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