The House of Rothschild (92 page)

On November 4 the Governor, William Campbell, raised Bank rate to 6 per cent and sent for Natty—a testament to the key role the Rothschilds still played in the money market. It was, Natty told his cousins, “unanimously decided to ask me to telegraph to you and ask you to use your best endeavours to renew with the Bank of France the operation which you did last year, and which was so successful then.” This was no sooner requested than done, this time to the tune of £3 million, of which the Rothschilds provided £400,000. Although Bank rate went up another percentage point on November 7—and remained there until the New Year—this once again did much to stabilise the London market: as Campbell wrote to the Paris house, their assistance had “prevented my taking even more stringent means to protect our Gold Reserves.” It was a further proof of the enduring value of the Rothschilds’ cross-Channel link that when J. P Morgan directly approached the Banque de France for assistance for the American market, he was rebuffed—a vindication of Natty’s view, expressed in a blunt telegram to Morgan on November 6, that the Americans should set their own house in order. By contrast, Campbell could count on being able to borrow further gold from Paris through the Rothschilds if the Bank’s reserve fell any lower. Conversely, his counterpart in Paris could discreetly hint that a British rate cut would be welcome once the crisis was over in January 1908; he could rely on the Rothschilds to give him advance warning of any such reduction.

The crisis of 1907 was the most serious financial crisis before 1914 itself and it revealed the economic dimension to the Anglo-French entente. Nor did such co operation end as market conditions eased. In July 1908, for example, the Banque de France bought consols worth over £1 million through New Court. Later the same year, the Bank of England consulted Natty about the possibility of large scale withdrawals of gold from the London market by French banks. It was a matter of routine that, when the London money market tightened again in late 1909, the Rothschilds discussed the possibility of yet another swap of bills for French gold.

At the height of the 1907 crisis, Natty wrote an uncharacteristically long and reflective letter to his Paris relatives in which he spelt out the functioning of the gold standard as he understood it, and the crucial role performed by the Anglo-French relationship. The key, he argued, was that “the whole trade of the world is carried on by bills on London.” There were always “running on London between £300 and £400 Millions of drafts, of which probably more than half are for foreign account.” According to the classical theory, “When the Bank is obliged to raise the rate of discount owing to an efflux of gold ... the rate of exchange rises automatically and gold comes back to the Bank of England.” But this had profound implications for the rest of the world—and particularly the Banque de France. The conclusion Natty drew was one with which modern historians of the gold standard would agree—namely that central bank co-operation was essential to the stability of the system:

In other words, the world’s principal creditor economies, France and Britain were “bound together” by a common interest in monetary stability. The Rothschild contribution to this system was all the more important if, as Natty believed, the Bank of England was failing to build up its gold reserves to a level commensurate with its global role. He and his French cousins thus continued to see themselves as auxiliaries to their respective central banks; even if they themselves were no longer, as they had been in the past, the lenders to the lenders of resort.

Yet it would be quite wrong to conclude that the final political and military consummation of the Anglo-French entente in 1914 was in some sense economically determined. These financial considerations undoubtedly helped to elevate the Anglo-French relationship above the Anglo-German relationship in British eyes; but that was far from meaning a defensive alliance, guaranteeing British intervention in the case of a continental war. In fact, prior to August 2, 1914, there was never any guarantee that Britain would support France militarily if war broke out (though the Foreign Secretary Sir Edward Grey gave personal assurances which encouraged the French to expect such support). In June 1908 Natty himself felt obliged to point out to his Paris cousins that “there was no question of alliance, offensive or defensive .. . and nothing would be so unwise as to make use of that word.” To be sure, he was “equally certain that an unwarranted attack by Germany on France would arouse sympathies and feeling which no government could withstand”; but he insisted that “Germany [had] no idea of an unwarranted attack.”

This raises an important point. Historians usually talk as if Germany’s relatively rapid economic growth before 1914 implied an equal growth of German international power. Informed contemporaries knew better. The combination of a decentralised federal system and a relatively democratic imperial parliament meant that the Reich found it extremely difficult to finance its increased armaments expenditure after 1897 by raising taxes. This helps explain the relatively high level of German government borrowing in the pre-war period, though in fact much of the borrowing was undertaken by the federal states and local authorities to finance non-military expenditures. The high level of public sector borrowing in itself put a strain on the German capital market; the fact that it coincided with very high levels of private sector investment (mainly to finance the rapid growth of the electrical engineering and chemical sectors) compounded the difficulty. The resulting upward pressure on German interest rates—most apparent in the rising yields on German bonds—was widely seen by contemporaries as a sign of German financial weakness.

By now, Natty was no longer sympathetic towards “the German octopus” (or “Deutschland über alles,” as he sometimes called it). He was, he told his cousins in April 1907, “no admirer of German statesmanship and I am never enamoured of their policy, nor do I trust what they choose to call Weltpolitik.” He was especially hostile to the efforts of Admiral Tirpitz to narrow the naval gap between Britain and Germany. Yet he was quick to discern the limits of German power. “There is no doubt,” he observed, “that the foreign policy of Germany has resulted in her isolation and also that there has been a comparative failure of securing by political means what is euphemistically called commercial and industrial enterprise and which would be better designated under the term financial concessions [overseas].” Moreover, he knew perfectly well that the Germans could not afford a prolonged naval race, and this financial weakness made the “scaremongering” notion of a German threat to British security seem fundamentally implausible. “[T]he German Government is very hard up,” noted Natty in April 1906, as yet another Reich loan was put on the market. Nor did he overlook the difficulties experienced by the Reichsbank during 1907, which were in many ways more serious than anything experienced in London. “Germans are scientific and symmetrical in everything,” he wrote (with more than a hint of irony), “and their Bank act has been held up to the admiration of the world by those speculators who grumble at high rates of interest here as a marvel of scientific simplicity and elasticity.” But although “elastic conditions [had] enabled them to inflate their currency ... the length of their [tether?] has been reached as the German Government has Treasury Bonds and Treasury Notes to issue.” Natty was especially struck by the German need to sell bonds on foreign capital markets, an expedient which neither Britain nor France had to resort to in peace-time.

Of course, the Rothschilds saw that financial constraints might positively encourage the German government to pursue an aggressive foreign policy, because by “rattl[ing] the sword in the scabbard” the Kaiser and Bülow hoped to “defer the realisation of many socialistic dreams.” Yet such sabre-rattling could only “incur fresh military and naval expenditure on a grand scale” and thus worsen the internal position. This explains why Alfred renewed his old links to the German court when the Kaiser visited England in December 1907. As Natty observed shrewdly, “it is hardly likely that the German Emperor will want to be quarrelsome ... [when] he has his hands full with all his socialists.” The impression of an over-stretched Reich was promptly confirmed by a huge Prussian bond issue in April 1908 and by the Reich budget, which showed “a large deficit ... due to an ambitious naval programme, to the necessity of increasing the pay of all their civil servants, and to what they practically call ‘miscalculations’ in their old age pension scheme.” Small wonder the Rothschilds, like the Warburgs in Hamburg, expected the German government to seek some sort of agreement limiting naval construction. The second Moroccan crisis in 1911—when the German government sent the
Panther
to Agadir—underlined the vulnerability of the Berlin market to withdrawals of foreign capital. To the bankers, Germany seemed weak, not strong.

Nor could it be taken for granted that a Liberal government would ever be able to bring itself to fight on the same side as Russia in a war. Here too the Rothschilds sought to resist the tendency for Europe to divide into “armed camps” by opposing the idea of an Anglo-Russian entente. Perhaps if the 1905 revolution had led to an enduring liberalisation of Russia, their attitude might have been different. The French socialist leader Jaurès hoped that the Rothschilds would use their financial power to force Russia down the road of parliamentarisation, recalling how “in 1848 the Rothschilds, as creditors of the King of Prussia, had imposed on him the budgetary control of a Landtag and the granting of a constitution for the sake of their loans.” Natty did indeed express the hope in January 1906 that “wise counsels will prevail at St. Petersburg & that a liberal regime may be instituted.” But the Rothschilds were sceptical when the post-revolutionary government approached the Paris house in the hope of securing financial assistance in exchange for promises of reform. In the hope of overcoming the English partners’ hostility, an informal approach was made by one Dr Brandt, a minor figure at the Russian embassy in London (whom Natty described as “an ugly hump-backed Russian Jew, evidently full of his own importance”) who “came here in order to explain to us the position of Russian Jews & to point out to us how their fate might be ameliorated”:

But Natty had heard this tale too many times before: “I told him not precisely in the words that I am using to you, but words to the same effect: that he was putting the cart before the horse, namely, that when the Russian Jew has liberty & equal rights, Russian finance would improve & the Treasury difficulties would be considerably less.”

It was the same story when the somewhat more plausible figure of Arthur Raffalovich called on Alfred the following month:

Again Natty was unbending. Similar promises had been made when the Paris house had arranged large loans for Vyshnegradsky, but had not been kept. Nor had Witte given Edmond and Edouard any reason to believe in a real change of policy in St Petersburg when they had last seen him in Paris. “[T]aking all the circumstances into consideration,” Natty replied, “we could & would not help Russia in her need until she had done for our co-religionists that which would make them happy & contented subjects of the Czar & prosperous citizens of the Russian Empire.” He added for good measure that “it was absurd to suppose that the Jewish population hated the Czar. A large number of alien emigrants only [prayed?] to go home & dwell in their own country ... & I also told him that when the Cesarewitch was born, strange to say, in the ghettos of London & New York, the health of the Czar was drunk, and blessings invoked on the new born babe.” This was Raffalovich’s cue to produce a draft message to be sent back to Russia which Natty “slightly altered, as I. was particularly desirous that he should only lay stress on the Jewish Question.” A final approach by a Russian purporting to speak on behalf of “our co-religionists” was dismissed out of hand: