the world of private banking

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THE WORLD OF PRIVAtE BANKING
Civil War created opportunities for developing banking activities, and the postwar
decade was decisive for the rise of German Jewish private banks in New York.
Among them, following the example of Rothschild, the numerous Seligman
brothers established houses in London, Paris and Frankfurt, thereby building the
strongest network of all.
Government loans made up an essential part of private banking operations for
the first two-thirds of the nineteenth century. After the Aix-la-Chapelle Congress of
1818, thanks also to their privileged connection with Metternich, the Rothschilds
dominated the continental market. National debts then consisted partly of long-term
amortizable loans and perpetual stock, and partly of short-term, floating debt made
up of Treasury bills. The amortizable loan gave rise to repayment of the capital
in annual instalments, for a fixed term of several decades. In the case of perpetual
loans, however, the State contracted to pay out annual interest in perpetuity, known
on the Continent as a rente, on the capital advanced by the lender, without ever
redeeming the principal. On occasions the government could retire part of the
funded debt by buying out the rentier. Whenever possible, a government which
enjoyed a good credit rating would offer its loans by public subscription, the normal
practice being to farm the loans out to a banker or a financial syndicate. These
would undertake to contract for a given price or guarantee a minimum part of the
issue. They might either retrocede part of the loan to other bankers, or organize
a public issue, or sell the bonds on the stock exchange. The banker’s reward
consisted of the commission received from the government for placing the loan
and the underwriting margin. While long-term securities and amortizable loans
easily found investors amongst a public increasingly familiar with stock exchange
and speculation, only banks could respond to the needs of State treasuries as far as
the issue of short-term government stock was concerned.
At the start of the nineteenth century, a factor impeding the placement of
government loans in foreign capital markets was uncertainty about the terms of
interest payment. These were due in the country of origin at undefined dates and
liable to exchange fluctuations. A major innovation in this respect was introduced
by the Rothschilds, who issued loans contracted with the regimes of the Holy
Alliance. Their interest was paid in London on fixed dates with a fixed rate in
relation to sterling. All public credit operations undertaken on the continent were
subject to preliminary discussion with the London branch, which played a key
role in the flotation of continental loans during the 1820s. As a result, the greater
security of new loans granted in Prussia, Austria, Naples, France, Spain and Russia
attracted a larger clientele. Between 1813 and 1830, the Rothschilds were able to
float four billion francs in loans at London and Paris.
When Belgium achieved independence in 1830, the assistance of the Rothschilds
enabled the young State to obtain its first loans on the capital market, and to
maintain a credit rating then threatened by the contemporary scepticism about the
country’s viability. At the same time, Jonathan-Raphaël Bischoffsheim founded
the Administration Générale des Rentes Nationales et Etrangères with Cahen
d’Anvers in 1834. It issued securities in Belgian currency with a fixed interest rate,