The House of Rothschild (32 page)

The most serious consequence of the Polish crisis was to set back Rothschild plans of establishing a long-term relationship with Russia. The financial costs of suppressing the Polish rising were sufficiently heavy to jeopardise the payment of the interest on the newly issued bonds, forcing James and Lionel to put up around a million pounds on the security of yet more Russian bonds, while at the same time disinclining them to offer any more bonds to the market. This seems to have confirmed Nat’s habitual pessimism about Russian finances, and for the rest of the 1860s he opposed involvement in any other Russian bond issues. There were other reasons for keeping at a safe distance from St Petersburg too: pro-Polish sentiment was strong in Paris and in London, and both Charlotte and Alphonse cited this as an argument for leaving Russian business to others. “I am so glad that the Barings, and not the Rothschilds have taken the Russian loan,” wrote Charlotte in April 1864, following the announcement of a new bond issue by the Rothschilds’ old rivals. “If our house had negotiated it, most assuredly there would have been a great outcry against those horrid jews for helping the cruel Russians to crush the poor Poles.”

For the rest of the 1860s, Russia reverted to her traditional bankers, Hope and Baring, who also issued a major £6 million loan in 1866. James, however, still itched to be involved. He was “heartily sorry to have lost the country” when there was “pure wine” to be made there. As early as February 1867, he began to contemplate the possibility, which he had previously rejected, of involving himself directly in Russian railways, a subject he discussed at some length when the Tsar and his Prime Minister Gorchakov visited Paris in 1867. However, he remained convinced that the Russian government should act as the borrower by issuing conventional rentes in Paris and London, rather than trying to issue railway bonds, and the discussions came to nothing, as did another project for a Russian mortgage bank. It was not until after his death that the Rothschilds finally agreed to issue a Russian railway loan.

As far as James was concerned, Austria’s defeat in Italy in 1859 was a decisive turning point: he would never again regard Austria as a great power in financial terms. In his eyes, the main question thereafter was how to wind up Austria’s presence in Italy rather as a bankrupt enterprise might be wound up: an insolvent empire, he reasoned, needed to liquidate its unsustainable commitments—to rationalise itself. It was mysterious to James that this diagnosis was rejected not only by the Austrian government but also to some extent by his own nephew Anselm, who (like his father before him) increasingly identified himself with the Habsburg regime, especially after his appointment to the Reichsrat Imperial Council Finance Committee in 1861. In many ways, James was right about the extent of Austrian weakness; but because the Austrians themselves resolutely denied the fact, he was inclined to overplay his hand.

No sooner had hostilities broken out in 1859, as we have seen, than the Austrian government issued a frantic plea for a loan of 200 million gulden; James responded as if Austria were at his mercy, insisting that no other foreign banks be involved. Yet there were too many rival banks eager to lend to Vienna for such a monopoly to be easily achieved. Bischoffsheim and Goldschmidt were able to secure the first tranche of the new loan, which was issued as a lottery loan. James retaliated by selling Austrian securities and refusing to co-operate when Anselm advanced the government 11 million gulden due to it from the loan of 1859. “We have got nothing from the Austrian sterling bonds,” he wrote angrily, “including a price at which we can sell them.” James felt “ill” at the thought of advancing money to Vienna when the government had provided no real security and even spoke darkly of instigating legal proceedings against the Austrian government to protect “our money.” Relations reached a nadir in 1862, with protracted wrangles about the commission still due for the 1859 bonds, and talk of suspending the interest payments due on them. When the possibility of a new Austrian loan of 50 million gulden was raised in 1862, James was indifferent:

Only when Anselm threatened to form a consortium including Erlanger and others did the other Rothschild houses hastily agree to participate in what was effectively a second issue of 1860 premium bonds. This threat was a sign of the growing distance between the Vienna branch and the other Rothschild houses, and irritated Mayer Carl and James. The pattern repeated itself a year later when the Austrian Finance Minister Brentano sought to raise another loan. Again Anselm infuriated James by agreeing to act in partnership with the two rival syndicates formed to bid for the loan, which included the Crédit Mobilier, its London imitator the International Financial Society and the new Anglo-Austrian Bank established earlier in the same year by George Grenfell Glyn. In fact, this loose consortium ended up merely advancing £4 million to Brentano. When the government sought to fund this advance by issuing 70 million gulden of bonds the following year, the Creditanstalt was one of only two bidders, and offered to subscribe just 19 million.

Primarily, then, Rothschild financial support for the Austrian government was renewed in an effort to preserve family unity
contra mundum;
James remained pessimistic throughout about Austrian bonds, selling heavily in the summer of 1862 and again the following year. The unexpected resurfacing of the Schleswig-Holstein question in November 1863 merely reinforced his pessimism: he could see no advantage for Austria in siding with Prussia against the Danish annexation of Schleswig and Holstein, especially as their joint invasion was not sanctioned by the German Confederation’s Diet in Frankfurt. True, Denmark was technically in breach of the Treaty of London; but the war which broke out in February 1864 seemed to most members of the family an absurdity: Charlotte called it “a mere freak on the part of Kings and Emperors and royal Dukes!” If anything, she was inclined to sympathise with the Danes, a widespread sentiment in both London and Paris. For his part, James saw only increased expenditures which Austria could ill afford and which therefore made the latest tranche of her bonds even harder to sell—though needless to say he was quick to see the possibility of a loan to Denmark, assuming an indemnity would be imposed on her.
⁵

What especially alarmed James was the fact that no sooner had the Danes been defeated than the alliance between Austria and Prussia evaporated: united against Denmark (and against foreign arbitration of the sort attempted ineffectually by France and Britain), they still could not agree between themselves what should become of the duchies. Various combinations were discussed when the two monarchs met at Schönbrunn, but William would not agree to give up Prussian land in return for both Schleswig and Holstein, while Franz Joseph still rejected the old Prussian demand for military hegemony in North Germany. Increasingly, the Austrians inclined towards the German liberals’ favourite solution: that the duchies should pass to the Duke of Augustenburg. However, in February 1865 Bismarck intimated that he would agree to this only if the duchies were made wholly dependent on Prussia, a
demarche
which (coming just months after he had vetoed the Austrian application to join the Zollverein) raised the prospect of another, more serious war—between Austria and Prussia. This anxiety merely made the Austrian position worse. The curious thing is that the Rothschilds chose this moment to take up the £3 million balance of the 1859 sterling loan, including £500,000
à forfait;
once again, the only rationale for this foolhardy commitment was the need to thwart the ambitions of another rival, Langrand-Dumonceau, who was touting a scheme for an Austrian Mortgage Bank and a loan secured on crown lands. To all intents and purposes Austria was broke when Belcredi took over from Schmerling as Chancellor in July 1865, with a deficit of 80 million gulden and no apparent means to cover it other than yet more advances from the banks.

Austria fell into further disrepute in James’s eyes with the decline into insolvency of the Esterházy family, on whose behalf the Frankfurt and Vienna houses had been raising loans since the 1820s. Between 1861 and 1864, no less than 6.3 million gulden had been raised through the issue of bonds secured on Esterházy lands. Then, in June 1865, Paul Esterházy was forced to suspend payments on premium bonds bearing his name, prompting a storm of public criticism directed at the banks which had issued the bonds. At a time when Móric Esterházy increasingly directed Austrian foreign policy as Minister without Portfolio, the collapse of his own family’s finances neatly paralleled the collapse of those of the Empire itself. The embarrassment this fiasco caused the Rothschilds might have served as a warning.

Why then go on doing business with Vienna? The answer to this question is that James believed he had a solution to the Austrian problem. From as early as December 1861 he had begun to contemplate a transaction which, as he saw it, offered not only financial advantages but also diplomatic advantages to the Austrian government, as well as a substantial commission for himself: the sale of Venetia to Italy. The Gastein compromise of August 1865, which temporarily gave Austria Holstein and Prussia Schleswig, did not preclude an analogous deal whereby Austria could sell Holstein to Prussia. Indeed, Bismarck had suggested this at Schönbrunn the year before, and the Gastein agreement seemed to set a precedent by transferring Lauen burg from Austria to Prussia in return for a payment of 2.5 million Danish thalers. The question seemed to be simply whether a price could be found acceptable to all parties. If this could be achieved, the territories disputed between Austria and her enemies to the north and south would be transformed into mere real estate, as marketable as the over-encumbered private estates of the Esterházys.

To understand what the Rothschilds were attempting to do in the tortuous but decisive negotiations of 1865, it is important to realise that there was in fact a degree of symmetry about the Prussian, Italian and Austrian positions. Each state was strapped for cash. The prospective buyers of disputed territory would therefore be able to raise it only by borrowing. But neither was in a position to do so easily, Prussia because of the constitutional conflict, Italy because of her increasingly low credit-rating. To the Rothschilds, the answer seemed to be obvious: both should privatise state assets—preferably railways—using the receipts to buy Holstein and Venetia respectively. At the same time, Austria’s financial position was so precarious that even selling one or both of these territories was unlikely to balance the budget. Austria had already sold off most of her state railways, so privatisation was not the answer here; instead, James reasoned, the already private railway lines should seek tax breaks from the government as part of the price of financial assistance. This was the essence of James’s vision in 1865: a complex of interdependent transactions designed to liquidate Austria’s unsustainable empire without the need for an economically disruptive war.

The Prussian case is the best known. Prussia was financially stronger than Austria; but in the short term the constitutional crisis and the Danish war created a cash-flow crisis. Once it was apparent that the Landtag would not sanction any kind of loan to the government, Bismarck had to fulfil his threat to resort to other sources. One option which had immediately presented itself in early 1864 was a loan of 15 million thalers from a consortium of bankers led by Raphael Erlanger. To Bleichröder this was alarming: he knew the hostility James felt towards upstarts like Erlanger, and hastened to reassure him that this offer had been “totally rejected,” though in fact the Seehandlung did some sort of deal with Erlanger shortly after this. The trouble was that the Rothschilds wanted Bleichröder to stop Erlanger without being willing to lend to Berlin themselves. When Bleichröder suggested that the government raise money by mortgaging some 20 million thalers of 4.5 per cent bonds already authorised by the Diet to pay for Silesian railways (but as yet unsold), James referred him to Mayer Carl; but the latter passed the buck back, replying that the Paris house would “remain completely aloof” from such a deal—a refusal which Bleichröder felt it wise to conceal from Bismarck: “On the contrary, I tried to make him believe that your esteemed Houses would cheerfully lend their support to Prussian finance operations.” The government was by now deeply divided on the finance question, the Finance Minister Bodelschwingh opposing the diversion of the railway bonds to military ends, and pressing Bismarck to recall the Diet in the hope of securing an authorised loan. But any hope that the victory over Denmark would relax the mood of the Liberals in the Landtag was dashed in 1865, when the government’s conduct was denounced as illegal and all its requests for funds firmly rejected.

This raises an important question: how, if Austria had accepted the idea of selling Holstein to Prussia, would Prussia have paid for it? As early as November 1864, Bismarck was promising “magnificent money equivalents”; if the equivalents “were high,” Esterházy told the Prussian ambassador Werther, “he would not reject the offer.” It was here that the Rothschilds sought for the first time to act as brokers, with Bleichröder and Moritz Goldschmidt of the Vienna house corresponding back and forth in search of a price which both sides would accept. As Goldschmidt said, the sum in question “would have to be fat to overcome the immense reluctance against a cash settlement, which would not be very honourable,” a view echoed by the Austrian Finance Minister Plener. It soon emerged that the figure the Prussians had in mind was 40 million gulden (around 23 million thalers). But where was this to come from? Bleichröder might claim that Prussia’s “coffers were full,” but Bodelschwingh had told the Diet that the war against Denmark had already cost 25 million thalers, half of which had been met from the state “treasure” (meaning reserve funds); according to Bleichröder, that left around 37 million thalers in the reserve. Not much would have remained of that if Prussia had bought Holstein.