Rothschilds

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ROTHSCHILDS

The Rothschild bank was the largest and most powerful financial institution of the nineteenth century. Although owned and run until the late twentieth century as a private family partnership, principally concerned with the management of the family's own capital, the firm's ability to handle large-scale transactions in numerous different markets and in multiple financial centers set it apart from its competitors.

The original "house" of M. A. Rothschild was founded in Frankfurt by Mayer Amschel Rothschild (1744–1812) in the 1790s. Originally a dealer in coins and antiques, Mayer Amschel became a broker and later an investment manager to the court of William IX, the wealthy prince (later elector) of Hesse-Kassel. By 1797 Rothschild had already accumulated capital of around £10,000 and was extending credit to a wide range of German clients. When the elector quarreled with Napoleon I (r. 1804–1814/15) and was driven into exile, Mayer Amschel continued to help him manage his fortune, running the risk of arrest by the French authorities.

None of this was exceptional: Mayer Amschel was just one among many German-Jewish Hoffaktoren (sometimes known as "court Jews") offering financial services to petty princes. Nor was his decision unusual to send a representative—his third son Nathan (1777–1836)—to England in 1799. The rapid growth of industrial textile manufacturing in England attracted numerous German merchants, all eager to purchase the new Lancashire fabrics for the Continental market.

Even Nathan Rothschild's decision in 1811 to become involved in British war finance was unoriginal. Since the late seventeenth century, British government borrowing—both long-term through the Stock Exchange, and short-term from the money market—had attracted foreign financiers to the City of London. The Rothschilds' mobilization of their Continental credit network to relay bullion to the British armies in the field in France in 1814 and 1815, as well as to transfer subsidies to Britain's Continental allies, was remarkable only for its scale. The risks were commensurate: contrary to legend, Nathan and his five brothers were brought to the brink of insolvency by the news that Napoleon had been defeated at Waterloo, since they had accumulated large gold reserves in the expectation of a prolonged war. Nathan's immense and speculative purchases of British government bonds in the aftermath of Waterloo not only salvaged the situation but also reaped a huge profit. By 1818 the Rothschilds' combined capital amounted to nearly £1.8 million, an immense sum at that time.

Until this point, the Rothschilds' mode of operation had been crude. Their bookkeeping was chaotic. Their correspondence was often intercepted and, although written in Judendeutsch (German transliterated into Hebrew characters), deciphered by the Austrian authorities. However, under Nathan Rothschild's mercurial leadership, and on the basis of the funds they had accumulated during the war, the family now began to play a more innovative role, specifically in the integration of the European bond markets.

The system whereby European states funded their budget deficits by selling long-term interest-bearing bonds to an elite of investors through financial intermediaries was well established by 1818. But the loan of that year issued by the Rothschilds on behalf of the Prussian crown was novel in that it was issued simultaneously in multiple markets. The interest was also payable in the market of issue. This corresponded to the unusual form of the Rothschild bank itself. Although it remained a family firm—structured as a partnership between adult male family members—the Rothschild bank took on a multinational character, in that the five brothers were now based in five major European financial and political centers: Frankfurt, Vienna, London, Naples, and Paris.

The success of the Prussian loan and similar transactions for the other great European powers in the 1820s rapidly established the Rothschilds as the dominant force in European financial markets. In terms of capital, they dwarfed their nearest rivals, the Barings. The Rothschilds' operations extended far beyond the European bond markets, however, embracing a whole range of financial services including bullion and commodity broking, the discounting of commercial bills, insurance, and even private banking for an elite of aristocratic clients, selected according to their political influence.

Nevertheless, bond issuance and trading remained the Rothschilds' core business. In particular, their multinational structure and the sheer scale of their resources allowed them to conduct a huge and profitable arbitrage business. The acute sensitivity of the bond markets to political events—particularly intimations of revolution or war, both of which implied financial dislocation and an increased default risk—gave the Rothschilds an intense interest in the acquisition and rapid communication of political news. A network of salaried agents and correspondents spread rapidly outward from Europe to all the major financial centers of the Old and New World. Their function was as much to transmit news to the partners in Europe as to engage in commercial transactions. Even so, the Rothschilds were surprised by the 1830 and 1848 revolutions and suffered heavy losses.

Declining public-sector deficits in the mid-nineteenth century and defaults by major borrowers in America and Iberia encouraged the Rothschilds to diversify into industrial investment. Mainly at the instigation of James de Rothschild (1792–1868), they acquired major stakes in Austrian, French, Belgian, and Italian railways, mercury mines in Spain, and the ironworks of Witkowitz (Vitkovic) in Moravia.

In absolute terms, the Rothschilds reached their zenith in 1899, when their combined capital (more than £41 million) exceeded that of the five biggest German joint-stock banks put together. In relative terms, however, they were in decline. In part, this reflected the diminishing returns of endogamy: the fourth generation evinced only mediocre financial acumen and was exceedingly risk-averse. But the economic and political environment had also become less favorable. The spread of joint-stock banking eventually created comparably large concentrations of capital; more importantly, joint-stock banks were more willing to accept deposits, whereas the Rothschilds persisted in acting more like an investment trust, managing the capital of the Rothschild family alone (and doing so very conservatively). At the same time, the advent of the telegraph and commercial news agencies eroded the advantage the Rothschilds had derived from their information network of private agents and couriers. Finally, the unifications of Italy and Germany shifted political power away from Naples, Vienna, and Frankfurt.

In the 1840s the Rothschilds had all but monopolized the markets for French and Belgian government bonds. By the 1890s there were only a few countries in a similar position of near-dependence, notably Brazil and Egypt. Increasingly, the Great Powers found themselves able to sell long-term bonds directly to the public or via rival intermediaries such as post offices, savings banks, or consortia of joint-stock banks. Even Russia—which relied heavily on the Paris market—was never wholly dependent on the Rothschilds.

By the end of the nineteenth century the extent of the Rothschilds' business empire remained impressive, ranging from Indian railways to South African diamond mines to Caucasian oil fields. They continued to be a crucial part of the "international financial architecture" of the gold-standard era, often acting as intermediaries between the major central banks and the bullion market. Their political power was, however, in decline—a reality belied by the family's increasingly conspicuous consumption and investment, especially in art and real estate, and their acquisition of aristocratic titles and sons-in-law. As amateur diplomats, the Rothschilds worked in vain to avert a military clash between Britain and Germany. The ensuing First World War exposed their strategic Achilles heel: the absence of a full-fledged Rothschild house in New York. Heavy losses in the financial crises of 1914 and 1931 (the latter largely arising from the collapse and costly rescue of the Rothschild-founded Creditanstalt) drastically reduced the scale of the family's resources. At the same time, the formal ties between the remaining Rothschild houses in London, Paris and Vienna were dissolved.

The Depression, the rise of National Socialism, and the outbreak of World War II brought the Rothschilds to the nadir of their fortunes. The Vienna house was wound up following the Nazi Anschluss of Austria in 1938; the French Rothschilds had to flee Paris after the debacle of 1940; the London office was fortunate to survive the Blitz more or less unscathed. The Nazi war on European Jewry was worse than a return to the days when the family had been incarcerated in the Frankfurt ghetto; now those Rothschilds who fell into the hands of the Nazis risked losing their lives. Yet the family—grotesquely caricatured in the German propaganda film Die Rothschilds (1940)—had grown accustomed to vilification. In the wake of their spectacular rise to preeminence in European finance during the later Napoleonic Wars, there had been innumerable attacks on them, not just by avowed anti-Semites but also by conservative aristocrats, radical democrats, populists, and socialists—even Zionists. The image recurs in numerous publications of a vast spider's web of money, with the Rothschilds at its center, and politicians, kings, and even popes entangled round its edges. Recent scholarship, however, has produced a more balanced depiction of their political role.

The Rothschilds were able to achieve a partial—although very far from complete—restoration of their fortunes after 1945. Although the Paris house was nationalized by the government of François Mitterrand in 1981, it has since been reconstituted. Only the original London house of N. M. Rothschild & Sons has survived without interruption. In the early twenty-first century it forms part of a complex network of Rothschild-controlled companies.

See alsoBanks and Banking; Jews and Judaism.