Money’s prophets

The two-volume history, The House of Rothschild by Niall Ferguson, gives remarkable insight into how the Rothschild family prospered as a formidable force in Europe throughout the 19th century and has maintained the tradition to this day

Chances are you've heard of the Rothschilds and their epic story: how the family grew out of the Frankfurt ghetto – a dark, crowded street described by Goethe as a "hellish slum"; how Mayer Amschel Rothschild became "court Jew" to William, Elector of Hesse-Kassel; how his five sons set up shop in separate European capitals and developed a unique banking partnership; how they won the trust of emperors and statesmen, and made a fortune floating bonds for continually depleted state treasuries; and how they became barons and lords themselves and built palatial country residences.

For most of the century from 1815 to 1914, according to historian Niall Ferguson, the family enterprise was far and away the world's largest bank. Ferguson's recent two-volume history, The House of Rothschild, shows how closely the family's fortunes were bound up with the wars and revolutions, the redrawing of boundaries, and the birth of new nation states in Europe. "Not a cabinet moves without their advice, "said one American observer with only slight exaggeration. "Baron Rothschild holds the keys to peace and war."

Sir Evelyn de Rothschild, current chairman of NM Rothschild & Sons, suggested a new family history be written to mark the 200th anniversary of the arrival in England of his great-greatgrandfather, Nathan. Ferguson, a fellow at Jesus College, Oxford, was given access to a vast family archive of letters which were the principal means of communication among the five Rothschild houses until well into the 20th century.

The two volumes, Money's Prophets 1798-1848 and The World's Banker 1849-1999, comprise a scholarly tour de force, dense with detail, covering everything from the family's struggles to win equal rights for themselves, and their coreligionists to the family's tastes in art and architecture. The books also tell the story of a remarkably resilient family and how they managed to stay together and build a tradition that continues to this day.

How does a family that grows up in a ghetto, where they are confined and despised, where they must have special permission to leave the city, where a sign at the public gardens proclaims, "Jews are forbidden to enter"– how do such people break out and become 'the world's banker'?

One answer is that they are driven by very ambitious dreams. "Amschel", the founder once told his oldest son, "keep your brothers together and you will be the richest people in Germany. "Few have honoured the commandments of a parent more faithfully than the five sons of Mayer Amschel Rothschild.

Breaking out of the ghetto
Mayer Amschel started as a dealer in rare coins and medals and became one of the richest men in the ghetto. Jews were second-class citizens in most of Europe but were 'protected' in places like Frankfurt because of their value as money-changers and lenders. Mayer sold coins to William of Hesse-Kassel and then was entrusted with investing the Elector's profits from renting Hessian mercenaries to other states. Before long the patriarch was performing similar functions for other rulers, including the emperor in Vienna. And then he was in the textile business, selling fabrics from mechanised English mills distributed in Europe by smugglers.

Of the children of Mayer and Gutle Rothschild, five sons and five daughters survived. The five sons – Amschel, Salomon, Nathan, Carl and James -- all slept in a small attic room of the Rothschilds' four-storey Judengasse house. When the sons were of age, Mayer Amschel involved them in his business but treated them like employees even after the firm became MA von Rothschild & Sohne.

In about 1800, Nathan, the most competitive and fiercely ambitious brother, went off to England to buy textiles directly from Manchester mills to send back for sale by the family. Soon he was in London smuggling gold bullion across the Channel and challenging established banks in the City.

Winning the confidence of the British Commissary-in-Chief, he was put in charge of smuggling specie (coins made of precious metals) to Wellington's advance against Napolean as well as to Britain's allies – Prussia, Austria and Russia. Nathan had a "superhuman appetite for risk", Ferguson writes. He borrowed huge sums to fund these complex operations, in which his brothers assisted on the other side of the Channel. The payoff was huge, laying a foundation for the family fortune. The Rothschilds not only earned commissions on these transfers but profited from fractional differences in exchange rates.

The family's continuing success in the 19th century, however, was based on their creation of an international market for tradable bearer bonds, which they were able to put together by dint of having one brother in each of five financial centers. Nathan founded the London house; Amschel, the oldest brother, took over the original Frankfurt firm that had two subsidiaries – one in Vienna run by Salomon, the other in Naples by Carl. James, the youngest brother, founded de Rothschild Frères in Paris.

By currying favour in the highest government ranks, the family was able to virtually corner the market for bonds issued by states unable to collect enough taxes in years of poor harvests, revolutions and wars. The brothers could trade British consols on the Paris bourse or in Vienna; they could offer Austrian metallics in London. No other bank at the time could offer such a broad market for state securities.

Their swift network of couriers also gave them an edge, bringing news of political and economic developments affecting the financial markets before anyone else. The system was so efficient it was used by various rulers for diplomatic exchanges, affording the Rothschilds unique access to state secrets.

Mayer Amschel's legacy
On his deathbed in 1812, Mayer Amschel exhorted his sons to remain united; only by maintaining the principle of concordia could they preserve the family's wealth and ensure their own happiness as well as that of their descendants.

Salomon, Niall Ferguson notes, once attributed "all our luck to the benediction that our father gave us an hour before he passed away". As a family, they shared the belief that their riches were not just a result of brains or luck but a blessing gained through piety, respect for tradition and good works. Any threat to their unity was viewed, almost mystically, as risking loss of the patriarch's blessing – and God's.

The Rothschilds were observant Jews though not Orthodox. Starting with the founder, who paid the sum of 250, 000 gulden to buy equal citizenship for the ghetto Jews of Frankfurt, the family promoted the cause of Jews all over Europe. They weren't always consistent – sometimes profits came first. But they often withheld support from regimes that acquiesced in pogroms or denied full legal and political rights to Jews.

They were proud of their reputation or honesty and fair-dealing, and not above promoting myths that grew up around it. There was the famous story of how William of Hesse-Kassel had vouchsafed his fortune to Mayer Amschel before fleeing Napolean's army. The patriarch hid the treasure, investing it while William was in exile and returning it to him afterwards in full -with interest. According to Ferguson, the Rothschilds were actually given only a small part of William's fortune to protect. And William accused Mayer Amschel of swindling him out of the interest on his stocks.

Nevertheless, the story of the family's scrupulous handling of the money took hold; family members commissioned two small paintings of the founder returning the cache to a grateful William.

The wisdom of the founder, frequently invoked by the sons, always in reverential tones, was sometimes more Machiavelli than Moses. "Father used to say, 'If you can't make yourself loved, make yourself feared'", James once observed about his relations with rival firms. Salomon recalled another paternal tip: "Our late father taught us that if a high-placed person enters into a [financial] partnership with a Jew, he belongs to the Jew".

That principle was one of the keys to the family's astonishing leverage with governments. Salomon's personal loans to Metternich left the Austrian foreign minister deeply in his debt and ensured government business for his house. The Rothschilds cosied up to Prussia's Otto von Bismarck by paying some of his personal expenses. In London, they extended their influence with the upper crust by keeping the prodigal Prince of Wales out of debt and by loans to relatives of Prince Albert.

The 'commanding general'
Nathan's speculations on consols had made the Rothschilds sterling millionaires, and upon Mayer Amschel's death, he stepped into the role of 'commanding general'. Though his brothers were equal partners -- the family emblem became an arm holding five arrows symbolising their unity -Nathan ordered them around like his agents. They resented his bullying letters and complained constantly about not getting enough business from the London house. After receiving a letter scolding him for some mistake, a distraught Carl took to his bed. Little brother James, in his 20s, ran around Europe doing Nathan's bidding even though he was to become a match for his brother in brains and business bravado.

Ferguson offers few clues to how the brothers worked together and made business decisions. Clearly, though, writers at the time described their collaboration in overly idyllic terms. The author of an influential encyclopedia article, for example, wrote:

"With the greatest conscientiousness, the brothers [have] obeyed their father's heartfelt deathbed injunction to maintain unbreakable unity and cooperation in all business transactions. Each business decision is the subject of their joint deliberations; every operation of even moderate importance is carried out according to an agreed plan and with co-ordinated efforts; and all the brothers have an equal share in the results".

Perhaps one reason the brothers stuck together was that they were so far apart geographically. They carried on their business, for the most part, through correspondence, sparing them too many face-to-face confrontations and shouting matches. However much they quarreled, Ferguson adds, the brothers also knew "they had no one else whom they could trust as much. "

Keeping it in the family
It wasn't only the concordia principle that kept the family and its wealth together. For most of the 19th century, the Rothschilds practiced endogamy. Cousins were encouraged to marry other cousins. Social gatherings of the extended family were a marriage market for the young, with parents sometimes arranging matches cold-bloodedly. "Only a Rothschild would do for a Rothschild, it seemed", notes Ferguson.

Other strict rules laid down by the founder forbade any role for daughters or in-laws in the business. "None of my daughters and their heirs has any right or claim on the said firm, "Mayer Amschel decreed in his will. "I would never forgive a child of mine who, against this my paternal will, allowed themselves [sic] to disturb my sons in the peaceful pursuit of their business. "There is no evidence in Ferguson's work that the rules were ever challenged, even by daughters in later generations. The males in the business had sole discretion in deciding how much of a deceased partner's share of the capital to allocate to his widow.

Intermarriage and exclusion of daughters and in-laws prevented dilution of the business wealth and perhaps headed off future discord by sharply restricting the number of relatives active in the firm. The partnership agreement, moreover, was structured to reinforce unity and cooperation.

Revised every few years at first, the agreement was flexible enough to be adapted to changing patterns in the profits of the individual houses. The brothers were barred from doing business independently, without sharing with the other houses – a precedent modified in the next generation in order to prevent a split in the partnership. Each house owned a share of the capital of the other four, and was entitled to a percentage of profits negotiated under each partnership agreement. Thus, there were strong incentives to support one another's efforts and, indeed, the partners sometimes rescued a house in temporary difficulties.

Bridging the generation gap
As the brothers aged, they met as a group even more rarely. An exception was the wedding in 1836 of one of Nathan's sons, Lionel, to Carl's daughter, Charlotte. The brothers took the occasion to negotiate a new agreement to include some of the nephews. A dark cloud settled over the celebration, however, when Nathan was suddenly bedridden with a painful and persistent medical problem, apparently a rectal abscess. He died a few months later from complications.

The vacuum in leadership was soon filled by James, who was not far apart in age from the oldest of the 12 nephews. James was a brilliant entrepreneur in his own right, a bear for work and an affable host who entertained Parisian society with lavish balls. An advisor to a succession of emperors and ministers, Baron James became "the absolute monarch of Parisian finance".

Although intimidating to his nephews, James was a powerful force in bridging the generation gap. In the business, he and two of the most talented members of the third generation – Nathan's son Lionel and Salomon's son Anselm – formed a triumvirate of key decision-makers. "Unbreakable" family unity, however, soon faced its severest test.

In 1848, with revolutions breaking out all over Europe, the value of state bonds plummeted, and the Rothschild houses, with their large holdings, were all in trouble. Vienna, led by the rash and ostentatious Salomon, was in the worst shape. Salomon had sunk too much money in railway construction (which took time to pay off) and a number of unwise business loans. Irritated by 'Uncle' Salomon's excesses, Lionel was reluctant to bail him out and threatened to withdraw from the partnership.

In the end, concordia prevailed through James's intervention with his nephews. The London house was able to repay Salomon's debts with the help of silver shipped from America by the Rothschilds'agent there.

Amschel, Carl, and Salomon all died within nine months of one another in 1855, thereby bringing to an end the sibling partnership. Gradually James, too, began to let go, typically ending letters of advice to the other houses with, "Do, dear nephews, what you wish". James's investments in railway expansion had paid off handsomely: by the time of his death in 1868, the assets of de Rothschild Frères had eclipsed those of the London house.

The Rothschilds' influence declined in the latter half of the 19th century mostly because of what Ferguson calls structural factors – a proliferation of competitors, the rise of nationalism, more efficient tax collection by liberalised regimes. Paradoxically, they continued to be the world's largest bank because the third and fourth generations turned cautious, choosing to nurture their immense capital base and avoid big risks.

The centrifugal forces of nationalism, however, were pulling the houses in different directions. The Vienna house, led by Anselm, created ill will by doing more business with Austrian partners and through Creditanstalt, an investment consortium, sometimes without even notifying the other houses. In the FrancoPrussian war of 1870-71, Rothschilds found themselves on different sides for the first time: Mayer Carl, Carl's son, identified with Prussian interests while his Paris cousins lined up behind la patrie. Mayer Carl later took a seat in the parliament of the new Reich.

As the family grew in numbers, as more doors opened for Jews, fewer Rothschilds seemed to aspire to careers in the firm or have the requisite talent. Lionel's son Natty was an exception. Though a disappointment to his parents at Cambridge, Natty led the family business in a wholly new direction, following the British flag abroad with loans to the colonies and major investments in diamond and gold mines. He was rewarded with elevation to the peerage.

Nevertheless, the partnership was not renewed after 1905. The three remaining houses, London, Paris, and Vienna went their separate ways, in much diminished roles. The family saga by this time bore resemblances to Buddenbrooks. Wealthy heirs pursued pastimes such as hunting, horseracing and collecting art. Oddly, quite a few were drawn to horticulture and zoology. For years, the New Court offices were a sleepy, genteel place with short work days for the partners.

Durable dreams
What, if anything, do other family businesses have to learn from the Rothschilds' experience? How to account for their longevity as a widely dispersed, private family partnership? Obviously, a good deal of their success was rooted in 19th century economic conditions and practices that would be considered unwise today. (Endogamy and bribery are not to be recommended!) Nevertheless, a few lessons emerge.

First, to maintain a business in family hands for a century, the owners need to have vision and a long-term perspective. The Rothschilds definitely had both, perhaps in part because of their long view of time as Jews with a history of persecution. They were concerned with securing not just their own happiness and prosperity, but that of generations unborn.

Second, Mayer Amschel's five sons made a determined effort to pass on the founder's dream of unbreakable unity to the next generation. The message was repeated – emphatically -- in their wills, during partnership negotiations, on their deathbeds.

Third, the founder's very explicit, strict rules for ownership and participation in the business, however unfair to women and in-laws, may have had one beneficial effect. By limiting the claims of relatives on the business, the Rothschilds prevented the fractionalisation of their capital.

Lastly, it appears the Rothschilds lacked the fully developed governance structures and procedures usually needed to preserve harmony in later stages of a family business. Despite occasional quarrels, the five brothers shared a basic trust as adults. The cousins, who grew up in different countries and households, were probably not as close. Without ongoing, formalised means of resolving disputes, forging common strategies, and renewing the shared dream, later generations may have been powerless to resist the forces pulling them apart.

Strength of tradition
The Rothschilds escaped Hitler's Germany, though much of their wealth was confiscated. The Paris house had to shut its doors in 1981 when Banque Rothschild was nationalised, but it later re-emerged as a boutique investment firm. The London and Paris houses both went through ups and downs in the postwar period, developing an expertise in taking firms private during the Thatcher era and, more recently, playing a lead role in global mergers and acquisitions.

It is a tribute to the strength of tradition that the family partnership has recently been renewed. In 1989, the Paris and London houses were reunited in Rothschild Continuation Holdings AG, a collection of 19 family-controlled investment banking and assetmanagement firms. Sir Evelyn, 70, has designated the chairman in Paris, his cousin David de Rothschild, 58, to succeed him as chairman of the London house.

Other once independent European investment houses – Schröder, Warburg, Morgan Grenfell – have passed into history, absorbed by multinational megabanks. Though only a shadow of the 19th century firm, Rothschild stands as one of the last private, family-controlled houses. The name still has magical resonance. Sir Evelyn's interest in having the story retold is thus understandable, and Ferguson has done an impressive job.