The House of Rothschild (97 page)

Considering the size of the government’s majority in the Commons, Natty’s equanimity was strange. It had two bases. Firstly, he retained the old Rothschild faith that an excessively radical fiscal policy would be punished by the financial markets : capital would be sent abroad to avoid higher taxes and consols would fall, embarrassing a Radical Chancellor into compromising. The already low price of consols when the Liberals came to office seemed to reinforce that argument; it was even more gratifying when they dropped two percentage points in the summer. Natty outlined his views on the subject in a series of letters to Paris:

Nor did Natty see this as a peculiarity of British politics. His letters to Paris in this period constantly allude to the parallel between British events and the attempts by left-of-centre French governments to introduce income tax or to increase state control over the railways. He saw it as a general rule of democratic politics in a capitalist economy: financial “nervousness on account of the socialistic tendencies of modern legislative bodies ... is very disagreeable but it is perhaps the best cure for the socialistic tendencies.” And again: “the fear of socialistic legislation is the real cause of the depression in both hemispheres.” Natty constantly hoped that “the small bona-fide holders of English securities ... many of [whom] helped to put a radical government in power” would turn against the government’s fiscal policy
en masse.
Indeed, he went so far as to outline his argument in an interview with the left-leaning
Daily News
in October 1907—one of the first occasions a journalist had ever been admitted to New Court, and a calculated bid to reach a wider audience. The message was straightforward: “‘Stocks are low,’ said Lord Rothschild, ‘because Governments all over the world are hitting at capital.”’

This marked the start of an escalating campaign of public opposition to the government’s fiscal policy. When the government proposed radical reform of the licensing laws—a sop to the Temperance lobby—Natty chaired a meeting of brewery debenture holders to protest at the negative financial consequences. When Lloyd George became Chancellor and hinted at the need to “rob henroosts” to pay for the new non-contributory pensions, he harped on the same old theme. The culmination of his campaign came with the unveiling of Lloyd George’s so-called “People’s Budget” of 1909, the key features of which were an increase in tax on “unearned” income to 1s 2d in the pound, the introduction of a super-tax on incomes above £5,000, an increase in inheritance tax and levies on land values. With the exception of the last item (which implied the first systematic survey of land values for centuries), none of these changes was actually unprecedented: differentiated taxation had been introduced by Asquith in 1907, the principle of graduation had always been implicit in the existence of an income tax threshold and Goschen—a Conservative Chancellor—had been the first to tax inheritances in 1889. Yet the apparently radical
intent
of the budget as a whole galvanised Natty into a kind of high-profile political engagement which went beyond even his father’s campaign for Jewish admission to the Commons.

No sooner had the Finance Bill been introduced than he organised the letter to Asquith signed by twenty-one leading City figures (representing fourteen City houses, including Barings, Gibbs, Hambros and J. S. Morgan), which warned that the new taxes—particularly the “great increase and graduation of the death duties”—would not only “prove seriously injurious to the commerce and industries of the country” by eating into capital, but would also “discourage private enterprise and thrift, thus in the long-run diminishing employment and reducing wages.” He then called and chaired a protest meeting “representative of all interests in the City, and independent of political associations” at the Cannon Street Hotel on June 23, which passed a resolution that “the main proposals in the Budget weaken the security in all private property, discourage enterprise and thrift, and would prove seriously injurious to the commerce and industries of the country.”
²
His own speech at this meeting took a somewhat different tack, arguing that the Chancellor had no historic right to raise a surplus for unspecified purposes and that the taxes on land were an underhand ploy to “establish the principles of Socialism and collectivism.” But, speaking later in the Lords, Natty reverted to his original economic critique, assuring fellow peers that both capital flight and increased unemployment in the building trade were due to the damage Lloyd George had done to “credit” and “confidence.” He was still peddling the same line when it was confirmed that the Tories had failed to secure a majority in the first 1910 election.

Just as he believed firmly in the power of the City’s banking elite, Natty also remained confident that the House of Lords would be able “to alter considerably or to throw out” any excessively radical measures. As early as January 1906, he had consoled himself with the thought that “it doesn’t matter what takes place in the House of Commons, as the House of Lords will put it all right.” “The Lords play with loaded dice,” declared Leo on the eve of the Liberals’ second session in early 1907, so that if “very many extreme measures [are] brought in ... it is doubtful if they will be passed, at all events in the shape in which they were introduced.” Even if these included, as he expected, “the abolition of the House of Lords, Home Rule for Ireland, a licensing bill, increased taxation with many other socialistic measures,” the Prime Minister would have to “put a good deal of water into his wine.” Nor did they take seriously the possibility that the Lords’ right of veto might be challenged. “I do not think,” declared Natty blithely later that summer, “that the House of Lords is in any peril whatsoever.” Talk in the Commons of “materially diminishing its power & influence” was “looked upon as a farce, & will probably be forgotten in a few days”; he mentioned it to his cousins only “to show how weak our Government must be, if they seriously introduce a plan which has no chance of ultimate success, & which exposes them to the ridicule of everyone, with the exception of their immediate followers.” Natty thus felt no qualms about voting with the other Tory peers to throw out the government’s Licensing Bill in November 1908; and he and his brothers were delighted when their relative and friend Rosebery joined the campaign against the People’s Budget, denouncing it as “the end of all, the negation of faith, of family, of property, of Monarchy, of Empire”—in short, “revolution.” The link between City opposition and the peers’ opposition was deliberately symbolised when Natty presented the Budget Protest League’s petition—carrying 14,000 signatures—to the Lords on November 22.

Yet Natty overestimated the power of both the City and the House of Lords. For one thing, it was not at all convincing to blame the “low price of English funds” on the government’s “socialistic doctrines.” As Lipman has shown with reference to the period 1859 to 1914, there was a difference between the average yield of consols under Conservative governments and the average yield under Liberal governments, but it was very small (less than ten basis points), and is much better explained by changes in inflation and the international situation. Consol prices did indeed fall under Campbell-Bannerman and Asquith, from a peak of 90.4 in February 1906 to a pre-war low of 71.8 at the end of 1913. But it was difficult to blame this slide on Liberal fiscal policy, and it did not have the effect of constraining Asquith or his more radical successor Lloyd George. “Politics,” as Natty occasionally had to admit, “but little influence our Stock Exchange.” Possibly some bears in the market were “influenced by the fear of prospective legislation, a temperance measure and various wild schemes which are spoken of in connection with old age pensions”; but “the chief anxiety of the City and the Stock Exchange [was] always the money market,” and that was much more influenced by the state of gold reserves, the Bank’s discounting policy and aggregate new debt creation in the global economy as a whole.

Time and again, the markets refused to back up Natty’s condemnation of Liberal fiscal policy by falling when they were supposed to. There was no negative reaction to Asquith’s 1907 budget, despite the fact that Natty denounced it as “immoral” and tending towards “the gradual extinction of all private fortunes.” In truth, he later had to acknowledge, it was “very doubtful if the markets are at all affected by political news just now. The prices improve or decline according to the financial news of the day, the state of the money-market and the news which is received from other financial centres.” “[I]n the long run,” he conceded in early 1908 as the markets once again refused to be moved by the Licensing Bill, “very easy money always tells.” The 1908 budget was also roundly condemned by Natty, but “all the markets [were] good” after its presentation, and the stock exchange seemed not to care about the new Chancellor’s explicit warnings of “further and heavy increased taxation on what he calls the idle rich.” A slight drop in the price of consols later that summer and a sustained decline in the second half of the year offered some support for Natty’s interpretation, but neither was solely caused by Lloyd George’s talk of “robbing henroosts.” Indeed, the clearer Lloyd George’s intentions became, the less consols fell: prices actually rose in the first five months of 1909. The most that can be said is that the City discounted the People’s Budget six months before its publication and even then the effect was modest and ephemeral. The Westminster Gazette cruelly summed up the absurdity of Natty’s position when its cartoonist depicted him “escaping to the Antarctic region disguised as a Penguin” to avoid Lloyd George’s taxes (see illustration 13.i).

Only when a tax measure threatened to bear directly on financial transactions was the argument plausible that fiscal policy was depressing the stock market. Thus Natty was on strong ground when he—along with a large number of other City representatives Lloyd George consulted—argued against an increase in the stamp duties on domestic and foreign bills of exchange on the ground that it would cause “a large diminution of business” and therefore of revenue. This argument was ultimately accepted by the Chancellor and the original scale of duties was altered to reduce the charge on “transactions of average magnitude” (defined as those greater than £1,000). Here the bankers had real leverage. But Lloyd George’s more important proposals apparently caused “no perturbation in the minds of the public” (meaning investors in aggregate): despite Natty’s campaign, the markets as a whole were “firm” in the wake of the 1909 budget. Indeed, a loan by the London County Council which was issued just after the budget was heavily oversubscribed. Nor can Natty’s claims that the markets improved on the news of the Lords’ rejection of the budget be taken seriously. As the Economist put it, the stock exchange had “now persuaded itself [that] its own interests will not be greatly affected. Prices have, therefore, been left very much to purely market influences.” So long as the markets seemed neutral, it was just as plausible for supporters of the government to argue that the Lords’ rejection would cause a financial crisis.

The key to the ultimate failure of Natty’s opposition to Liberal finance lies here: although Liberal tax policy was unprecedentedly progressive, it was entirely orthodox in that the aim of increased taxation was to balance the budget and indeed to reduce the national debt. Lloyd George inherited a deficit when he became Chancellor, largely the result of the 1907 economic downturn, the new pensions scheme and increasing defence expenditure. The principal objective of the People’s Budget was to reduce that deficit; and, for the majority of investors interested in consols, that was the crucial thing. How the money was raised was less important, and Natty’s claim that any surplus would be squandered on “socialistic expenditure which would pander to the lower classes” was absurd. To write about “the destruction of capital” and “firm and brilliant markets” in one and the same letter was to encapsulate the contradiction in the argument.

Natty also exaggerated the strength of the Lords on fiscal questions. As he himself admitted, “the House of Lords cannot amend [a Finance Bill], but can only reject en bloc, [and] that is a very serious thing to do.” If a budget were rejected principally because it increased tax on the very social group which was over-represented in the Lords—the wealthy elite—then a good case could be made for a constitutional reform. As early as December 1906, Lansdowne indicated that he did not wish to see a head-to-head confrontation with the government when he argued that the Trades Disputes Bill was “a test question at the last election.” When “the conflict between Lords and Commons” began in earnest over peers’ amendments to the Education Bill, Natty was right to feel nervous and wrong to assume that the resulting “agitation” would “damage the Government a good deal.” If, as he suspected in February 1907, the government wished to provoke the Lords into rejecting “very popular measures” in order to fight a new election on the constitutional issue, the stakes would be high indeed. It was all very well to sneer at “the much pampered and not over-worked British workman”; but there were now enough lower-income voters enfranchised to make the position of “those who have got something”—a typical Natty euphemism for the very rich—politically vulnerable.