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September 1, 2008

Napoleonic Dynamite

By Spear's

At the opening of the French Revolutionary and Napoleonic Wars in 1792, the Rothschilds were fairly prosperous antique coin and medal dealers trading in the Judengasse, the Jewish ghetto of Frankfurt. They were by no means the richest family there. Yet by the end of the conflict in 1815, the family owned a thriving, powerful multinational bank, which was set fair soon to become the biggest in the world.

A family that was not even first among equals in one German town at the time of the outbreak of the Wars, were by the time of the battle of Waterloo on the verge of becoming the modern equivalent of the Medicis. How did they do it?

Mayer Rothschild, born in 1744, was the patriarchal founder of the family fortunes. A hard-working, highly intelligent, hugely driven businessman, he brought up his five sons as far as possible in his own image. A complete concentration on business was Mayer’s lifelong watchword, as his third son Nathan said of him: ‘My father’s chimney will not smoke unless there is a profit involved.’

Many of Mayer’s business maxims (albeit some of them probably apocryphal) have entered the Rothschild folk memory, and give an indication as to the sort of man he was. They include: ‘It is better to deal with a government in difficulties than one that has luck on its side’; ‘With money, you become an Excellency’; ‘If you can’t make yourself loved, make yourself feared’; ‘Investment should be like a cold bath: in quickly, out quickly’; ‘Always leave the last 10 per cent to the next man’; and ‘One third securities, one third real estate, one third jewels and art.’

Mayer understood how family unity would be vital for the success of the House of Rothschild, and drummed it successfully into his children. When he died in 1812 his last words, directed to his eldest son, Amschel, were: ‘Keep your brothers together and you will become the richest people in Germany.’ As a result, they stayed united despite wildly differing talents, outlooks and temperaments. The Rothschilds never questioned or criticised family members in front of non-family, and in accordance with the provisions of Mayer’s will only male Rothschilds of his direct bloodline could join the partnership, a situation that pertained until 1960. The five arrows that the five brothers chose for their Austrian coat of arms in 1817 were a representation of a genuine truth: they acted together.

The next secret of their success was internationalism. In 1799, Mayer sent Nathan to live in Manchester to become a cloth exporter exploiting the British Industrial Revolution. Wherever power and profit were to be found, the Rothschilds would follow and set up offices. Amschel stayed in Frankfurt, while Salomon went to Vienna, Carl to Naples and James to Paris. Their network of offices soon spanned Europe, and the brothers sent the latest news to each other by the most efficient courier systems available at that time. Using carrier pigeons, galloping messengers, specially chartered boats and so on, the family’s salaried agents were able to pass information from brother to brother faster than any other institution of those pre-telegraph days, even including national governments.

To prevent industrial espionage, the brothers would write to one another in Judendeutsch, a form of German that employed Hebrew characters, while using family nicknames and codes indecipherable to outsiders. On occasion it would just be the colour of the envelope — blue for sterling rising, red for sterling falling, for example — and not what was contained inside that imparted the key message.

Luck — that greatly under-acknowledged factor in the genesis of many great family fortunes — also smiled on the Rothschilds. Just at the moment that Mayer had capital from the success of his coin business, the cataclysm of European war meant that he could put it to far more profitable use than merely buying and selling antiques. Without any integrated capital markets in Europe at that time, all governments had to issue tradeable paper to individual banks in order to finance their military expenditure, and with Napoleon on the march from Milan to Moscow as well as in Cairo, Vienna, Berlin and Madrid, there were inevitably wild fluctuations in the prices of government bonds, exchange rates, interest rates and therefore endless possibilities for arbitrage and speculation, at which the Rothschilds proved highly adept.

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Ingenuity and a capacity to turn setbacks into opportunities characterised the family in those early years of war. When Napoleon attempted to strangle British trade through his protectionist Berlin Decrees of 1805, thereby stymieing the cloth export trade, Nathan simply took up very complicated smuggling operations, sending, for example, Brazilian coffee to Sweden via Amsterdam in American ships with Dutch false importation papers. Insurance was impossible and the risks high, but so were the rewards.

When in 1808 the Elector William IX of Hesse-Kassel was forced to flee from the invading French armies, the Rothschilds undertook, as his official Court agent, to manage much of his £4 million fortune while he was in exile, and hide part of the rest. Nathan invested £600,000 of the money in consols (gilt-edged securities) in London, and though he took only one eighth of 1 per cent commission he made money on the exchange rate. Because he bought on his own account — the connection with the Elector had to be kept secret from the French — the huge purchases boosted his standing in the City of London and allowed him to leave Manchester and set himself up as a respected City financier. In July 1811 Nathan opened NM Rothschild at New Court, St Swithin’s Lane, where the company remains to this day.

Mayer’s friendship with the Elector, meanwhile, opened doors to other rich people and institutions, such as the Prince von Thurn und Taxis (the hereditary postmaster of the Holy Roman Empire), the Order of St John and the Imperial Court at Vienna. It also led to a dangerous moment when the Napoleonic authorities, in the person of the special commissioner of police for Westphalia, a man called Savigny, interrogated the whole Rothschild family about where the Hesse-Kassel fortune had wound up. Mayer claimed he had ‘developed a short memory’, while his wife, children and children-in-law stonewalled the official. Since there were four chests of William’s treasure lying in a secret cellar in Mayer’s office there in Frankfurt, the situation seemed dire, until Savigny agreed to a ‘loan’ from the Rothschilds, one that was free of interest, and indeed of a repayment date.

What we today would call bribery was in the early 19th century regarded as a normal business practice, and was resorted to by the Rothschilds with tremendous regularity and alacrity. Sometimes the brothers would argue over the sheer extent that various officials — such as the Elector’s own comptroller, or the Russian finance minister, or the Austrian Chancellor Prince Metternich and dozens of others — needed to be paid, but they all agreed on the value of having all the key decision-makers on the family’s books.

As the Rothschilds became richer and more influential, they pursued the cause of civil, political and religious liberty for Jews. In December 1811, largely due to Mayer’s advocacy — and because Baron Karl von Dalberg, Prince-Primate of the Rhenish Confederation was also a Rothschild debtor — Jews were emancipated in Frankfurt, and given full legal equality and citizenship. Whereas some other successful Jewish families gave up their faith at that period in order to assimilate into the Christian world, the Rothschilds never did, but instead worked in every country – even those such as Syria and Rumania, as it was then known, where they had no business interests — for Jewish rights.

By the time of Mayer’s death in 1812, Nathan was providing bullion for the Duke of Wellington’s campaign in the Peninsular War, a huge undertaking requiring £100,000 a month. As well as prompt repayment, this brought the gratitude and friendship of the British prime minister Lord Liverpool, chancellor of the exchequer Nicholas Vansittart and crucially the commissary-in-chief, JC Herries, the man who chose which banks would raise which loan for which campaign. As a result of the trust reposed in them, the Rothschilds often knew what the British Government was going to do before the Cabinet itself.

Between 1793 and 1815, British public expenditure rose from £18 million to over £100 million per annum (16 per cent of national income), increasing the national debt from £240 million to £900 million. Britain spent £59 million subsidising her allies on the Continent to fight against Napoleon, and the Rothschilds came to dominate this business, undercutting rivals such as Barings because although they made little on the 2 per cent commission, they found ways of profiting on the exchange rates and fluctuations in the price of gold. At one point in 1814 they were doing so much business they even managed to corner the sterling-franc exchange rate. ‘When we buy, everybody buys,’ Carl wrote to his brothers, which was true, because investors believed that the Rothschilds knew the mind of the British government, and they were usually right to think so.

Yet the most famous Rothschild myth of them all, that the bank made a fabulous fortune out of early knowledge of the battle of Waterloo, is quite untrue; indeed their most distinguished biographer, Professor Niall Ferguson, believes that 1815 in fact saw them make losses rather than profits. Although the Rothschilds’ superb system of communication had informed them of the great victory only 24 hours after it was won — and a full 48 hours before the British Government itself found out — government consols moved only from 56.5 to 60.5 on the news, and Nathan could buy just £20,000 worth of stock.

Yet because of their huge expenditure on bullion since Napoleon had escaped from Elba that March, in the expectation of another long and expensive campaign, the Rothschilds had badly miscalculated. They had bought enough gold to fill 884 boxes and 55 casks, amounting to £2.1 million, while the price of gold climbed 23 per cent, so they suddenly found themselves with vast amount of depreciating gold that the Government no longer wanted or needed. A surge in the sterling exchange rate, the end of subsidy contracts, and the death of their beloved sister Julia aged only 35, all made 1815 anything but a happy time for the Rothschilds, contrary to the most enduring myth about them. ‘Our resources here are like lions,’ an undaunted Nathan nonetheless wrote to James, ‘equal if not superior to all and every demand.’ In the event, they managed to unwind their gold position successfully, and were undamaged.

The end of the Napoleonic Wars saw this astonishing family poised to become the great behemoth of European banking, for the remainder of the 19th century was to be their greatest period of power, wealth and influence. Ultimately, it was built on hard work, secrecy, early and inside information, smuggling, bribery, intuition, luck, the willingness to take huge risks, but above all their secret weapons had been fraternal unity and mutual trust, the greatest of all the legacies of Mayer Rothschild.

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