The House of Rothschild (31 page)

In one sense, it is easy to see why Bismarck was able to avoid “depending” on the Rothschilds or any other bankers in a way that no Austrian politician of the period could. Financially, Prussia was in a different league. Table 4a gives some bald figures for the nominal increases in expenditure for three of the principal combatants in the period. The figures for France and Prussia are in fact quite similar; but the Austrian figures—which show expenditure nearly trebling between 1857 and 1867—testify unambiguously to the Habsburg monarchy’s unsustainable military commitments. It was the army and the defence budget which caused this growth, not (as might be imagined) inflation, which was comparatively restrained (prices rose by just 5 per cent, surprisingly little in view of the substantial monetary expansion of those years).

Sources: Mitchell,
European historical statistics,
pp. 370-85; Schremmer, “Public finance,” pp. 458f

The attitudes of bankers, however, were more directly determined by the way military spending was financed. Here Prussia’s advantage over both her principal rivals was more pronounced. Between 1847 and 1859 the total Austrian debt increased by a factor of 2.8; for Prussia the equivalent figure was just 1.8. More important, Prussia started the period with an exceptionally low debt burden: in the 1850s public debt as a proportion of national income was around 15 per cent and as late as 1869 was still less than 17 per cent; the equivalent figure for France rose from 29 per cent in 1851 to 42 per cent in 1869. Figures for the cost of debt service make the difference equally apparent: in 1857 the Austrian state was spending 26 per cent of its ordinary revenue on debt service, compared with a figure of just 11 per cent for Prussia. For the Bonapartist era as a whole, the equivalent figure for France averaged 30 per cent; even at its peak in 1867 the Prussian debt service burden was less (27 per cent). This meant that, from the point of view of a prospective lender, Prussia was a good credit risk; France slightly less so; Austria a downright bad one. Again, these differentials can be illustrated with reference to bond prices. The price of Austrian 5 per cent metalliques touched twin troughs of around 42 (a price not seen since the Napoleonic period) in 1859 and 1866. Prussian 3.5 per cents, by contrast, never fell below 78 (see table 4b).

To make the difference clear, throughout the period between 1851 and 1868 the yield spread between Prussian and Austrian bonds ranged between 2.7 and 8.6 percentage points, averaging almost exactly 5 per cent (see illustration 4.i). The gap is less pronounced for Prussia and France, but it is still there: on average between 1860 and 1871, it was just over one percentage point. As Talleyrand observed (with par-donable exaggeration) in January 1865, “Prussia stood above par in politics as on the bourse.” Thus while it is still possible to explain the outcomes of the various conflicts of the period 1858-71 in terms of the shrewd diplomacy of statesmen or the bold strategy of generals, a financial explanation is necessary too, if not sufficient. Another way of putting this is that Austrian policy failed precisely because it was financially unsustainable: unable to afford the military effort necessary to achieve victory in both Italy and Germany, the Austrians should have accepted the option of selling their territory in one, to enable them to afford to defend the other. This was essentially the strategy advocated by James and his nephews. By seeking to defy financial reality, Austria ended up losing on both fronts.

Sources: House of Commons,
Accounts and papers
, vol. XXVII and XXXI;
Economist·,
Heyn, “Private Banking and Industrialisation,” pp. 358-72.

Nevertheless, it would be wrong to suggest that Bismarck’s victory was financially predetermined. Bismarck’s access to state revenues in the crucial years 1862-6 was technically illegal in the absence of parliamentary approval, and even his own “gap theory”
(Lückentheorie)
could not easily justify increases in expenditure much above the last approved budget. On average, expenditure in the years 1863-6 exceeded the sanctioned ordinary expenditure of 1861 by some 38 million thalers per annum. Bismarck risked being held personally liable for raising funds without parliamentary sanction, and in January 1864 the Liberal-dominated Landtag rejected his request for a loan of just 12 million thalers. From this point, he had no option but (as he put it) to “take [funds] wherever he could find them.” But that, as we shall see, was easier said than done, and Bismarck was bluffing when he assured the Austrian charge d‘af faires in the summer of 1864 that he had reserves of 75 million thalers. Indeed, it is arguable that the market’s confidence in Prussian finance in this period was to some extent overdone. In the immediate aftermath of the war against Denmark, Bismarck advocated cuts in defence spending as a way of raising money; if this could be achieved, he reasoned, “Nobody would be able to form an opinion about the financial strength of Prussia.” That puts the high quotation of Prussian bonds in a rather different light.

In any case, the struggle for mastery in Germany was as much diplomatic as military: money furnished the sinews of war, but the role of money in the diplomacy of the 1860s proved relatively limited, as James found out to his chagrin. Regardless of Austrian weakness, there were a number of occasions when Bismarck’s ambitions could have been thwarted if not wrecked altogether: the element of contingency in the diplomacy of the 1860s should never be forgotten. Had Russian policy been less hostile to Austria, for example, Bismarck would have been vulnerable to the pressure from the East which had forced Prussia to accept the restoration of German dominance in Germany at Olmütz in 1849. Had British policy not been so passive, the crises over Poland and Denmark might have turned out less advantageously to Prussia. Had Napoleon III not replaced Thouvenel with Drouyn de Lhuys, French policy might have been more consequential: instead of acting primarily in the interests of Italy (over Venetia if not over Rome), Napoleon might have anticipated the threat posed to France by an expansionist Prussia. Nor should the Austrian attempts to reform the German Confederation be dismissed as mere pipe-dreams. Each time Austria raised the subject—in February 1862, in January 1863 and, most dangerously for Bismarck, in August of the same year—Prussia’s position looked precarious. Austria had more support among the other German states. And Franz Joseph might conceivably have made up his mind to exchange Venetia or Holstein for cash and a “fig-leaf” of territory rather than face another war and another defeat.

Ultimately, it was the mistakes of others which gave Bismarck his opportunities: the Danish decision to annex Schleswig and Holstein in November 1863, the Austrian appeal to the Confederation over the duchies in June 1866 and, later, the superfluous French demand for a permanent renunciation of the Hohenzollern claim to the Spanish throne in 1870. Even the military outcomes were more balanced than is often assumed: when war broke out in 1866, Austria seemed to have secured the support of mighty France as well as the other major German states, while Prussia’s sole allies were, as one Prussian official observed with only slight exaggeration, “the duke of Mecklenburg and Garibaldi.” Well drilled and well armed though the Prussian infantry were, their breech-loading “needle-guns” did not guarantee victory at Königgrätz.

The crisis precipitated by the Polish revolt against Russian rule in January 1863 provided a sort of dress rehearsal for the wars of 1864 and 1866: in so far as Russia waged war against Poland, she was able to do so swiftly and, despite much fuss abroad, without foreign intervention. The financial implications were less straightforward. From the Rothschild point of view, the rising was singularly unwelcome. For the first time in forty years, the Rothschilds had managed to secure a major Russian loan in April 1862. It seemed a tremendous coup: an issue of 5 per cent bonds worth £15 million, of which £5 million were taken directly by the Paris and London houses at 94 and the rest sold to the public on commission. But the bonds did not do as well as James had hoped and the London, Paris and Naples houses were left holding Russian paper worth at least £2 million on the eve of the Polish rising. James’s hope had been that prices would rise provided Russia did not become embroiled in war; but the crisis in Poland confounded this expectation. What made the crisis so alarming was not so much Bismarck’s somewhat heavy-handed offer of support to the Tsar (which won him no friends anywhere)
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as Napoleon III’s attempts to stick up for Poland, which threatened—as in 1830—to precipitate a Franco-Russian war. Bismarck was lucky: if Britain had supported France more warmly, or if Alexander II had been persuaded to back down, his position would have been exposed. As it was, Drouyn’s attempt to resurrect the Crimean coalition was a disastrous failure, simultaneously alienating both Russia and Britain.

At the time, Disraeli offered a characteristically imaginative interpretation of events which has often been repeated since as evidence of Rothschild power. On July 21 he warned Mrs Brydges Williams—one of his many middle-aged female admirers—that “a war in the centre of Europe, on the pretext of restoring Poland, is a general war, and a long one,” adding: “The Rothschilds, who have contracted two loans this year, one to Russia and the other to Italy ... are naturally very nervous.” Three months later he was still pessimistic:

This was pure fantasy. In reality, the crisis had been beyond any Rothschild control; all James and Lionel could do was fume as inept French diplomacy drove down the price of Russian and Italian bonds. As James put it after hearing a torrid account from the Russian ambassador of Napoleon’s desire to “turn the whole map of Europe around,” it was “devilishly disagreeable to be issuing a loan right now”; but he did not believe for a moment that there would be a war—only “bad bourses” and “hot water.” This relative optimism reflected the fact that James was better informed than Disraeli: he knew that both the French and the Austrian governments were divided on the issue (in the French case, Walewski for war, Persigny and Fould against), and for this reason calculated that the crisis would blow over. His only real flicker of doubt came on June 17, when a second Anglo-French note to Russia and an interview with Drouyn persuaded him to sell £25,000 of Russian bonds. By the end of July, after long discussions with Prince Altenburg at Wildbad, the “old bourse man” (as James called himself) was sure peace would be preserved. In London, too, Lionel was confident on the basis of “West End” (that is, political) intelligence of “better times.” “Nothing in Poland,” he told his son Leo. “We shall not interfere for the Poles who are not a bit better than the Russians.”
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