In his delightful memoirs, the art historian Kenneth Clark recalls that Lord Cunliffe, governor of the Bank of England, came to lunch with his father on August 2, 1914. “There’s talk of a war,” said Lord Cunliffe, “but it will never happen; the Germans haven’t got the credits.” Almost a century earlier Gutle Rothschild, widow of Mayer Amschel Rothschild, is supposed to have said of a dispute between England and Prussia, “It won’t come to war; my sons won’t provide money for it.” Niall Ferguson’s extraordinary book is both a history of the world’s most powerful banking dynasty and an attempt to understand the role of high finance in an international system about which such statements could be made and be believed.
In the nineteenth century the power and wealth of the Rothschilds fascinated their contemporaries, not least because their trans-European business remained a family firm. An American observer of the 1830s portrayed the five sons of Mayer Amschel as “peering above kings, rising higher than emperors, and holding a whole continent in the hollow of their hands…. Not a cabinet moves without their advice…. Baron Rothschild…holds the keys of peace or war.” When Amschel’s son James de Rothschild died in 1868, he was reported to have left a personal fortune which came to just over 4 percent of France’s GDP. (Today the equivalent fraction would make it about $50 billion.) Ferguson’s own calculations yield a significantly lower figure.
Unaccountable power always breeds resentment, especially when it is money power. The Rothschilds were demonized in Europe in much the same way as J.P. Morgan was in the United States—only more so, because they were Jewish. The myth of their omnipotence, in which they themselves sometimes believed, bred a virulent anti-Semitism, which fastened onto a uniquely visible Jewish family. To conservatives the Rothschilds were a standing threat to the establishedhierarchy; to socialists they stood for unbridled exploitation of the worker. Long after their power had disappeared, Hitler combined the two strands into a lethal cocktail, when he referred to the “rapacity of a Rothschild, who financed war and revolutions and brought the peoples into interest-servitude through loans.” The origins of Auschwitz can be traced in part to this fateful coupling.
Ferguson has taken to heart Fernand Braudel’s maxim that “the history of the great merchant families is…every bit as valuable as the history of princely dynasties in the study of political fluctuations….” The central historical question raised by his book is the extent to which high finance shaped the politics of the nineteenth century when, as he says, the Rothschilds were “the world’s banker.”
Although it was published as a single volume in England, Viking has split up Ferguson’s long history into two books for the American market. The first, published in the US last year, takes the story up to 1848. It tells how Mayer Amschel’s five sons, led by Nathan, spread out from the Frankfurt ghetto in which they were born to become the leading merchant bank of Europe and Europe’s richest family. What enabled their spectacular rise was the final breakdown, under the impact of the French Revolutionary Wars, of the continental feudal order which had confined most European Jews to urban ghettoes. Ferguson shows how the Rothschilds were the first to exploit the financial opportunities opened up both by the Napoleonic Wars and the long, but uncertain, peace which followed. They made their initial fortune through several different kinds of activity. They smuggled textiles and bullion from England to the Continent, managed the investments of exiled German rulers, transferred the cash needed to buy food for Wellington’s armies in Spain and to subsidize Britain’s Continental allies, and speculated in British government debt. Between 1797 and 1818 their capital grew from å£10,000 to å£1.77 million.
Peace brought new opportunities: to arrange the loans needed to settle debts and indemnities left over from the wars, to finance the fiscal needs of the Holy Alliance and the Ottoman and Spanish empires. Except in England, nineteenth-century governments had tiny sources of revenue; they continually needed to borrow, and were unreliable debtors. What the Rothschilds did was to create an international bond market. Nathan Rothschild’s loan to Prussia in 1818 set the pattern for future loans. It was a fixed-interest sterling loan, with investors being paid in London, not Berlin; this removed both the risk of loss owing to changing exchange rates and the inconvenience of collecting interest from abroad.
In addition, Nathan insisted that the “good faith” of the borrowing government had to be underpinned by a ceiling on state debt and a special mortgage on the royal estates, the first time that such conditions had explicitly featured in contracts between moneylenders and sovereigns, and anticipating the modern concern with the problem of debt sustainability. “Without some security of this description,” Nathan wrote to the Prussian state chancellor, “any attempt to raisea considerable sum in England for a foreign Power would be hopeless.” In Ferguson’s words, the Rothschildsdeveloped a system that
enabled British investors (and other rich “capitalists” in Western Europe) to invest in the debts of…states by purchasing internationally tradable, fixed-interest bearer (that is, transferable) bonds. The significance of this system for nineteenth-century history cannot be over-emphasised.
In the first half of the nineteenth century, the Rothschilds—especially the London house—were the dominant force in European bond issues. In 1844 their capital was å£7.78 million, ten times that of their chief rivals, the Baring brothers.
In helping to create a capitalist world market, Jewish firms like the Rothschilds enjoyed an initial comparative advantage, deriving from their original legal disabilities. Their financial innovations were built on two highly functional traditions. The first was that of the Hofjuden, or “Court Jews,” moneylenders to German princelings. Arranging loans through the international bond markets was merely an extension of this older occupation, with the important difference that the balance of power had shifted toward the lender. It is significant that the five Rothschild banks were established in political, not trading, centers: London, Paris, Vienna, Frankfurt, Naples. The decline and eventual closure of the latter two were the direct result of the political unification of Germany and Italy, which transferred the seat of government to Berlin and Rome respectively.
The Rothschilds aimed to be as close as possible to the political centers of power, geographically and socially, in order to harvest and transmit political intelligence for the firm’s benefit. As Ferguson says, their uniquely fast communication system, based on private couriers, was used by European statesmen as an express diplomatic service. In concentrating on government finance they differed from, say, the Hamburg-based Schroeders, whose firms were initially set up in ports to finance the Baltic trade. The Rothschilds understood that “a Court always leads to something.” In the Rothschild case it led not just to wealth but to ennoblement. The five brothers were given Austrian baronies in 1817, admittedly a devalued currency. In England, Nathaniel Rothschild had to wait till 1885 for his peerage: “To make a Jew a peer,” Queen Victoria told Lord Granville, “is a step she cd. not consent to.” She did in the end.
There were two large gaps in the Rothschild multinational network, to the detriment of both their profits and influence. They never opened a bank in New York. Even though James Rothschild glimpsed America’s potential in the 1830s, no Rothschild wanted to emigrate to a land without a royal court. So they missed out on the post-Civil War boom. The Rothschilds’ failure to establish themselves in the United States, Ferguson writes, “proved to be the single biggest strategic mistake in their history.” As important politically was the fact that establishment of the founder bank in Frankfurt meant there was no Rothschild bank in Berlin. This cut the family off from continuous contact with Bismarck, the manager of the European state system in the second half of the nineteenth century. Bismarck had his own “Court Jew,” Gerson Bleichröder, to manage Prussian state, as well as his own personal, finances. Their relationship has been wonderfully explored by Fritz Stern.* The lack of a Rothschild in Berlin removed a crucial link from the financial circuit which bonded the European nations.
The second tradition that the Rothschilds brought to their new businesses was that of family connection. In laying the bank’s foundations, Mayer Amschel insisted it must be a family partnership, and his wish was law for a century. “The family,” wrote James Rothschild in 1851, “is everything: it is the only source of…happiness,…it is our unity.” Here too the Rothschilds were able to turn a legal disability into a business asset. Dispersed nations have always relied on strong and cohesive family structures to protect them from outright hostility and inadequate redress in their host countries. Their family circuits promoted exactly the business qualities—mutual trust, pooled resources, and information—so advantageous for cross-border trading operations, which were subject to large uncertainties.
The function of dispersed nations in the development of capitalism is starting to be studied seriously again. Contemporaries had no doubt about its importance. As early as 1712, the English journal the Spectator could write:
They [Jews] are so disseminated through all the trading Parts of the World, that they are become the Instruments by which the most distant Nations converse with each other and by which mankind are knit together…. They are like the pegs and nails in a great building, which, though they are little valued in themselves, are absolutely necessary to keep the whole frame together.
The same could be said, though less universally, about Armenians, Chinese, and Indians. Family networks, located in diasporas, helped to supply international credit facilities before the formal legal and institutional structures were put into place. They still do today, in many of the emerging markets. In the development of the international economy, trust comes before law, and kinship before state.
Admittedly, the Rothschilds carried the dynastic principle to extreme lengths. Of twenty-one marriages involving the descendants of Mayer Amschel between 1824 and 1877, fifteen were between his direct descendants. These endogenous alliances, which went together with excluding daughters and sons-in-law from partnerships, were designed to “fortify the cohesion of the financial partnership.” Despite the usual fraternal quarrels, they achieved this. For many years family and religious cohesion—for the Rothschilds never renounced their Jewish faith—was the most potent factor in the Rothschild success.
Endogamy, though, had the unexpected consequence of creating, in effect, a Jewish royal family. The Rothschilds became “Kings of the Jews” as well as “the Jews of Kings.” And with kingship came kingly responsibilities, not just philanthropic, but as spokespersons for their dispersed Jewish kingdom all over Europe. Theodor Herzl offered the Rothschilds the throne of Israel if they would support Zionism.
Already, then, by the time Ferguson’s first volume ends, one can see the seeds of decay in the very factors which brought the Rothschilds their preeminence. With the improvement of state revenues, the development of deposit and joint-stock banking, and the growth of domestic capital markets, there was less demand for the financial services supplied by the “Jews of Kings.” And their dynastic principles doomed the Rothschilds to the inevitable problem faced by all family firms: lack of energetic new blood.
See Fritz Stern's book, Gold and Iron: Bismark, Bleichröder, and the Building of the German Empire (Knopf, 1977).↩
See Fritz Stern’s book, Gold and Iron: Bismark, Bleichröder, and the Building of the German Empire (Knopf, 1977).↩