The House of Rothschild (105 page)

Source: RAL.

Closer examination reveals, however, that the Rothschilds were involved in lending to some of the most unstable regimes of the inter-war era. This was the unintended consequence of a rather uncritical resumption of pre-war patterns of business activity.

It was, of course, logical enough for a firm with such close historical links to Central Europe to play a leading role in financing the new states established in the ruins of the Habsburg and Hohenzollern empires. Unfortunately, even the most stable of these proved to be less than easy to deal with. Czechoslovakian bonds worth around £10 million were issued by a Barings-led consortium of N. M. Rothschild, Schröders and the New York firm of Kidder Peabody in 1922 and 1923; but the first tranche of bonds dipped below par because of an ill-timed attempt by the City of Prague to issue its own paper. The Rothschilds appear to have eschewed the disastrous German bond issues of the early 1920s, most of which were reduced to near-worthlessness by the hyperinflation of 1922-3; but they were drawn back to the German market (partly under the influence of Max Warburg, then at the height of his powers), raising £835,000 for the Prussian province of Westphalia and combining with Barings and Schröders to float major loans for the cities of Hamburg and Berlin in 1926 and 1927. In addition, the London house joined the Vienna house as shareholders in the Warburgs’ ambitious International Acceptance Bank (IAB), founded in 1921 to help finance the yawning post-war German trade deficit; and were later involved in another Warburg project, the London-based Industrial Finance and Investment Corporation Ltd. Hungary was perhaps the most important Central European client of the period: here it was New Court which took the lead, issuing loans for £7.9 million in 1924, £2.25 million in 1925-26 and £1.6 million in 1936.

Finally, there was Austria. In addition to the £3 million government loan of 1930, which was handled jointly with Barings, Schröders and Morgan Grenfell, the London house was indirectly interested in the Austrian economy—perhaps more than it realised before 1931—through its sister house in Vienna. Louis perhaps rather resembled Max Warburg in his over-optimistic assessment of the Central European economy in the 1920s. He elected to hold on to the Witkowitz ironworks once they became part of an independent Czechoslovakia (though he might have acted differently had they gone to Poland). More important, he increased Rothschilds’ involvement in the bank founded by his grandfather some six decades before: the Creditanstalt. In July 1921, he accepted the post of president of the Creditanstalt board (
Verwaltungsrat
), and it was in conjunction with the Creditanstalt that the Vienna house involved itself in concerns like the IAB and the Dutch-based Amstelbank. It was a former Creditanstalt director and supervisory board member, Wilhelm Regendanz, who managed to persuade the London Rothschilds to issue £2 million bonds for an Austrian firm, the Vorarlberger Illwerke at Bregenz, the failure of which was an early warning of what lay ahead for the Central European economies.

When the Bodenkreditanstalt got into difficulties in October 1929, it was to Louis that the Austrian government turned. He obliged by agreeing to what amounted to a merger of the two banks. On Wednesday October 18, the Paris house wrote to congratulate him on his action. “Thanks to your decisiveness and courageous attitude,” wrote Edouard, “you saved Vienna’s finances and avoided events that could have been extremely serious for your country and that would certainly have had repercussions in other financial capitals and markets.” Had he known what the following Tuesday would bring, he would have been offering anything but congratulations. Neither he nor Louis realised that history was about to repeat itself: just as Louis’s great-grandfather Salomon had bailed out Arnstein & Eskeles on the eve of the 1848 crisis, so Louis’s decision to bail out the Bodencreditanstalt was to bring the Vienna house to the brink of ruin.

It seemed equally logical for the London house to continue its traditionally close relationship with Latin America and above all with Brazil and Chile.
⁹
During the war, the American ambassador in Brazil had commented that “the Rothschilds have so mortgaged Brazil’s financial future that ... they will place every obstacle in the way of her entering into banking relations with any other house than their own or with any other nation than England.” This was a pardonable exaggeration. The London house issued bonds with a nominal value of more than £28 million for the Brazilian federal government in the inter-war years, plus an additional £17.5 million for Brazilian states and railways. (The total figure for Chile was around £10 million.) In the case of Brazil, financial (and political) stability hinged in large part on the world market for coffee; the 1922 loan of £9 million—in conjunction, once again, with Barings and Schröders—was specifically designed to finance the government’s coffee price-support scheme and placed control of coffee exports in the hands of a committee of City banks (a repeat of what had been attempted, despite Rothschild reservations, in 1908).

Doubts about the reliability of the Banco de Brasil persisted, however, and when the Brazilian government approached New Court for another £25 million loan in 1923 “to liquidate the floating debt and set Brazilian finances in order,” Lionel asked Edwin Montagu to lead a mission to Brazil in the hope of imposing “some palatable form of foreign financial control” on the Banco de Brasil. Unfortunately, the best that Montagu and his colleagues could come up with was a suggestion that the London banks might buy the Brazilian government’s shares in the Banco, which Lionel rejected on the ground that it would be “most unpopular in Brazil for the national bank to be owned by foreigners.” In any case, the Bank of England’s temporary embargo on foreign loans undercut the planned loan, and three years later—after a spat between Brazil and Britain over the admission of Germany to the League of Nations—the Brazilian government turned instead to Wall Street. The London house nevertheless continued to exercise control over the coffee support scheme, which was transferred to the São Paulo state goverment in 1924, and resumed its dominant role in Brazilian federal bond issues when Brazil returned to the gold standard in 1927. The Rothschild agent in Brazil, Henry Lynch (known locally as “Sir Lynch” after his knighthood), remained a key figure in the country’s finances throughout the period. In Chile the stability of government finance was also linked closely with a staple export—nitrates for use in fertilisers and explosives.

In addition to this traditional bond market business, the Rothschilds maintained their pre-war interests in mining. Their influence as the principal shareholders in Rio Tinto became even greater as the firm expanded its interests from copper and pyrite to embrace sulphur-recovery, cinder-treatment and silica gel, and its geographical range from Spain to Belgium, Rhodesia and the Americas.
¹⁰
Key members of the board such as Lord Milner, Sir Arthur Steel-Maitland (the managing director of the Company in 1920) and Sir Auckland Geddes (who succeeded Milner as chairman in 1925) worked closely with New Court as the firm tried to cope with the volatility of the inter-war raw-materials markets. In South Africa the London and Paris houses together remained major shareholders in De Beers, though increasingly its direction was determined by Ernest Oppenheimer’s Anglo American Corporation (founded in 1917), which had acquired an even larger stake than the Rothschilds. The only reverse was in Spain, where the Almadén mines were nationalised in 1929; but that had ceased to be a major source of revenue even before the war.

All this business hardly constituted immobility. The firm’s familiar circle of stockbrokers—Cazenove, Messels, Panmure Gordon and Sebags—were kept occupied, as were the firm’s lawyers. The trouble was that activity was not always matched by profitability. For when the world economy plunged into the great deflation of 1929—32—with prices, production and employment levels falling by unprecedented amounts—the areas of greatest Rothschild involvement were among the worst affected.

It is arguable, of course, that this greatest crisis of the capitalist system was caused by “structural” factors beyond the control of bankers and politicians alike. The legacy of the First World War was one of over-capacity and distorted markets for many staple agricultural and industrial products. But there can be no doubt that misguided fiscal and monetary policies—allied with the impossible tangle of international war debts and reparations obligations—did much to exacerbate and perpetuate the slump. In the early 1920s, too many countries sought to evade difficult political choices by running excessive public sector deficits and financing them with the help of the printing press: inflation and hyperinflation were the results, and in their wake financial instability as investors (especially bondholders) demanded higher yields to compensate them for the risk of more inflation. Austria was one of the states which experienced high post-war inflation. In the aftermath, the Vienna house had a hand in stabilising the new schilling, thwarting the efforts of inflation enthusiasts like the financier and industrialist Camilio Castiglione; but it is probable that, like virtually every Central European bank in the 1920s, its post-inflation balance sheet was long on deposits and short on reserves. From the mid-1920s onwards, the prevalent policy error was a fixation with unsustainable exchange rates, as governments sought vainly to imitate the gold standard system of the pre-1914 period, ignoring the absence of many of the essential preconditions for its earlier success. The result was that, especially after 1929, politicians sought to balance budgets and tighten monetary policy in the teeth of recession, subordinating all other policy objectives to the maintenance of gold equivalence.

There is no question that the Rothschilds had a hand in this, though the error was so widespread as to constitute a near-universal “conventional wisdom.” Perhaps the London house’s continuing importance in the international gold market was a factor. When the war-time ban on gold exports from London was lifted, N. M. Rothschild took on the role of intermediary between the bullion market and the Bank of England, to which the South African mine companies agreed to ship all their gold (roughly half of world output). The system adopted was that N. M. Rothschild advanced £3 17s 9d per standard ounce to the producers on receipt of the refined gold and then sold it at “the best price obtainable, giving the London market and the bullion brokers a chance to bid,” pooling any premium and remitting it to the mines every six months. Thus was born the so-called “Fix,” whereby the world market price for gold was set every morning at 11 a.m.—beginning on September 12, 1919—following an auction conducted at New Court.
¹¹
The choice of venue reflected the London house’s dual role: as refiners and agents for the South African producers (the biggest seller).
¹²
It thus played a pivotal role in the stabilisation of the Indian and British currencies after the war.

Yet it is hard to believe that this was the only reason the Rothschilds adhered to the reconstituted gold exchange standard. Ultimately, they liked gold for the same reason that the rest of the City liked gold: they feared that, if the pound were allowed to float, London would see its central role as the world’s financial capital pass irrevocably to New York. Nor was their faith in the gold standard unthinking: in 1931 Walter argued—rightly—that the breakdown of the system in the Great Depression had “nothing to do with the rights or wrongs of Capitalism or Socialism, but ... is owing to the greed of [certain] countries for gold. What they have succeeded in doing is to injure their own trade by withdrawing the means of barter from the rest of the world.” This was fair comment: the biggest difference between the pre-1914 gold standard and the gold exchange system of the 1920s was that two of the most important players—the United States and France—bent the rules by “sterilising” additions to their reserves in order to avoid domestic inflation. Without central bank co-operation, the system could not survive.

Compared with Britain, France compromised. So long as French tax-payers persisted in believing that the budget would be balanced by reparations which the Germans were determined not to pay, there was no chance of restoring the franc to its pre-war exchange rate. Indeed, it was only after protracted debate that the currency was pegged at 20 per cent of its old external value in 1928. This was a compromise which Edouard vehemently and vainly opposed in his capacity as one of the twelve regents of the Banque de France. In the summer of 1924 he was openly critical of the Left Cartel government led by Edouard Herriot for what he saw as its soft line towards striking railway workers—an important preoccupation for de Rothschild Frères in their role as major Nord shareholders. Early the following year, with the franc depreciating rapidly, he led a delegation from the Banque to discuss the currency question with Herriot. Though Edouard tactfully laid part of the blame for the weakness of the franc on “the clerical right and Communist extremists,” he was also critical of excessive public sector pay settlements and called for a coalition of the Left Cartel with the more right-wing National Bloc it had replaced, with the aim of balancing the budget. However, the appointment of Emile Moreau as Governor of the Banque in June 1926 led to a diminution of Rothschild influence, for, while Edouard continued to dream of a return to pre-war parity, Moreau more realistically argued for stabilisation at something closer to the existing rate. This division came close to outright conflict the following spring. Edouard had a powerful supporter in the industrialist François de Wendel as well as leverage when the French government sought to raise money in London in 1927, but he was asking the politically impossible. Even a new government led by Poincaré and empowered to balance the budget by decree could do no more than peg the franc at 25.52 to the dollar. Under Poin care, the 3 per cent rente rose from 48.25 francs to 67.60; by contrast, Rothschild influence declined.