The House of Rothschild (82 page)

Similar in style was the French Rothschilds’ involvement in the Russian petroleum industry. This had been an interest since the 1860s, when the French house had begun to import petrol from America, and in 1879 they had gone into partnership with the refiner Deutsch de la Meurthe to manufacture kerosene in Spain and later to establish a new refinery at Fiume. The search for oil to supply this refinery led to the first Rothschild soundings of the rapidly growing Russian oilfields around Baku. (The Austrian house also had some interests in the Galician oil industry, but no collaboration seems to have been contemplated.) When the Paris house’s proposal of a partnership with the Nobel Brothers Petroleum Co. was rebuffed in 1883-4, the Paris partners took the decision to buy another firm, the Batum Oil Refining and Trading Company (usually known by its Russian acronym BNITO). They also built up a substantial fleet of over 2,000 oil tank cars as well as “immobilising vast capital” in a refinery at Novorossiysk and an oil depository at Odessa. McKay has estimated the value of the Paris house’s investments in Russian oil by the turn of the century at around 58 million francs (£2.3 million). At peak, around a third of Russian oil output was Rothschild-controlled.

The 1890s were a period of frantic growth in the world market for oil. The Rothschilds’ Russian kerosene was sold in Europe (in much the same way as Spanish lead) through their Industrial and Commercial Caspian and Black Sea Kerosene Company (Société Industrielle et Commerciale de Naphte Caspienne et de la Mer Noire). Later, they also went into partnership with a Russian shipping firm (Pollack & Co.) and the International Bank of St Petersburg to form a new company called Mazout in order to expand their sales to the Russian domestic market. This meant they were competing not only with the Nobels, but with the American giant Standard Oil. A similar competition developed in the Asian market. In 1891 the London-based brothers Marcus and Samuel Samuel acquired the right to market BNITO’s kerosene east of Suez, using their pioneering tanker ships—the origin of the Shell Transport and Trading Company formed in 1897. Their principal Asian rival was the fast-growing Royal Dutch company, based in the Dutch East Indies.

As competition drove prices down, the customary efforts were made to end the “oil wars” by forming a profit-sharing cartel (1893-5). However, the negotiations with Standard Oil came to nothing and the tendency was for the Rothschilds to participate in the gradual merger between Shell and Royal Dutch. The Rothschilds took a third share of the Asiatic Petroleum Co. created by the two oil firms in 1902, and in 1911 exchanged their entire Russian operation for shares in Royal Dutch and Shell, making them the largest shareholders in each. Even at the time, this seemed a good deal as the Rothschild stakes in BNITO and Mazout were valued at £2.9 million, while their new shares in Royal Dutch/Shell promised healthy returns. Just six years later, the wisdom of the Rothschild retreat from Baku would become clear.

Mercury, gold, copper, lead, silver, diamonds, rubies and oil: by 1900 the Rothschilds occupied a remarkable position in the world market for non-ferrous metals, precious stones and petroleum. Not only did they raise capital for new mining companies directly or through the Exploration Company; they also invested substantial sums of their own in mining shares and took a close interest in efforts to cartelise or otherwise regulate the international raw-materials market. This was hardly the strategy of a business in decline. On the contrary, the London and Paris houses had shrewdly discerned a way of developing one of their traditional lines of business in response to fundamental structural changes in the world economy.

Aside from its generally high profitability, part of the appeal of the mining empire the Rothschilds acquired in the 1880s and 1890s lay in its apparent freedom from political control. Once a concession had been granted or a piece of territory sold, mining companies seemed to enjoy something close to complete autonomy, especially when the mines were in remote locations, as they often were, or in parts of the world with relatively rudimentary state structures. Yet this kind of imperialism could never entirely be separated from the formal imperialism of national flags and dotted lines in maps; least of all in the mind of Cecil Rhodes.

The origins of the Rothschilds’ relationship with Rhodes can be traced back to 1882, when Natty sent the firm’s former San Francisco agent Albert Gansl to Kimberley—the main diamond mining centre—to report on the affairs of the Anglo-African Diamond Mining Company, which had a claim in Dutoitspan, one of the four major “pipes” in the area (the others being Kimberley, Bultfontein and De .Beers). Within a few months, Gansl had concluded that the numerous small companies—there were more than a hundred altogether—were ruining one another by over-production, and argued strongly for amalgamation. However, despite the creation of an Amalgamation Committee in London and plans to issue shares worth £3.5 million in a merged diamond company, the scheme foundered on the jealousies of the shareholders and directors of the rival firms. In addition to the difficulty of reaching agreement on the value of existing shares (which, in an amalgamation, would have been exchanged for new ones), the slump in diamond prices in 1882-3 probably also put the Rothschilds off. The French Rothschilds certainly grumbled about their losses on the Anglo-African shares which their London cousins had recommended.

It was the Exploration Company which, albeit indirectly, revived the Rothschilds’ interest in diamonds when it recruited another American engineer, Gardner Williams, to report on mining prospects in South Africa. By this time, the process of amalgamation was further advanced than it had been five years before: the Kimberley claims were virtually under the sole control of Kimberley Central, which had a market value of around £2.45 million in 1887 and a yield of 1.3 carats per load. The next biggest operation was the De Beers Mining Company, which was worth around £2 million and had a slightly lower yield. The question in the mind of Cecil Rhodes—a director and major shareholder in De Beers, and a promiscuous Kimberley company promoter—was which of the two would succeed in merging with the Compagnie Française, one of the last independent firms on the Kimberley pipe.

Rhodes had begun to realise that, given the limited financial resources of both De Beers and Central, the key to victory in the impending takeover battle lay in London, and that whoever secured the financial backing of a major City house would win. Identifying Williams (whom he had first met on a steamer to London in 1885) as his entrée to New Court, he hastily offered him the job of general manager at De Beers; and two months later set off for London for his first interview with the famous Lord Rothschild. Natty drove a hard bargain. On August 4, Rhodes cabled to Kimberley the details of a plan which would give De Beers the money to buy the Compagnie, but at a steep price. Essentially, Rothschilds advanced £750,000 in cash in return for 50,000 new De Beers shares at £15 each, plus £200,000 in debentures. For this, they received a commission of £100,000, but also half the difference between the £15 price paid for the De Beers shares and their London market price on October 5, 1887. According to Turrell, this implied an additional £150,000, so that “the Rothschild syndicate was paid £250,000 for advancing £750,000 for the purchase.” After negotiations in Paris which dragged on into September, the directors of the French company accepted the merger terms, which converted French shares into De Beers shares at a ratio of 100:162.

Yet this was far from being a victory for Rhodes. It is true that a counter-bid by the Central for the Compagnie was seen off, but it would seem that this was achieved only by a promise to sell the Compagnie to the Central for £656,000. Because all but £100,000 of this was paid in the form of Kimberley Central shares and stock, historians used to think Rhodes had cleverly acquired a stake in the Central; in fact, all that had happened was that the Central had acquired the Compagnie at a bargain price, and it was generally expected that De Beers would now be swallowed by the Central. Rhodes envisaged buying up stocks in the remaining independent mines in Bultfontein and Dutoitspan and completing the De Beers-Kimberley Central merger, but to do this he needed the agreement of the chairman-director of the Kimberley Central, Francis Baring-Gould, and its biggest shareholder, the ebullient Barney Barnato. Had both resisted—as legend has it they did—Rhodes would in all likelihood have lost.

In the event, only Baring-Gould proved hard to get; Barnato saw the opportunity to make a killing, and secretly committed himself to Rhodes. In November de Crano wired from Kimberley that Rhodes needed a new loan of £300,000 to buy up Central shares, suggesting strongly to the Rothschilds that, if they did not provide the money, Rhodes’s associate Alfred Beit would do so. It was at this point that Natty acquired 5,754 shares in De Beers for himself, making him one of the company’s biggest shareholders (Rhodes himself had only 4,000). This strategy continued throughout 1888, while Rhodes and Natty sought to overcome the resistance of Baring-Gould. On March 13, 1888, Rhodes formally registered De Beers Consolidated with a capital of £3.1 million and a further £1.5 million in debenture stock, but still Baring-Gould and a minority of Central shareholders held out. Apart from the prospect of hefty profits on both Central and De Beers shares, which soared in the first half of 1888, a decisive factor in bringing Barnato round was the offer of a “life governorship” of the new company, an extraordinary concession which Natty evidently disliked.
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Even so, the merger continued to be impeded, first by a legal challenge from Central shareholders who objected to the blanket terms of the trust deed defining the new company’s objectives, then by a fearful fire in the De Beers mines, which killed 202 men. It was not until January 1889 that the liquidation of Kimberley Central was finally concluded, by which time De Beers had acquired 93 per cent of its rival’s capital, so that the final purchase of the Central cost less than a tenth of its valuation at £5.3 million. Thereafter, it was a relatively easy matter to mop up the remaining small companies.

Throughout this protracted struggle, Natty’s main role had been to help Rhodes find the money for his share purchases, issuing £2.25 million first debenture stock so that De Beers could pay off its old debts and acquire leases in Dutoitspan and Bultfontein. The total cost of the merger was plainly more than he had expected; but like many others Natty was not immune to Rhodes’s melodramatic charm. “The whole case depends whether you have any confidence and trust in myself,” Rhodes appealed to him on one occasion in 1888. “Perhaps someone else can do it better. I really do not know. You know my objects and the whole case is a question of trust[.] I know with you behind me I can do all I have said. If however you think differently I have nothing to say.” This relationship continued after the merger was completed. It was the Exploration Company, for example, which issued £1.75 million De Beers Consolidated Mortgage Debentures in 1889, 17.8 per cent of which were taken by the London Rothschilds; and in 1894 the London house itself issued De Beers debentures worth £3.5 million. All this meant that the Rothschilds had acquired a substantial stake in the new firm and thus a substantial financial hold over Rhodes, who felt more than a little uneasy at the high level of gearing the takeover battle had necessitated. Carl Meyer’s appointment to the board of the new De Beers was the most visible sign that Natty intended to keep a weather eye on its progress. By 1899 N. M. Rothschild & Sons were the second biggest shareholder in De Beers (with 31,666 shares), only slightly fewer than Barnato’s nephews the Joel brothers (33,576). Rhodes had only 13,537; Beit 11,858. It was to prove a superb investment.

As the smoke dispersed in the boardrooms, the question immediately arose as to how the new De Beers Consolidated—which now controlled 98 per cent of South African output—was to establish its authority over the international diamond market. Schemes for a syndicate had been discussed since 1887, though it was not until March 1890 that De Beers concluded an agreement with a combination of five friendly firms led by Wernher, Beit & Co. As this was the kind of thing the Rothschilds had traditionally done to maintain the price of mercury and were also doing with copper, the syndicate soon received Natty’s blessing, though the Rothschilds’ own participation in it was limited. The one strategy which the Rothschilds firmly opposed was any kind of hoarding of diamonds by De Beers. As Natty told Rhodes in July 1891, he had “no right to speculate in diamonds, but were bound to sell as best you could.” “[A]s regards the disposal of the diamonds,” he concluded, “the more I think of it the more I feel convinced that you cannot do better than follow the ordinary laws of supply and demand and avoid, as far as possible, all artificial means, combinations, accumulations, etc, etc.” When it transpired that the Kimberley directors had nevertheless covertly established a “secret reserve” to bolster their depressed share price—one of a number of acts of defiance by the men on the spot—Carl Meyer denounced it as “immoral.” In the event, the device proved superfluous: from 1896 onwards the diamond market rallied, and De Beers’ annuals dividends reached 40 per cent (£1.6 million) over the next five years, pushing the share price up after the initial sticky start. As Natty told Rhodes in 1900, “The history of the De Beers Company is simply a fairy tale. You have established a practical monopoly of the production of diamonds, you have succeeded in establishing a remarkably steady market for the sale of your productions, and you have succeeded in finding machinery capable of carrying this through.” In other words, what more did Rhodes want? Nevertheless, Rhodes continued to chafe at the restrictions imposed on him regarding the sale of diamonds, travelling to London in 1898 to complain about the marketing syndicate’s excessive profits.

Establishing De Beers as the dominant power in the Kimberley diamond fields had little or no political ramifications, given that Kimberley and the surrounding land (Griqualand West) had been annexed by Britain in 1871. But from the outset Rhodes’s ambitions extended far beyond British territory. It was not just the gold discoveries on the Boer-controlled Witwatersrand which whetted his appetite to expand British influence north of Cape Colony. In fact, Rhodes had been rather unsuccessful in his investments on the Rand and his company, Consolidated Gold Fields, was soon looking further afield for as yet undiscovered gold reserves (when it was not investing in De Beers shares). To be precise, he wanted to strike northwards beyond the Transvaal into the kingdom of the Matebele King Lobengula.