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Wednesday, December 10, 2014

Rothschild - The Bonaparte of Finance (part III)

To an extent that even today remains astonishing, the Rothschilds went on to dominate international finance in the half century after Waterloo. So extraordinary did this achievement seem to contemporaries that they often sought to explain it in mystical terms. According to one account dating from the 1830s, the Rothschilds owed their fortune to the possession of a mysterious 'Hebrew talisman' that enabled Nathan Rothschild, the founder of the London house, to become 'the leviathan of the money markets of Europe'. Similar stories were being told in the Pale of Settlement, to which Russian Jews were confined, as late as the 1890s. As we have seen, the Nazis preferred to attribute the rise of the Rothschilds to the manipulation of stock market news and other sharp practice. Such myths are current even today. According to Song Hongbing's best-selling book Currency Wars, published in China in 2007, the Rothschilds continue to control the global monetary system through their alleged influence over the Federal Reserve System.

The more prosaic reality was that the Rothschilds were able to build on their successes during the final phase of the Napoleonic Wars to establish themselves as the dominant players in an increasingly international London bond market. They did this by establishing a capital base and an information network that were soon far superior to those of their nearest rivals, the Barings.


Between 1815 and 1859, it has been estimated that the London house issued fourteen different sovereign bonds with a face value of nearly £43 million, more than half the total issued by all banks in London. Although British government bonds were the principal security they marketed to investors, they also sold French, Prussian, Russian, Austrian, Neapolitan and Brazilian bonds. In addition, they all but monopolized bond issuance by the Belgian government after 1830. Typically, the Rothschilds would buy a tranche of new bonds outright from a government, charging a commission for distributing these to their network of brokers and investors throughout Europe, and remitting funds to the government only when all the instalments had been received from buyers. There would usually be a generous spread between the price the Rothschilds paid the sovereign borrower and the price they asked of investors (with room for an additional price 'run up' after the initial public offering). Of course, as we have seen, there had been large-scale international lending before, notably in Genoa, Antwerp and Amsterdam. But a distinguishing feature of the London bond market after 1815 was the Rothschilds' insistence that most new borrowers issue bonds denominated in sterling, rather than their own currency, and make interest payments in London or one of the other markets where the Rothschilds had branches. A new standard was set by their 1818 initial public offering of Prussian 5 per cent bonds, which - after protracted and often fraught negotiations* - were issued not only in London, but also in Frankfurt, Berlin, Hamburg and Amsterdam.
[NB * At one point, when the Director of the Prussian Treasury, Christian Rother, attempted to modify the terms after the loan contract had been signed, Nathan exploded: 'Dearest friend, I have now done my duty by God, your king and the Finance Minister von Rother, my money has all gone to you in Berlin . . . now it is your turn and duty to yours, to keep your word and not to come up with new things, and everything must remain as it was agreed between men like us, and that is what I expected, as you can see from my deliveries of money. The cabal there can do nothing against N. M. Rothschild, he has the money, the strength and the power, the cabal has only impotence and the King of Prussia, my Prince Hardenberg and Minister Rother should be well pleased and thank Rothschild, who is sending you so much money [and] raising Prussia's credit.' That a Jew born in the Frankfurt ghetto could write in these terms to a Prussian official speaks volumes about the social revolution Nathan Rothschild and his brothers personified.]

In his book On the Traffic in State Bonds (1825), the German legal expert Johann Heinrich Bender singled out this as one of the Rothschilds' most important financial innovations: 'Any owner of government bonds . . . can collect the interest at his convenience in several different places without any effort.' Bond issuance was by no means the only business the Rothschilds did, to be sure: they were also bond traders, currency arbitrageurs, bullion dealers and private bankers, as well as investors in insurance, mines and railways. Yet the bond market remained their core competence. Unlike their lesser competitors, the Rothschilds took pride in dealing only in what would now be called investment grade securities. No bond they issued in the 1820s was in default by 1829, despite a Latin American debt crisis in the middle of the decade (the first of many).

With success came ever greater wealth. When Nathan died in 1836, his personal fortune was equivalent to 0.62 per cent of British national income. Between 1818 and 1852, the combined capital of the five Rothschild 'houses' (Frankfurt, London, Naples, Paris and Vienna) rose from £1.8 million to £9.5 million. As early as 1825 their combined capital was nine times greater than that of Baring Brothers and the Banque de France. By 1899, at £41 million, it exceeded the capital of the five biggest German joint-stock banks put together. Increasingly the firm became a multinational asset manager for the wealth of the managers' extended family. As their numbers grew from generation to generation, familial unity was maintained by a combination of periodically revised contracts between the five houses and a high level of intermarriage between cousins or between uncles and nieces. Of twenty-one marriages involving descendants of Nathan's father Mayer
Amschel Rothschild that were solemnized between 1824 and 1877, no fewer than fifteen were between his direct descendants.

In addition, the family's collective fidelity to the Jewish faith, at a time when some other Jewish families were slipping into apostasy or mixed marriage, strengthened their sense of common identity and purpose as 'the Caucasian [Jewish] royal family'.

Old Mayer Amschel had repeatedly admonished his five sons: 'If you can't make yourself loved, make yourself feared.' As they bestrode the mid-nineteenth-century financial world as masters of the bond market, the Rothschilds were already more feared than loved. Reactionaries on the Right lamented the rise of a new form of wealth, higher-yielding and more liquid than the landed estates of Europe's aristocratic elites. As Heinrich Heine discerned, there was something profoundly revolutionary about the financial system the Rothschilds were creating:

The system of paper securities frees . . . men to choose whatever place of residence they like; they can live anywhere, without working, from the interest on their bonds, their portable property, and so they gather together and constitute the true power of our capital cities. And we have long known what it portends when the most diverse energies can live side by side, when there is such centralization of the intellectual
and of social authority.

In Heine's eyes, Rothschild could now be mentioned in the same breath as Richelieu and Robespierre as one of the 'three terroristic names that spell the gradual annihilation of the old aristocracy'. Richelieu had destroyed its power; Robespierre had decapitated its decadent remnant; now Rothschild was providing
Europe with a new social elite by raising up the system of government bonds to supreme power . . . [and] endowing money with the former privileges of land. To be sure, he has thereby created a new aristocracy, but this is based on the most unreliable of elements, on money . . . [which] is more fluid than water
and less steady than the air . . .

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