the world of private banking

10
THE WORLD OF PRIVAtE BANKING
justifying the differential between his terms and those obtained by France from
Baring. What is beyond dispute is that, in stipulating these conditions, Nathan not
only succeeded in making the Prussian loan attractive to British and continental
investors; he also established a model for such international bond issues which
would swiftly become standard.
The export of capital from London and later from Paris was one of the
most remarkable features of nineteenth-century economic development; the
contribution made by the Rothschilds to this globalization of the capital market
has not always been adequately emphasized in the literature. Although some of the
capital channelled abroad by the Rothschilds was undoubtedly used for military
purposes of minimal developmental benefit, much of it was used in a way which
did promote economic growth. This was especially true in the case of those States
(such as Belgium and some German States in the 1830s and 1840s) which raised
money in London in order to finance railway construction. Loans which served to
stabilize fiscal and monetary systems also had positive macroeconomic effects.
In addition to issuing and underwriting commissions, much of the money
which the brothers made on the bond market came not from new issues, but from
speculating in existing bonds. Another way the Rothschilds routinely made money
was by arbitrage, as the price of a given bond varied between London and Paris.
Here the fact that they had branches in five different financial centres gave them a
distinct advantage over their rivals.
Of comparable importance in terms of the volume of business involved,
though not in terms of profits, were dealings in commercial bills. The buying
(accepting) and selling of bills of exchange were among Nathan Rothschild’s
principal activities as he stood by his pillar on the Royal Exchange: in 1828, ‘bills
receivable’ accounted for a quarter of the London house’s assets; ‘bills payable’
for 5 per cent of its liabilities. 29 Such business was probably less important to
the continental Rothschilds, reflecting the far greater importance of the bill of
exchange as a financial instrument in Britain. It is worth noting the Rothschilds did
not seek to make their money from the commissions they charged for accepting
bills (indeed, Nathan was well known for charging half a per cent less than other
firms); 30 rather, the aim was to profit from exchange-rate differentials between the
various European markets. 31
The Rothschilds were not as dominant in the market for bills as they were
in the market for bonds, however. In his influential survey of the City, Lombard
Street, Walter Bagehot called them ‘the greatest . . . of the foreign bill-brokers’; 32
29
CPHDCM, 637/1/6/52–57, N.M. Rothschild, balance sheet, 31 July 1828.
30
S. Chapman, The Foundation of the English Rothschilds: N.M. Rothschild as a
Textile Merchant, 1799–1811 (London, 1977), p. 22.
31
See e.g., RAL, XI/109J/J/32, James and Anselm, Paris, to Nathan and Nat, London,
5 Nov. 1832.
32
W. Bagehot, Lombard Street: A Description of the Money Market (London, 1873),
p. 213.