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