The House of Rothschild (50 page)

Even so, Ferdinand was shocked by the effect of the crisis on his cousins’ physical condition: he found Alphonse and Gustave “painfully green and yellow” when he met them in Paris in August—and disconcertingly secretive.

From the point of view of the indemnity payment, the descent of Paris into civil war was a setback, bringing financial activity to a near standstill. There were compensations nonetheless. Events in Paris could be portrayed as a threat to the governments of all countries, and further evidence of the unwisdom of a Carthaginian peace. Moreover, once military discipline had been re-established within the regular army, it gave the government a chance “to get rid of all those vermin, veritable gallows fodder who constantly threaten society”—to “purge France and the world of all these rogues.” Evidently, Alphonse shared the violent antipathy towards the Parisian “dangerous classes” which was at the root of the Bloody Week.

It is tempting to add that there was one further benefit: the defeat of the Commune reinforced Thiers’ position as President. But was this really advantageous? One of the puzzles of the early 1870s is the nature of the relationship between Thiers and the Rothschilds. Early on, Alphonse referred to Thiers as “our friend” and seemed happy to see him as “master of the situation”; and there is no question that he stood four-square behind him and the moderate republicans during and immediately after the “war against Paris.” To Alphonse, Thiers seemed the only man capable of reconciling republican Paris with the monarchist provinces. But “our friend” was a Rothschild euphemism devoid of emotional content. In truth, Alphonse had reservations about Thiers which soon resurfaced. Thiers, after all, had been no friend of Alphonse’s father in the days of Louis Philippe; and the old man evidently made Rothschild
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feel uneasy, perhaps on account of this. “It is really difficult to converse with him,” complained Alphonse after one encounter, “especially for people like me whom he knew as children.” Was Alphonse just a little afraid of Thiers? Alfred noticed that he “rather dreaded calling upon the little President of the great Republic.” More often, Alphonse articulated this sense of unease by criticising Thiers’ dictatorial tendencies (especially towards the Banque), or his fondness for political double-dealing. “A Proteus who, despite his great stature, always slips through our fingers” was his curious verdict. As early as June 1871, Alphonse predicted that, if Thiers were to fall, he would most probably be replaced by the duc d‘Aumale, paving the way for an Orleanist restoration.
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Nevertheless, Thiers had one quality which the Rothschilds did not underrate: he grasped the primacy of finance over all other factors under the circumstances of 1871—3. “Above all,” Alphonse told Thiers in early June, “the political situation must be clarified and for the present it must be completely subordinated to the financial questions.” Subsequent events were to confirm that Thiers accepted this. Despite his seniority, the President generally deferred to Alphonse’s advice on these financial questions. And despite repeated efforts by rival banks to challenge the Rothschilds’ position, he never really questioned the need for their leadership in the payment of the indemnity. This in turn may explain why, as he later told Gambetta, Alphonse acted to keep Thiers in power when his position seemed to be threatened in late 1872. According to one account, Alphonse told Gambetta:

Whatever their suspicions about one another, the two men were united by bonds of interest, though in the strictly financial sense of both words.

Could other banks have handled the indemnity payment just as well—perhaps even more cheaply? It is arguable. Three per cent rentes looked undervalued in the first half of 1871 at prices of 50—53 francs. Bleichröder was far from being the only European banker who saw the opportunity for netting large profits from the “great operation,” not only in the form of commissions, but in the form of capital gains if the rentes could be taken firm at such low prices; given the track record of the rente as an investment since 1815, a substantial rise seemed inevitable. He and other German bankers swarmed around Paris in May, trying to secure a share of the action. Nor were they alone. The Banque de Paris also attempted to outbid the Rothschilds, and there was also competition from J. S. Morgan, who had taken the risk of financing the French war effort in October 1870.

However, none of the Rothschilds’ rivals could claim to match their international reach as an issuing house: as Mazerat of the Credit Lyonnais put it, “Rothschild’s great European relations and the power of his capital resources create for him an absolutely exceptional role.” This was the key. In order to raise the maximum amount of hard currency from the issue, Thiers and the French Finance Minister Augustin Pouyer-Quertier wished to sell as many of the new rentes as possible outside France, and ideally in London. The fact that Alphonse could legitimately present himself as the spokesman not just of the Parisian haute banque but also of New Court was his trump card. “Our opinion, I have no doubt,” he reported to London, “will have a very great influence over the decisions which the [Finance] Minister is in the process of taking and our attitude must necessarily be very influenced by yours.” “The minister has addressed himself to no one other than us,” he added later, “and I have no doubt that you can be assured of the conduct of the entire operation in England.” Alphonse also recommended that the issuing of rentes in Germany be handled through the Frankfurt house, rather than by Bleichröder and Hansemann, “particularly as it seems to me that it would be difficult for the government to open a subscription directly through German bankers, whereas the house of Rothschild has a cosmopolitan name.”
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Small wonder the Rothschilds’ rivals grumbled: as Mazerat put it, Alphonse had become “the pivot of all the financial combinations which are going to emerge. It is impossible to keep abreast of his projects.”

With the government thus committed to Rothschilds, all that remained to be agreed were the mechanics of the operation. Alphonse’s letters of June 1871 give perhaps the best insight available into the way such negotiations were conducted. The points at issue were numerous: the timing of the issue (before or after the elections of July 2?); the amount to be issued (2 billion francs or more?); the respective shares of the French, English and other markets; the interest and amortisation payable on the bonds; the issue price (figures discussed ranged from 80 to 85); the timing of subscription payments (how many monthly instalments?); the bankers’ precise role (should they take the bonds firm or underwrite part or all of the issue?); the size of their commission, brokerage and other charges; and finally the exchange rate for interest payments to foreign subscribers (should this be pegged against future depreciation of the franc?).

The answers arrived at after days of haggling were as follows: subscriptions for 2.6 billion francs worth of 5 per cent rentes were to be opened on June 26 at an issuing price of 82.5, though with the timing of subscription payments such that the net price was around 79.5. The exchange rate for English interest payments was fixed at 25.30 francs to the pound. The two syndicates led by the Rothschilds in London and Paris were formally underwriting only 1,060 million of the total issue, in return for which they received a commission worth 2 per cent of the nominal value (21.2 million francs), so that the effective price of their subscriptions was more like 77.5 (Alphonse calculated the figure as 77.7). There was, admittedly, a catch of sorts. Technically, the syndicates were underwriting not the first billion of the issue (as the Berlin bankers had expected) but the second billion. If the issue went badly, their chances of being left holding large quantities of rentes were therefore higher. On the other hand, if the issue went so well that the public bought the lot, the bankers would have to rest content with their commission. The Berliners thought this “flatly unacceptable.” However, the French government concluded a secret oral agreement with the Rothschild houses to the effect that they would be allowed to hang on to some or all of the rentes they underwrote. The Rothschild share was therefore 410.5 million francs—more than a third of the total amount underwritten or 16 per cent of the total issue.
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It is therefore a matter of straightforward arithmetic to calculate the profits they earned. The commission alone was worth 8 million francs; but that overlooks the large capital gains involved. If the London and Paris houses held on to all the rentes for which they had paid an effective price of 77.7 and sold them all at the market’s next peak in November 1871 (97.1), they would have made a profit of around 80 million francs (c. £3 million).
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It was typical that Alphonse regarded this as rather less than might have been achieved. It had proved impossible to achieve a complete Rothschild monopoly. Not only had the French joint-stock banks managed to secure a small share, but the markets other than London and Paris had been effectively “free for all,” so that brokers began trading unofficially in Brussels even before the subscriptions were opened. “I confess it’s a veritable muddle,” grumbled Alphonse, whose opinion of the inexperienced Pouyer-Quertier had never been high, “but I assure you that it is not our fault; to prevent it we would have had to become Ministers of Finance ourselves.” Yet within a few days, as the full extent of the loan’s success became apparent, such complaints faded. At first, subscriptions were said to be double the amount issued; by July 20 Alphonse estimated a factor of eight. Not only that, but the French joint-stock banks had been successfully squeezed out, as they were again when the city of Paris issued a loan of its own through the Rothschilds not long after. As Mazerat of the Credit Lyonnais complained:

With Alphonse now one of the dominant regents at the Banque de France and the Rothschilds’ “long-standing intimate friend” Say now Prefect of the Seine, the joint-stock banks saw themselves as the victims of political discrimination. On August 5 they therefore signed an agreement which was little short of an anti-Rothschild alliance. As Mazerat put it, deliberately casting aspersions on Alphonse’s patriotic credentials, the joint-stock banks had united “as French establishments” to lay claim to “the place which they must legitimately take in French affairs.”

The objective of cutting the German banks out of the operation had also been achieved—though how far this was the fault of bad communications, timidity in Berlin or malice aforethought in Paris is hard to say. It is worth noting that this exclusion extended not only to Bleichröder, Hansemann and Oppenheim but to the Rothschild houses in Frankfurt and Vienna as well. Anselm applied for as much as 31 million francs of the new rentes and the Creditanstalt for 47 million, but by the time these applications reached Paris subscriptions were already closed. Mayer Carl only just managed to secure a subscription for 2 million francs. Not for the first time, the fault lines dividing the European capital market were breaking up the traditional co-operation between the Rothschild houses, leaving only an Anglo-French axis intact. That this did not concern Alphonse is plain. “I do not regret,” he wrote with a hard-edged satisfaction, “having been able to demonstrate to these gentlemen, despite all our goodwill, that when we are engaged in a transaction, we can do without them, just as we can do without the Berlin types who have missed the chance to make a pretty nice profit.” Triumph though it was for the English and French houses, the first Thiers rente also marked a further step towards the disintegration of the Rothschilds as a united pan-European force.

This, of course, was only the first phase: there remained the question of how the money raised by the rentes issue should be transferred to the German government. The obvious way of proceeding was for the government to buy bills on London—the most popular of liquid financial instruments—and hand them over to Berlin. Something like a third of the first 1.8 billion francs was indeed paid in this way; to Alphonse’s annoyance, it proved impossible to establish a monopoly on the French government’s purchases of bills. However, the Germans now began to make difficulties, insisting that they would rather receive gold or German thaler bills than long-dated sterling bills.
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As usual, Bleichröder sought to inflate his own importance by relaying the views of his “friend” on this issue to Paris. But Alphonse was unimpressed. “These gentlemen may be great [military] victors,” he commented acerbically, “but they are certainly pretty bad financiers. They are locking up the money we remit them and do nothing to facilitate the payments.” The transfer difficulties precipitated a mild currency crisis in the last months of 1871, coinciding as they did with a poor harvest (and therefore a need for French grain imports), a speculative surge at the bourse and the first serious arguments about tax policy. To protect its reserve, the Banque de France had to issue new small-denomination notes and pressurised the government to reduce its large floating debt. This burst the bubble on the bourse: the price of rentes peaked in November then fell about five percentage points, in the first half of 1872 (see illustration 6.i). As a consequence of all this, discussions of the next payments due in Berlin by May 1872 had to be deferred until the New Year.