The House of Rothschild (51 page)

The French government’s difficulties gave the Rothschilds’ rivals a fresh opportunity to tout for business. It was the Banque de Paris which led the challenge, acting as a front (so Alphonse suspected) for German interests, notably Henckel von Donnersmarck. The “Paribas”
²¹
director Soubeyran had got the better of Alphonse in the scramble for bills in the summer of 1871 and on the question of the 300 million francs due by May Alphonse was forced to give ground: after much wrangling, he and the other private bankers guaranteed half the sum, leaving the other half to the joint-stock banks. This was but a foretaste of the bitter competition for control of the remaining 3 billion still to be paid. Once again Bleichröder kept trying to force the pace, having made contact with Pouyer-Quertier when the latter visited Berlin. He pestered Alphonse with more or less hare-brained schemes, all designed to secure for himself a bigger share of the next big operation: a new Franco-German joint-stock bank should be set up in Paris to handle the next loan; the 3 billion should be guaranteed by French railway shares (in other words, French railway shareholders would exchange these for rentes and hand over control of the French rail network to Berlin). Like Henckel von Donnersmarck’s proposal for a lottery loan, all these German schemes were ultimately irrelevant: a sudden upsurge of patriotic feeling in France itself—an impatience to end the occupation as soon as possible—made it highly likely that the 1871 rente operation would be repeated. The only question was whether the Paris and London Rothschilds would be able to repeat their earlier coup of controlling the new issue.

At first, Alphonse was sceptical about the possibility of paying the 3 billion ahead of schedule in view of French political instability and the slight deterioration in Franco-German relations which happened in the spring of 1872. By the end of June, however, fear that the Paribas group might steal a march on him galvanised him into action. It was inevitable that the government would be less generous the second time around. In order to secure a repeat of the underwriting system, the bankers had to promise to provide the government with 700 million francs in hard currency. As Alphonse said, this was necessary only “in order to be able to justify a bigger commission.” The price of the issue was also set higher—it was offered to the public at 84.5, though the effective net price to the underwriters was 80.5. It was probably also inevitable that the joint-stock banks would succeed in securing a larger participation. Yet once again Alphonse had the best of the bargaining. As in the previous year, only a billion of the total issue of 3.5 billion francs was guaranteed: of this billion, the Rothschild group (that is, the Paris and London Rothschilds, Barings and the
haute banque
firms) took 64.3 per cent, leaving slightly less than a third to the joint-stock banks; the same proportions applied to the 700 million franc foreign currency advance. The two Rothschild houses alone accounted for 282 million of the guaranteed billion and 197.5 million of the 700 million advance—28 per cent of the total in each case.

Despite the fact that most of the transfer in 1872 and 1873 was paid in thaler bills, the German banks continued to play a minor role. Bleichröder even came to Paris in person to combat what he saw as a sinister conspiracy to corner the German market by Hansemann, but neither was really on the inside track: altogether, German subscriptions amounted to just 3 million francs.
²²
As for Mayer Carl, he could only grumble: “[W]e know nothing and have only the pleasure of seeing empty letters from our Paris friends with long phrases
pour tout potage.”
For the lucky insiders, the profits involved were once again substantial. The commissions amounted to 1.5 per cent on the guaranteed billion (15 million) and 25 million on the 700 million francs of foreign exchange, implying 11.2 million francs for the two Rothschild houses alone. That excludes the large capital gains made as the rentes rose rapidly above the purchase; it seems reasonable to assume that the Rothschilds themselves invested in the issue as well as underwriting it.

Mayer Carl evidently would not have been sorry if the loan had flopped; in fact, as Alphonse had foreseen, the guarantee was even more superfluous than in the previous year, though even he was taken aback at the extent of oversubscription: a factor of around eight. This struck him as “ridiculous,” and in the short term that view seemed to be confirmed. Once again, transfer problems depressed the exchanges in late 1872 and rentes sagged to a new post-war low. This time, it was the German government’s objection to being paid in bills on Hamburg which caused the difficulty.
²³
Yet the oversubscription of July reflected a far from unrealistic market assessment of the rente’s medium-term prospects: in the three and a half years between December 1872 (81.5) and March 1877 (107.88), the 5 per cent rente rose more or less uninterruptedly by more than 25 percentage points, prices last seen on the very eve of the Empire’s fall.

Nothing could better illustrate the lack of correlation between French financial and political strength in the crisis of 1870-71. We are bound to ask: if France could so swiftly “win the peace” by paying off reparations worth 5 billion francs in the space of just over two years, why had she been so woefully unable to win the war? Why were the French more willing to pay for defeat after the fact than to pay for the chance of victory before war broke out? The only logical conclusion is that the Bonapartist regime should have issued 5 billion francs of rentes to finance rearmament in the late 1860s; could have done so financially, but was unable to do so because of its own political deficiencies.

Thus were the spoils delivered to the victor. But what would the victor do with them? From an early stage in the indemnity transfer, Alphonse had expressed doubts about the financial competence of the recipients of reparations. “The Berlin market is in a shocking state,” he exclaimed in December 1872. “Where then are the 5 milliards we have paid to these gentlemen? It is said no profit derives from ill-gotten wealth.” The crisis which swept through the Central European financial markets in the summer of 1873 seemed to vindicate him entirely. “Our 5 billions have cost them dear,” he noted with satisfaction that September.

On the other side of the political divide, Mayer Carl had also had some doubts about the sustainability of the Gründer boom, which resumed with a renewed vigour in the wake of Sedan. In particular, he was disturbed by the proliferation of new joint-stock banks throughout Germany. Of course, his objections to this trend were self interested. “All these banks,” he grumbled in January 1871, “are too glad when they have an opportunity of investing money and showing that they are the only parties who make loans and push us aside.” On the other hand, he was right to recognise symptoms of economic overheating, even if he had no real idea of their cause. “The wild speculation in all the new bank shares,” he reported in October 1871, “continues to be the chief topic of conversation & nobody understands the mania shown in favour of all these new rubbishing schemes which absorb a good deal of money.” “The mania for starting new Banks and Credit Mobiliers is becoming a regular nuisance,” he added a month later, “and will no doubt end by a catastrophe as nobody knows what all these establishments are to do with the money of [their?] subscribers.” By May 1872 Mayer Carl was explicitly predicting “a monetary crisis which is not unlikely to take place in consequence of all the rubbishing shares which have been issued and what are floating about and seen to be perfectly unfal lable [
sic
].”

On the other hand, the sheer volume of business in the new Reich more than compensated for the nuisance of increased competition. Even as the new Reich was being proclaimed in January 1871, Mayer Carl was busy with a loan to Württemberg, though on this occasion he was defeated by “Erlanger and all his rubbishing banks.” He was more successful when Baden too turned to the capital market in the same year, and also arranged a small loan for the municipality of Ratisbon. Munich, on the other hand, eluded him. Plainly, the old Rothschild dominance in South Germany was a thing of the past. It was therefore of vital importance to Mayer Carl to develop his links to Hansemann and the Disconto-Gesellschaft, and through him to the burgeoning Berlin market. Hansemann, he reminded his English cousins with Victorian over-emphasis, was:

It was through Hansemann that Mayer Carl became involved in a number of profitable railways, including the Cologne-Minden line. “I am sure that you will be
more
than satisfied,” he reported to New Court, which evidently had a share in this business, “& think that
old Charly
is not so stupid as he looks”—a nice indication of the sense of financial inferiority the Frankfurt partners were beginning to feel. His involvement in South German railways also seems to have been linked to Hansemann. It seems that in the early 1870s Mayer Carl was increasingly acting as a satellite of the Disconto-Gesellschaft, the more so with each fresh sign of neglect from London or Paris.

It would be too much to posit a direct causal link between the French indemnity and the crash which brought German finance to a standstill in 1873. After all, it was in Vienna rather than Berlin that the crisis began on May 8—9. Nevertheless, there is no question that German fiscal and monetary policy in the period the indemnity was paid did nothing to check the post-war “mania.” “I saw the Finance Minister in the [upper] house,” wrote Mayer Carl in March 1872, “& he asked me if I could make use of money as he has so much that he did not know what to do with it.” This was a pardonable exaggeration: still, if we accept that the war had cost Germany 220 million thalers, it had in effect generated a budgetary surplus in the form of reparations worth 1.3 billion thalers (5 billion francs). The German government used this money in a number of ways which tended to fuel the stock market boom. Granted, 120 million thalers were put in a “war chest” in the Julius Tower to await the next war—as effective a sterilisation of the money as could have been achieved. But the Germans spent around 60 million on grandiose building projects in newly imperial Berlin, and much of the rest on reducing the debts of the Reich’s member states and the North German Confederation. This created additional liquidity in an already buoyant economy.

A related difficulty was the uncertainty about Germany’s monetary arrangements. Within the new Reich in 1871 there were at least seven coin systems, mostly silver-based. However, the Liberal bankers like Ludwig Bamberger who took the lead in the monetary debate after 1870 favoured the adoption of an altogether new German currency based on gold, partly because of the fall in the price of silver relative to gold. The first legislative steps towards this were taken as early as October 1871, but it was not until July 1873 that a Coinage Law was passed, and not until March 1875 that a central bank, the Reichsbank, was created to manage the new currency. By that time, the bubble had long since burst. The available statistics point to an increase in the money supply of around 50 per cent in the period 1871-3 and price inflation of a similar order. The crash of 1873 wiped out those gains and drove thousands of firms into bankruptcy.

Was this nemesis after the hubris of Versailles? Alphonse thought so. Yet the financial crisis of 1873 and the subsequent onset of the so-called “Great Depression” —the decline in primary product prices which continued into the 1890s—did not spell the end of French
strategic
vulnerability. As early as January 1874, just four months after the last German troops had left French soil, Thiers’ successor the duc Decazes was accusing Germany of planning a new war against France. The following year, Bismarck’s mouthpieces in the German press asked “Is war in sight?” unleashing panic on French markets.

The alarm proved to be a false one; possibly Bismarck had never intended anything more than to beat the militarist drum for domestic political reasons. To the Rothschilds, however, what was crucial was the decision of Disraeli and Gorchakov to put aside their differences in Central Asia in the interests of peace in Europe. At least, that was how Disraeli presented it to them. “Last evening,” reported Charlotte to her son, “[Dizzy] paid a flying visit to your father, and told him of his immense success in negotiating for the maintenance of peace on the continent.” The Prime Minister was, of course, indulging in his customary hyperbole. Still, the difference between his conduct and Gladstone’s in 1870—71 can hardly have escaped Lionel’s notice. The events of those years revealed two things: that conflicts between the great powers, though hazardous to them as a family, were not unprofitable to them as bankers; and that the key to international stability lay not in Paris, nor in Berlin—but in London.