal policies. This was only really true in so far as public sector bond issues were tending to push up the cost of borrowing across the board by “crowding out” or competing with private sector claims on the capital market. Nevertheless, the accusation of fiscal incontinence was repeatedly levelled at most governments—even the British—by critics on both the left and right. Table 13f shows that rising yields were a universal phenomenon; of more interest, however, is the fact that there were pronounced differences or “spreads” between the yields on the various countries’ bonds. These yield spreads genuinely did express market assessments not just of fiscal policy but more generally of political stability and foreign policy, given the traditionally close correlations between the perils of revolution, war and insolvency. Perhaps predictably, because of the experience of 1904-5 and her more general problems of economic and political “backwardness,” Russia was regarded as the biggest credit risk among the great powers. More surprising is the wide differential between German yields and those for British and French bonds, which were remarkably similar. This cannot be explained in terms of the greater demands by the German private sector on the Berlin capital market, as these are
London
prices (and in any case investors were generally choosing between different governments’ bonds, not between industrial securities or bonds). It seems investors shared the view of the better-informed political observers of the time that Wilhelmine Germany was financially less strong than its Western rivals.

Source:
Economist
(weekly closing prices).