This resemblance was not coincidental. For earlier events in Latin America were not only responsible for sending inveterate troublemakers like Dom Pedro back to Europe; they also fundamentally weakened the fiscal systems of both Portugal and Spain, which had come to rely heavily on the revenues from their transatlantic empires. Portugal and Spain were thus not merely politically unstable; in many ways that was also true of France, where a similar kind of dynastic feud had seemed a possibility after 1830. The Iberian problem was one of chronic national insolvency. Trying to make money from two countries which recurrently teetered on the verge of bankruptcy proved much less easy than the more sanguine Rothschilds initially assumed.

The Portuguese story is the less complex of the two; it also proved to be the less lucrative. We have already seen that Nathan had interested himself in the affairs of Portugal and her sister-kingdom Brazil in the 1820s, arranging loans for both, secure in the knowledge that this was a traditional British sphere of interest. In doing so, he had unwittingly been lending to both the combatants in the impending civil war: Dom Miguel, whose coup he had backed in 1828, and his brother Dom Pedro, the Emperor of Brazil and father of Maria II, the Queen of Portugal whom Miguel had overthrown. In April 1831 Pedro was forced to abdicate in Brazil in favour of his son; he at once set off for France, intent on restoring his daughter to power in Portugal. For no very good reason, French liberals (and some British Whigs) tended to assume that Pedro was a kindred spirit, casting Miguel as a kind of Portuguese Charles X. Pedro therefore had little difficulty in raising money in Paris and men in London, and by July 1832 was able to seize control of Oporto. However, in the absence of popular support it took him until May 1834 finally to secure Miguel’s surrender—a victory which he mainly owed to the assistance he received from the English sea captain Charles Napier. Four months later Pedro himself expired, having lived just long enough to restore his daughter to power.

Yet that did not bring Portugal’s political troubles to an end. Finding Maria a suitable husband proved harder than expected when her first consort, the Duke of Leuchtenberg, died after just four months of marriage, and a replacement—Ferdinand of Saxe-Coburg, nephew of the Belgian King—was not found until 1836. More seriously, Maria’s supporters quickly split into two rival factions: moderate “Chartists” (loyal to the constitution of 1826) and more radical “Septembrists” (who looked further back to the more liberal 1822 version). Shortly after Maria’s marriage to Ferdinand, the latter faction forcibly seized power. The Chartists attempted to do the same in 1837 and succeeded five years later. In 1846 there was yet another revolution, which precipitated joint Anglo-Spanish intervention the following year.

The Rothschilds watched the unfolding of the Portuguese civil war with mixed feelings, loath to miss out on any lucrative new business, but worried that the conflict might escalate. By 1832 James had begun tentatively to participate in the operations of the Spanish financier Juan Alvarez Mendizábal, who had issued a £2 million loan for Pedro in Paris the year before. This was a gamble, for although there was indirect British and French support for Pedro, Austrian-backed support for Miguel could not be ruled out. Moreover, Miguel was able to raise a 40 million franc loan in Paris that same year. This explains why James was so pessimistic about the “Portuguese rubbish” from the outset. His view was that only a guarantee from Britain and France would make a Portuguese loan into “a nice piece of business”; but this Palmerston (wisely) refused to give. It is therefore not unreasonable to conclude that, when he and Nathan issued a £4 million loan for the restored government of Maria II in 1835, they were consciously dealing in what might today be called “junk bonds.” For, even with Pedro dead and Miguel exiled, the likelihood of Portugal maintaining interest payments on these bonds was low. Thus James regarded those to whom he sold the bonds as, to put it mildly, naive. “We have a great many asses who have been buying this shit,” he candidly reported to Nathan in early April. The 3 per cent bonds—which the Rothschilds issued at 67.5—enjoyed a temporary vogue, but within a matter of months were sliding rapidly as political instability persisted in Lisbon. Within a year they had fallen to 55; and by 1839 they stood at just 25. James later explained the rationale of the Rothschild involvement: such bonds were “the only thing on which one can gamble and speculate, for what is there to gain from the French rentes? Nothing. So the world is now speculating on this shit. One can gamble with these but one can never hold on to them.” In other words, these high-yielding bonds were never seriously regarded as assets for long-term investors. They were mere speculative objects.

The trouble with selling “rubbish” is that some naive investors—or unlucky speculators—will inevitably be left holding it when the interest ceases to be paid; and they are unlikely to think very highly of the original vendor. For the sake of their own reputation, and therefore their ability successfully to float future bond issues, it was in the Rothschilds’ interest to avoid a Portuguese default. As early as March 1835 James was nervously suggesting that the Rothschilds “should send someone over there [to Lisbon] two months before the interest falls due so as to assist the Government. We are too deeply involved in this matter not to try to render any assistance we can to these people.” By May it was obvious that even with a change of Finance Minister there was not going to be enough cash to pay the interest due that year. “I think that we will have to pay the interest,” he concluded gloomily. The disadvantage of this, however, was that bondholders would “get accustomed to the idea that you will [always] have to extend your helping hand, and in the end you will be unable to retreat.”

As it turned out, however, Nathan’s plan for a further £1 million advance was rejected in favour of a more generous offer by Goldschmidt, prompting a wave of retaliatory selling by the Rothschild houses in London and Paris. “There is no occasion for our supporting the market now that others have interfered in the Portuguese affairs,” wrote Lionel angrily from his dying father’s bedside in Frankfurt. “We can job in and out and only study our own advantage.” James was beside himself at the conduct of the Lisbon government: “The miserable Portuguese Minister wants to cut the throat of his own credit so that one can’t tell the world with any degree of certainty that the interest will be paid, and so he makes it appear as if he wants to bring everything down.” “Your Portuguese are giving me a fever,” he wrote to London in December 1836. “Never before in my life has anything upset me so much. These people are nothing more than the scum of the earth.” The only aim now was to “persuade the public that these people have positively decided to ruin the credit and that we on our part have been doing everything in our power to prevent this.” “We have to get out of this shit as quickly as we can,” he reiterated a day later, “because we are dealing here with thoroughly disreputable people and with a minister who speculates on the demise of his own country.”

Yet when the same problem arose in 1837 Lionel had no option but to offer once again to bail the government out: after all, the bonds on which the interest was due were still the bonds which had been issued by Rothschilds two years before. James too could see no alternative but to offer another short-term advance, especially now that the Rothschilds’ old friends the Saxe-Coburgs had become involved through Ferdinand’s marriage to Maria. The strategy in 1837 was to give Lisbon one final injection of cash “to prevent it being said that a Rothschild loan was not paid,” and then to pull out. Even this attempt at damage-limitation misfired, leading to a protracted and highly embarrassing legal wrangle with the Portuguese government. ¹ Lionel sought to rationalise what had happened: Portuguese bonds might have fallen from 75 to 25, but “still our name is not lost.” His uncle was unconvinced. “I don’t wish to speculate with any money whatsoever on this muck” was more or less his last word on the subject of Portugal. Subsequent attempts to involve the Rothschilds in the country’s finances were firmly rebuffed. Nor did their rivals let them forget the débâcle. When Barings were approached for a loan in 1846, one of the partners argued strongly against any involvement on the grounds that “Portuguese credit has been so tainted by the mismanagement of the Jews and Jobbers . . . that it would not be a very desirable connexion for any House wishing to stand well with the public.”

Spain was politically not so very different, though economically she had much more to offer than Portugal. Here too the source of conflict was dynastic: did Salic law—giving preference to the male line—apply in Spain, in which case Ferdinand VII’s brother Carlos was his rightful heir; or should the throne pass to his only child, Isabella, born in 1830? Technically, Isabella’s case was the stronger: although Salic law had been introduced in 1713, it had been repealed—albeit secretly—by Carlos IV in the Pragmatic Sanction of 1789, and Ferdinand took the precaution of publi cising this fact five months before his daughter’s birth. On the other hand, when he fell ill in 1832, it became apparent that his brother Carlos had enough might (if not right) on his side to challenge Isabella’s claim, forcing her mother Maria Christina into temporarily revoking the Pragmatic Sanction. Ferdinand’s unexpected recovery forced Carlos to flee to Portugal, but civil war was now more or less inevitable. When the king finally died in September 1833, Carlos revealed that he had no intention of recognising Maria Christina’s regency, returning to Spain to mobilise his supporters ten months later. As in Portugal, the dynastic dispute had an ideological significance: Carlos was the Spanish Dom Miguel, the reactionary “wicked uncle,” while his sister-in-law Christina (after an initial dalliance with reforming absolutism in the person of Cea Bermudez) allied herself with “moderate” liberals like Martinez de la Rosa, and therefore enjoyed conditional support from the more “progressive” democrats who harked back to the revolution of 1820. The war also had a regional dimension: while Carlism was strongest in the countryside of Navarre and the Basque provinces, Isabella’s cause appealed more to the bureaucrats of Madrid and the financiers of the country’s main commercial centres.

There were four reasons for offering financial support to the government of the young Queen. As in the case of Portugal, there were the short-run profits to be made from selling new, high yield bonds to investors bored with increasingly predictable consols and rentes; but of course such bonds could just as easily be issued for Don Carlos. The decision to plump for Isabella was partly diplomatic: the Quadruple Alliance of 1834 between Britain, Portugal, Spain and (later) France seemed to signal unequivocal foreign support for Isabella’s regime from the two powers who traditionally wielded most influence in the Peninsula. More importantly, however, Spain (unlike Portugal) had a particular kind of asset which proved irresistibly attractive to the Rothschilds as a security for any loans: the mercury mines of Almadén to the west of Ciudad Real, one of only two major sources of the metal in the world at this time. For over three centuries, the mines had played a pivotal role in the international monetary system because of the use of mercury (or “quicksilver” as the Rothschilds preferred to call it) in the refining of silver and gold in Latin America. This in itself made them attractive to bankers. The crucial point was that the Spanish government traditionally sold the rights to work the mines and to market their output to private companies, most famously mortgaging them in the sixteenth century to the Augsburg bankers, the Fuggers. Decisively, these mines were controlled by Isabella’s forces for most of the civil war. Finally, despite the dramatic contraction of her American empire, Spain still had lucrative commercial ties with her remaining colonies, notably Cuba and the Philippines; the former in particular was attractive to the Rothschilds because of its importance in the tobacco trade.

There were also, on the other hand, three difficulties attendant on any financial involvement with Spain. Firstly, and most obviously, there was the confusion caused by the country’s protracted and inconclusive civil war. It was not until 1839—six years after Ferdinand’s death—that the Carlist forces were effectively defeated. During that period, there were repeated changes of government in Madrid, as “Moderados” and “Progresistas” (to give the factions their later names) vied for control, the latter pressing for a more parliamentary and anti-clerical regime than Maria Christina had ever intended. Matters were further complicated by the growth in political influence of the leading military commanders; indeed it was one of these, General Baldomero Espartero, who, with Progresista support, forced Maria Christina to abdicate as Regent just a year after leading her forces to victory. Espartero in turn was ousted in 1843 and replaced a year later by his rival General Narváez, who presided over what amounted to a decade of Moderado hegemony until yet another revolution in 1854.

The second argument against involvement in this unstable country was furnished by the bonds issued under the liberal regime of the early 1820s, the so-called “Cortes” (that is, parliament) bonds, which King Ferdinand had refused to honour following the suppression of the revolution. A law of 1831 formally “deferred” interest payments on these bonds for forty years, but this was scant consolation to the investors who had bought them; and the English holders of the Cortes bonds were determined to oppose any further issues of Spanish paper on the London stock exchange until they had secured better terms. Events were to reveal the extreme difficulty of re-establishing Spanish credit internationally with memories of default so fresh. Finally, the support of the so-called “Northern courts”—Austria, Russia and Prussia—for the Carlist cause proved to be stronger than their support for Dom Miguel. Even if he could not contemplate direct military intervention, Metternich proved able to exert considerable diplomatic influence over events in Spain.

For all these reasons, the Rothschilds were initially reluctant to act alone in Spain. As early as December 1830 James and Nathan entered a kind of “sleeping” partnership (in return for a 2.5 per cent commission on sales) with the company which leased the Almadén mines in that year. This was intended as a first step towards greater involvement. “When the time comes that the Government wants to farm it out,” James observed to his brother, “you will then be well placed to know exactly who all the customers are and how much one can sell and you will then find it that much easier to submit a proposal for the whole sum.” More problematically, as it proved, James committed the Rothschilds to share all Spanish financial business with a consortium of Paris bankers led by the Spaniard Aguado. This provided a degree of camouflage for speculative dealings in existing Spanish paper (for the Cortes bonds continued to be traded, though at a price of around 30); but it placed awkward restrictions on Rothschild room for manoeuvre when new business had to be discussed with the Spanish government. By the summer of 1833, when a major tobacco deal came to nothing, Lionel was already finding the agreement with Aguado and his associates more a hindrance than a help.

The debate over whether to increase or diminish this involvement in Spain placed a greater strain on familial harmony than any other issue the Rothschilds had to contend with before 1848; indeed, it is not too much to say that it threatened to break up the partnership between the five houses. Nathan was evidently keen to play a bigger and more independent role in Spanish finances, a position consistently supported by his nephew Anselm and rather less consistently by Lionel. James vacillated endlessly, one day seeing all the advantages, the next day seeing only the risks: “With this country there is a lot of money to be made, but on the other hand, one could lose a great deal of one’s reputation”—this was James’s constant refrain throughout the 1830s. “You know my dear Papa how he [James] is,” wrote Lionel impatiently: “One minute he is for and one minute he is against the Business.” Unlike his own son, Salomon was generally opposed to direct—or, to be precise, overt—involvement, primarily because of the intense pressure to which he was subjected by Metternich. But he too was inclined to waver: “Be so good as to read Uncle Salomon’s letters,” Lionel urged his father sarcastically in March 1834, “the first for the Spanish , the second against, the third for.”

Nathan’s initial strategy seems to have been to secure some sort of agreement on the old Cortes bonds as the prelude to any new Spanish loan. However, all the Spanish negotiators with whom the Rothschilds dealt carefully avoided giving a commitment on the issue. After exceptionally convoluted and protracted negotiations, Nathan decided to ignore the warnings of Metternich, the Austrian ambassador Apponyi, the Russian ambassador Pozzo and no fewer than three French ministers (Broglie, Rigny and Soult), all of whom strongly advised the Rothschilds to avoid Spain.² Despite the reservations of James and Lionel, who continued to argue for, at most, a joint and preferably anonymous operation with the Paris consortium, on April 18 Nathan unilaterally proposed to advance the Spanish government 15 million francs to pay the interest due at the end of June on its undeferred bonds. He had obtained no firm guarantee from Madrid that the Cortes bonds would be revalued, merely an empty promise that the issue would be raised when the Cortes met. Nor did he receive any security for his advance when the agreement was signed with the Spanish ambassador in Paris and a representative of the Bank of San Fernando on June 7. As the Carlist-inclined Duke of Wellington sardonically observed, the Rothschilds were now well and truly “in the boat”; and, just as Metternich and the rest had predicted, “the boat” began to sink almost at once. Given the country’s notorious record of default, it is not surprising that Nathan’s decision to involve himself in Spanish finances attracted satirical comment. Two cartoons portrayed him as a “Jew-dish-us cakeman,” standing by his trademark pillar selling a “rice cake” marked “Loan” (see illustrations 13.i and 13.ii). “Who’s for a slice? Who’s for a slice?” reads the caption on the first. “All Hot! All Hot! Take care you don’t burn your Fingers, Plenty of cakes but none like I make.” From his pocket portrudes a bill marked “Spanish.” The second cartoon shows the “cakeman” with his stall under his arm, having sold the cake. “Dat rice cake sold very well—I hope it vill agree wid my customers—I vil make anoder.”

It is not easy to see why Nathan acted as he did. It is possible that he (along with Anselm) was lulled by the announcement of the Quadruple Alliance into thinking that the danger of civil war would fade, though there is no indication of any official nudge in this direction from Palmerston; on the contrary, Palmerston’s man in Madrid, Charles Villiers, indignantly accused Nathan of “doing” the Spanish government with “not very advantageous conditions.” The most likely explanation was that he wanted to pre-empt a rival bid by Thomas Wilson or Aguado and establish himself (or James) as “court banker” to Maria Christina, in anticipation of a major new loan and conversion operation when the Cortes finally met. He plainly had a plan ready to convert the old Cortes bonds and probably also anticipated short-run speculative profits, assuming that the announcement of a Rothschild advance would boost their prices. One (admittedly hostile) Austrian diplomat recalled his saying: “I must grant it [the loan] because if I don’t, somebody else will.” Whatever his motive, the advance was uncharacteristically reckless. As James, Lionel and Anselm had all foreseen, the other French bankers promptly sued James, on the ground that Nathan had acted without due regard to the consortium contract. Only by offering Aguado a new agreement to share any future loan was James able to avert a costly defeat in the courts. Nor did the Spanish government’s promise to bring the question of the deferred bonds before the new Cortes satisfy the Committee of the stock exchange in London. In Paris too the markets were unconvinced by Nathan’s plan: Spanish bonds fell sharply in late June. Worse still, no sooner had the 15 million francs been paid over than a new Finance Minister took over in Madrid who a month later reneged on the agreement, claiming that the Rothschilds had promised to lend twice the amount; this too Nathan had been warned to expect.

It is not known for sure why the Minister in question, Toreno, was (as James put it) an “enemy.” Partly, he was responding to domestic pressure to deal with Spanish bankers like Ardouin, with whom he concluded an alternative loan agreement for £4 million; more importantly, he was intent on a drastic “reduction” of the existing Spanish public debt—a conversion which would have cut the nominal value of Spanish bonds by as much as 75 per cent—something the Rothschilds regarded as a “declaration of bankruptcy.” To make matters worse, Toreno’s appointment coincided with the return of Don Carlos to Spain and an outbreak of cholera in Madrid. With Apponyi, the Austrian ambassador in Paris, issuing dire warnings as to the consequences of French intervention against Carlos, the price of Spanish bonds plummeted, occasioning suicides and murder threats on the Paris bourse. Yet the Rothschilds, while doing their fair share of selling, could not risk an all-out financial “war” against Toreno, for the top priority in the midst of this débâcle was to retrieve as much as possible of Nathan’s 15 million francs, if only in the form of “those stinking [bonds] with which he is going bankrupt.” It was, as James said, “an awful mess”; and it revealed very starkly the limitations of financial power when confronted by a government unafraid of the international bond market. “All I want you to declare is that we will get our money back and I ask nothing further of you,” James implored the Spanish representative. “My commission is now over,” the latter replied, “I have been recalled.” In vain, James appealed to the ambassador, to the French government and to Toreno himself. “My dear Nathan,” he admitted, putting his finger on the Rothschilds’ fundamental weakness, “we don’t have any troops to force the Government to do that which it does not want to do.”

All along, the Rothschilds had suffered from a lack of first-hand knowledge of Spanish affairs: none of them had visited Madrid and there was no dedicated full-time employee there until July. This explains why in August 1834 it was decided to send Lionel (accompanied by the lawyer Adolphe Crémieux) to thrash out some kind of agreement with Toreno face to face. The British ambassador was impressed by the young man’s negotiating skills; however, the Rothschild correspondence reveals that Toreno was able to convince Lionel that a fully fledged loan to Spain was now the only way of averting outright bankruptcy and the advent of a republican government. Anselm alone agreed. James and Nathan by now were interested solely in retrieving the money they had advanced to Toreno’s predecessor. In January 1835 they reluctantly agreed to accept the equivalent of 15 million francs as a share of the new loan to be issued by Ardouin. Salomon later estimated their losses on the contract at 1.6 million francs.

Yet Lionel’s negotiations achieved what proved to be a more important concession from Toreno; for during his stay at Madrid the contract for the Almadén mines fell due for renewal. As we have seen, the Rothschilds already had a stake in the mines and they had begun to think of increasing their control over the Spanish mercury market during 1834. Indeed, Lionel had explicitly suggested asking for the mines as a guarantee for the 15 million francs advanced. He now outbid four other companies to secure the new contract—essentially by bribing Toreno and the Queen and by offering, instead of a sealed bid, to pay 5 per cent more than the highest rival bid. The following year the contract was renegotiated in such a way that it became rather more advantageous for the Rothschilds. This was the beginning of a long and profitable involvement. According to the Rothschilds’ own estimates, the mines at the time of the 1835 agreement were producing between 16,000 and 18,000 hundredweight of mercury a year. Under the 1835 contract, they paid the government rather more (54.5 pesetas or £2.18 per hundredweight) than they had paid under the previous contract (37 pesetas); but were then able to resell the mercury in London for 76-80 pesetas or to silver refineries in Mexico for as much as 150 pesetas per hundredweight. In sterling terms, that represented a profit of at the very least £13,000 a year, with the possibility of more if the output of the mines could be increased without depressing prices. When production was stepped up in 1838, the Rothschilds’ annual income from the mines rose to £32,000, though this level of output proved unsustainable. That amounted to more than 13 per cent of the total net revenue from the mines—and no less than 38 per cent of the London house’s profits (though half the money was shared with the Paris house). By the 1840s, 20 per cent was James’s target return from Almadén.

The acquisition of the mercury rights also signalled a radical change of policy. From now on, rather than issue bonds for Spain against effectively worthless paper securities, they would finance the country’s chronically unreliable government by making relatively short-run advances on the royalties they had to pay for the Almadén mercury. Later, similar advances would be made on the basis of copper and tobacco from Cuba. Commodities thus proved to be the best kind of security for loans to unstable states. In his comic poem “Romancero” Heine joked that Mendizábal (who became Finance Minister in 1835) had pawned an ancient pearl necklace “to cover certain / deficits in state finances”; these had duly appeared “at the Tuileries . . . shimmering on the neck of Madame Solomon, baroness.” Contemporaries would probably have recognised the allusion to the “jewels” of Almadén.

Of course, the Spanish government may have hoped that the mercury deal would lure the Rothschilds into making a full-scale loan. But in this they were sorely disappointed. True, by the spring of 1835 James was feeling more sanguine about Spain following the success of Ardouin’s loan. This, however, proved to be short-lived as the Carlists seemed to gain the upper hand. The key question now became whether any foreign power would intervene to decide the outcome of the civil war. This had always been a possibility: France had intervened in Spain just over a decade before and there had been abortive liberal expeditions in the wake of the 1830 revolution. The Quadruple Alliance also seemed to imply some sort of British action on behalf of Maria Christina’s regime (provided the Whigs stayed in power). But it was only after Toreno had wrecked his financial plans that Nathan became a convert to the idea of military intervention, as did Lionel. James, summoned to London to decide the next move, once again wavered. The experience of the early 1830s had made him deeply suspicious of the more hawkish French politicians, and he was inclined to reinforce Louis Philippe’s pacific inclinations against the projects for intervention hatched by Thiers. On the other hand, he found it difficult to oppose his elder brother on the Spanish issue and gradually came round to supporting intervention. By contrast, their brother Salomon—who had all along had his doubts about getting involved with Spain—now acted energetically to counter Nathan’s arguments for intervention, ultimately going to extraordinary lengths to dissociate himself from his brother’s actions in his correspondence with Metternich.

Metternich had been kept well informed of Nathan’s actions by the Austrian chargé d’affaires in London, Hummelauer, and a junior official named Kirchner who was supposedly assisting Nathan with his consular duties. He therefore knew that Nathan was arguing for British intervention; indeed, Nathan appears to have admitted it openly to the Austrian ambassador Esterházy. To clear himself of guilt by association, Salomon therefore had to write one of the most extraordinary of all Rothschild letters, addressed to his senior clerk in Vienna, Leopold von Wertheimstein, but explicitly intended for Metternich’s eyes. He began by claiming that the collapse in Spanish bond prices following Toreno’s appointment as Finance Minister had been engineered by the Rothschilds as an act of “vengeance” on Toreno for the losses he had caused them. According to accounts which Salomon enclosed, Nathan had sold no less than £2 million of Spanish bonds, ruining Toreno’s credit and proving that the Rothschilds were now “confirmed enemies of Spain.” Not only that, but Salomon and James had then gone to see Talleyrand, Guizot, Broglie and Louis Philippe himself to argue “that France’s credit would go to the devil if they intervened, and that they would have to face a second and third revolution.” There was therefore no question of the Rothschilds lending “a single farthing” more to Spain. As if to convince Metternich of his sincerity, Salomon’s letter concluded by heaping abuse on Nathan’s head. “My brother Nathan Mayer,” he wrote,

Nor was that all. Salomon even went so far as to suggest that Nathan’s error had put the entire future of the brothers’ partnership in jeopardy:

For good measure, Salomon then accused the Russian ambassador Pozzo of slandering James because he had been excluded from a profitable issue of Austrian bonds. This was no mere charade: the Rothschilds’ private correspondence indicates how strongly Salomon felt on this issue. As late as 1840—after Don Carlos had been defeated—James could still tell his nephews:

It has generally been assumed that on this issue Metternich’s political power prevailed over the Rothschilds’ financial interests. Armed with good-quality intelligence and making the most of Salomon’s desire to acquire the title of Austrian consul for his son and nephews, Metternich appears to have succeeded in scuppering the project of an Anglo-French guaranteed loan to Toreno’s mercurial successor, Mendizábal. Like the British ambassador in Spain, Mendizábal assumed that the Rothschilds would back this project, not least because of his business links with James, with whom he had done business in Portuguese bonds.³ But Nathan—apparently responding to Salomon’s pressure—chose to leak the Anglo-French plan to Vienna and more or less deliberately allowed the project to fall through, leaving Mendizábal high and dry. Indeed, he told Palmerston that he had no confidence in the solvency of Mendizábal’s government. When the British Foreign Secretary pointed out that the planned sale of crown lands would raise money, Nathan replied with a characteristically earthy image: “Yes, in time, but not in time for the May dividend. It is like telling me at seven o’clock when I want my dinner [that] there is a calf feeding in a field a mile off.” Contrary to the widespread expectation in diplomatic circles that they were itching to make such a guaranteed loan, in fact Nathan and James were steadily baling out of Spanish bonds altogether.

The decisive moment in the civil war coincided with the Frankfurt family “summit” and Nathan’s death. Ultimately, despite pressure from the French government to come to Maria Christina’s assistance, the Rothschilds kept on selling Spanish bonds; indeed, Nathan’s last instructions to his sons were to liquidate all their holdings. After his death, this clear-out continued, so that by 1837 the Rothschilds had more or less withdrawn completely from the market for Spanish bonds. The Spanish Prime Minister was now “that stinking Mendizábal,” whom James had “never trusted”; Spanish bonds—now trading as low as 19—were simply “muck” or “shit.” The fact that Salomon moved so quickly after Nathan’s death to secure for Lionel the Austrian consulship in London also seems to point to the importance of Metternich’s leverage.

However, although Metternich appeared to have won, the private Rothschild letters show that if France and Britain had intervened militarily—rather than just financially—the Rothschilds might well have resumed large-scale lending to Spain. In ditching Mendizábal, Nathan was not merely bowing to pressure from Vienna. He was acting out of self-interest, in the belief that any loan to Spain was bound to fail in the absence of military intervention: no Spanish government could now afford to pay both the interest on its external debt and an army big enough to beat the Carlists. Despite all that Salomon had said to Metternich, by March 1836 James was privately itching for France to intervene. As he put it to Nathan following an inconclusive meeting with Louis Philippe and Thiers:

Of course, it would have been difficult to retain control of the lucrative mercury business without making any concessions to the Spanish government. A shot was fired across Rothschild bows when, not long after the fall of Mendizábal in August 1837, the Cortes sought to revoke the Almadén contract, arguing that it had been improperly modified two years before. Defenders of the 1835 contract in Madrid warned that, if deprived of the Almadén mines, the Rothschilds might back Don Carlos “for they are the monetary dynasty of Europe, and a new lever in the balance of power, which might decide the success of the Pretender by inclining the scales in his favour.” But only by agreeing to make more (and larger) advances on mercury and Havana bills were the Rothschilds able to retain the contract; and increasingly they had to allow their agent Weisweiller considerable latitude in the granting of such advances to avoid similar challenges, even turning a blind eye to the partnership he struck up with the governor of the Queen’s court, Manuel Gaviria. Of all the threats to their position, the biggest was probably posed by the banker Aguado, who returned to dangle the possibility of a large loan in front of the new Espartero government, with a view—so the Rothschilds suspected—to challenging their monopoly at Almadén. The new Finance Minister Alejandro Mon did his best to convince James that without a loan of £5 million the Rothschilds would lose the mines. But Salomon, with Metternich still breathing down his neck, continued to oppose involvement in any such loan unless it could be done through a “front” like the Bank of San Fernando; and James remained leery of the purely economic risks involved (not least because the Carlists managed to occupy Almadén briefly in the course of April 1838). Once again it proved possible to hold on to the mines by means of large advances, which fluctuated between around £200,000 and £400,000. In 1839, with the Carlist threat more or less dead, there was renewed talk of a loan, but the Rothschilds still declined to be involved, showing much more interest in establishing some kind of tobacco monopoly. As James shrewdly anticipated, the defeat of Don Carlos merely unleashed the Moderado opposition to Espartero, replacing one form of political instability with another.

The price of this strategy—which gave the Spanish government as much money as a bond issue, if not more—was a good deal of Austrian irritation. Despite their best efforts, the Rothschilds could not hope to conceal what they were up to from Metternich (it was at this point that they began to realise that Kirchner was effectively spying on them). Yet the consequences were not serious: even James’s fears that Lionel might lose his Austrian consulship proved unfounded. Throughout the successive revolutions, coups and pronunciamentos of the early 1840s, Rothschild policy remained consistent: to hang on to Almadén (albeit on rather less lucrative terms), to expand their involvement with the Cuban and Philippines trade, but to eschew bond issues. Politically, their position remained ambiguous: they apparently continued to act as Maria Christina’s bankers even after Espartero had overthrown her, while at the same time leaving Weisweiller to maintain normal service first with Espartero and then with his Moderado successor Narváez. This proved to be the only way of reconciling the sharply conflicting interests of the London, Paris and Vienna houses. The agreement reached in 1843 with the Austrian government for the import of 12 million Havana cigars may be seen as a kind of Rothschild peace-offering, designed to reconcile Metternich to the continuation of such business with Spain and her colonies.

A quite different diplomatic complication arose in the mid-1840s when the powers began to debate the question of Queen Isabella’s marriage. The French wished to marry Isabella to her hypochondriac (and, they hoped, impotent) cousin Francisco de Asis and her sister to one of Louis Philippe’s sons, the duc de Montpensier; Palmerston, appreciating that this might one day put a grandson of Louis Philippe on the Spanish throne, favoured the inevitable Coburg; while Metternich argued for a marriage between Isabella and Don Carlos’s son Montemolin, to bridge symbolically the dynastic rift. There was an economic subtext, as usual, with France and Britain seeking trade agreements with Spain, as well as the usual talk of internationally guaranteed loans and renewed efforts by the British bondholders to get their unpaid interest. There was a good deal of excitement about this at the time, including fanciful rumours in Madrid that James was refusing to lend money to Spain until Isabella had settled the succession question by having a son. However, the Rothschilds were little more than reluctant onlookers and occasional messengers in all this: it merely hardened them in their resolve to abandon Spanish bonds. When Guizot and his ambassador in Madrid interpreted James’s refusal to back a loan to Narváez and Mon as a vote of no confidence in their marriage schemes, they failed to see that this was merely the continuation of a Rothschild policy dating back fully ten years. Once again the great powers’ conflicting interests threatened to impinge on the interests of the Rothschild houses; but this time a position of neutrality was easier to sustain as none of the Queen’s possible spouses posed a threat to the Almadén monopoly. Control of the mines remained the sole object of Rothschild policy in Spain. Nor was it to be their last step away from “pure” finance and commerce, into the very different business of mineral extraction (and later also refining).

Yet even the commitment to Almadén was not unconditional. On the contrary: when the mercury contract came up for renewal in 1847, the Rothschilds were so unimpressed by the terms the Spanish government was prepared to offer that they began to contemplate withdrawal. This partly reflected their assessment of the world mercury market. Lionel Davidson’s confirmation in 1845 of the existence of substantial mercury deposits in Mexico raised the possibility of discoveries elsewhere in the New World. (The price which the Rothschilds had to pay for the mercury monopoly crept up steadily from 54.5 pesetas in the beginning to 70 pesetas in 1850, while the price at which it could be sold abroad began to slip following these discoveries.) With demand falling especially low in the depressed economic conditions of 1847, the Rothschilds not unreasonably expected the government to improve its terms. For a government which was struggling financially, the choice was between maximising revenue from the mines and securing further cash advances from the Rothschilds. Opting for the former, the Minister elected to publish his offer, effectively ruling out further bargaining. The result was deadlock, with Spanish requests for an advance of £600,000 being firmly refused in the absence of better terms for the mercury contract. As James put it, “If one could earn 20 per cent then I would be all in favour of going ahead with the deal, but as matters stand at present we stand to make only a trivial sum . . . I can’t see the big fortunes we stand to make from this deal, nor why we should invest our money in such a venture in these present times.” By now, as we shall see, James had found more lucrative financial opportunities.

The reason for this has not previously been explained. Of course, it was far away, and in many ways quite different in its business culture from Europe—“very sharp and peculiar” was the phrase once used at New Court, a view echoed and immortalised by Dickens in Martin Chuzzlewit. But the same might easily be said a fortiori of Brazil, with which the Rothschilds developed an enduring relationship. It has been suggested that the American market had been “sewn up” by the Barings before Rothschilds arrived on the scene, and later developed its own home-grown bankers, like J. P. Morgan, who would ultimately eclipse Rothschilds not only in the US but in the world. Yet this too will not quite do: the Rothschilds proved on numerous occasions in the nineteenth century that they had the financial muscle to oust even their most powerful rivals from business they coveted. That they did not do so in America requires a better explanation.

In fact, the answer may partly lie in the peculiarities of American democracy. The Rothschilds, as we have seen, always gave first place to public finance in their operations, and rarely conducted commercial business in a country without also lending to its government. However, this proved difficult in the US. The federal system meant that the financial needs of the central government were strictly limited, while some of the individual states proved to be among the least reliable creditors of the entire nineteenth century. A second and ultimately more serious obstacle was the American tradition of suspicion towards big banks. The Rothschilds generally liked to have a reliable local partner in their international operations, often a national or central bank in the mould of the Bank of England or the Banque de France. In Spain, that role was played by the Bank of San Fernando. In the United States, however, it proved politically impossible to establish such an institution on an enduring basis. The first Bank of the United States (BUS), set up by Alexander Hamilton in 1791, expired twenty years later when the Republican-dominated Congress refused to renew its charter on the ground that it was unconstitutional. The second BUS, established in 1816 with a capital of $25 million, became the focus of a powerful political campaign against the “money power” which was blamed for the deflationary pressures of the succeeding years. Though it survived a legal challenge by the state of Maryland, the Philadelphia-based bank fell victim to the populist President Andrew Jackson, who recognised the electoral advantages of an attack on the “monster,” identified as it was with his rival Henry Clay. When the BUS’s president, Nicholas Biddle, applied to have its charter renewed in 1832 (four years earlier than was necessary), Jackson vetoed it, vowing: “The Bank is trying to kill me, but I will kill it.” Despite Biddle’s effort to precipitate a financial panic in retaliation, “Old Hickory”—Jackson’s nickname—carried the day, and in 1836 the bank lost its public status, though it continued to exist as a state bank in Pennsylvania. As we shall see, the Rothschilds’ instinct was to do business with the BUS; but Jackson’s attack fatally undermined its position. It should be added that American suspicion of big banks was allied to a suspicion of foreign banks, and especially Jewish ones. No sooner had the Rothschilds appeared on the American scene than Governor McNutt of Missisippi was denouncing “Baron Rothschild” for having “the blood of Judas and Shylock flow[ing] in his veins, and . . . unit[ing] the qualities of both his countrymen.”

Rothschild interest in the US dates from the early 1830s, when an opportunity arose to arrange the payment of a million pounds owing to the Treasury in Washington from France. This coup led to the Rothschilds replacing the Barings as the federal government’s London agents. At the same time, Nathan and James began to interest themselves for the first time in American state loans and commercial finance. American exports of cotton and tobacco to Europe were advancing by leaps and bounds, and by the mid-1830s the London and Paris houses were doing a considerable volume of business in the bills generated by this trade, advancing substantial sums to a number of American bankers, notably J. L. and S. I. Joseph. In the American financial crisis of 1836-7, they and all the other firms with which the Rothschilds had dealings got into serious difficulties; and it was at this point that the Rothschilds were forced to make a decision about the future of their involvement in the US, and above all about the nature of their representation there.

The “appointment” of August Belmont (originally Schönberg) as the Rothschilds’ agent in New York was an accident. Belmont had joined the Frankfurt house as an apprentice at the age of fifteen, and had risen rapidly through the ranks, getting up at 5 a.m. each morning to improve his French, English and arithmetic. By 1834 he was acting as secretary to one of the partners, visiting Paris, Naples and Rome; and in 1837 it was decided to send him across the Atlantic. However, contrary to a report in the Allgemeine Zeitung des Judenthums, the intention was definitely not that Belmont should establish himself as the bank’s New York agent. His orders were to take stock of the financial crisis there—to “let us know what is going on and one can then decide accordingly what to do”—and then to proceed to Havana. This planned itinerary reveals that, in James’s view, the family’s interests in Cuba were what mattered: as he put it, quite apart from existing commitments there of around £100,000, “Spain receives all her income from that land and it is one of the most profitable business ventures.” By contrast, he and his nephews had managed to reduce their commitments in the US to just £9,000 by the end of April, and James was prepared to write this remainder off as “a lost cause.” The possibility of establishing a Rothschild house in New York was not wholly ruled out, for James recognised the American market’s potential and was convinced that there were bargains to be snapped up from the “shipwreck” left by the banking crisis; but he evidently regarded this as a job far in excess of Belmont’s capabilities. His trip was intended to be of short duration; indeed, there was not even any question of his taking over the Havana office. What James really wanted was for a Rothschild to go to America.

But who? The debate on this question illuminates the fundamental problem which was to bedevil the Rothschilds’ American policy for decades to come: no one wanted to go there—witness James’s vain attempts to persuade his nephews to accept the mission. Anthony, he claimed, had “long indicated that he would like to go to America [and] would gladly make use of this opportunity:”

For reasons which are unclear, this proposal was abandoned or rejected, possibly because of the opposition of Anthony’s mother. However, a month later—and a week and a half after Belmont had reached New York—James tried again. “Don’t you think,” he asked his nephews somewhat disingenuously, “that Belmont should go from America to Havana, for our interests in America are no longer so substantial? I don’t have anyone here and if you so want then I will go to America and Belmont can then go to Havana for the trip to America is no great deal. It is child’s play.” If this was intended to throw down the gauntlet to his nephews, it very nearly worked, to judge by James’s next letter:

The Rothschilds never satisfactorily answered these questions. Despite James’s reassurances that they would only be expected to stay for “three to six months,” neither Nat, Anthony or Mayer went to New York; and, although James’s sons Alphonse and Salomon visited the US some years later, they did not stay. The fundamental problem was that while it was James who had the enthusiasm for America, his nephews conducted most of the family’s business with the US, because Britain was always a bigger customer for American cotton and tobacco than France. James therefore had to defer to his nephews’ greater familiarity with the American market, even when he felt that they were passing up a crucial opportunity. As he frequently admitted: “America is more suited to England than it is to France.” (This imbalance between the London and Paris houses also gave rise to persistent friction as to the distribution of profits—and losses.)

As a result, the decisions which determined the nature of their representation in America for the rest of the century were taken by the man on the spot. Despite James’s repeated orders, Belmont did not go to Cuba. Instead, and to the intense but impotent irritation of his masters, he acquired an office at 78 Wall Street and announced the establishment of August Belmont & Co., with the plan of acting as the Rothschild agent there. “We received a letter from Belmont,” reported a furious James, “but I didn’t have the patience to read it”:

Nevertheless, James found he had little option but to reply, and a regular corre pondence commenced in September. When Belmont requested the right to discount bills (presumably in the Rothschild name), James was unable to refuse: “He writes every day that he wants to get the authority to discount which I well understand and the man is quite right. If one says ‘A’ then one must also say ‘B’ [a favourite James turn of phrase], though it is always dangerous to do so.” The following month it was agreed to increase his salary to £500, paid jointly by the London and Paris houses. By the 1840s he had a credit facility with the London house of £10,000. When Belmont wished to increase that limit, he threatened to start doing business for other houses.

The Rothschilds never quite forgave Belmont for taking such a profoundly important initiative, and never ceased to regard him as unreliable (feelings not alleviated by his involvement in a duel in 1841 and his conversion, evidently for the sake of social advancement, to Christianity). “We received letters today from Belmont,” wrote Anthony in August 1838, “which frighten us tremendously. How can the man be so mad as to think of doing the things that he is doing . . . I should not mind going out myself . . . if you think my presence there can be of use I will go for I then can write to Anselm to come here . . . I don’t think that any person is justified in doing what he has been without asking.” Two months later James accused Belmont of playing the London and Paris houses off against one another, giving his favour “today . . . to the English House and tomorrow to the Parisian House.” “I think Belmont is a great ass,” declared Nat in 1840. “He treats business so lightly that I do not like him at all as an agent.” He was “too great a cripple to leave New York & we have been so uniformly unlucky in everything he has had the management of.” James agreed: “I don’t have too much confidence in that man Belmont,” he commented, “because . . . he deals only for himself.” There were fitful efforts to replace him, or at least to control him better by sending an additional agent, as Anselm suggested (following reports that Belmont was evincing suicidal tendencies). In 1839 Lionel Davidson was despatched to New York, presumably for this purpose. “He seems a clever intelligent fellow,” commented Nat, implying a favourable comparison with Belmont, “and will do very well if you can manage to keep him down”—a phrase which tells us much about the Rothschilds’ attitude towards their agents. However, it made more sense to send him on to Mexico and the American West, while Hanau, who was sent in 1843, went to New Orleans. Belmont remained ensconced in New York, and was soon embarked on a political career which would take him to the commanding heights of the Democrat Party.

The debate over the American agency thus exposed a fundamental conflict of interests between the London and Paris houses, and revealed the limits of James’s power over his nephews. There is little doubt as to who was right: in refusing to establish a Rothschild house in New York, the English Rothschilds made what must have been the single greatest strategic error in the bank’s history. On the other hand, it is easy to see why they hesitated. For even the limited involvement in the American market symbolised by Belmont’s grudgingly conceded role as agent very soon cost the Rothschilds dear. And it is doubtful whether Anthony or Nat, in Belmont’s place, would have been able to avoid the disaster which lay ahead.

Even before Belmont arrived in New York, an irresistibly tempting opportunity had arisen for the Rothschilds to step into another niche vacated by Alexander Baring. The Bank of the United States had employed Barings as its European agent; but the relationship broke down in 1836-7, and the Rothschilds hurried to offer their services. Biddle had ambitious-sounding plans, including “a business with a guarantee of two million pounds sterling to provide advances for goods and stocks,” and a scheme for a quasi-monopoly on cotton exports. It seemed to James like a financial marriage made in heaven: these were, he enthused, “the wealthiest people in America” and “no less solid” than the Banque de France. At once, he began to imagine “flooding the American market” with his Spanish mercury “so that in six months time we will be masters of the market.”

At first the partnership with the BUS went well. The Rothschilds found themselves on the receiving end of large quantities of American state bonds from not only New York but also newer states like Indiana, Alabama, Missouri and even Michigan, which had only just been admitted into the Union, as well as shares in a number of new banks and a canal company. However, by September 1839 James and his nephews were beginning to discern why Barings had parted company with BUS when they had. Without its charter and its government business, the BUS was vulnerable; when the American cotton crop proved poor, it began to look seriously over-extended, its capital tied up in all kinds of long-term ventures, its managers reliant on the sale of high-yield obligations, post notes (promissory notes due in six months time) and foreign drafts. In order to secure money from the Rothschilds, the BUS’s agent in Europe, Samuel Jaudon, warned that he might be unable to meet his acceptances. Uncomfortably aware that their advances to him now totalled some £300,000—“upon stock which it would be most difficult to dispose of”—James and his nephews had little option but to bail Jaudon out. Reluctantly, they agreed to take over BUS drafts on Hottinguer worth 5.5 million francs (£220,000), though it was hoped to pass the buck to other investors by selling BUS debentures. James raised objections to this, arguing that the Rothschilds’ reputation would suffer if the BUS were to collapse “You make yourselves uneasy about nothing at all,” Lionel assured him:

This revealed a streak of ruthlessness of which, one suspects, his father would have approved. Moreover, as Nat pointed out, it had been James who had originally urged their involvement with the BUS:

Yet James’s pessimism was justified; for in October 1839 the BUS suspended payments and in 1841 finally collapsed. Its failure coincided with a rash of defaults by states, including a number whose bonds Jaudon had handed over as securities. In the wake of this fiasco, which saddled the London and Paris houses with a large quantity of thoroughly bad debts, the Rothschilds were content to hand back to Barings the position of bankers to the federal government: “You may tell your government,” James was reported as telling representatives of the US Treasury, “that you have seen the man who is at the head of the finances of Europe, and that he has told you that you cannot borrow a dollar, not a dollar.” The experience with the BUS had made James wish he had had “never become involved with [America].” In future, he concluded, unless the federal government were “prepared to guarantee all the States and make the payments with us” and to set up an officially backed central bank, he would keep his distance. This was a view which his nephews more than endorsed. In 1842 Anthony wrote to his brothers, urging them to sell “New Yorks & all the [American] stocks which pay an interest”:

The trouble began at the time of the brothers’ fateful Frankfurt summit in 1836. From the outset of the American crisis, James and the ailing Nathan urged Nat “not to let the people drive you round the bend and convince you not to send any gold [just] because this might meet with the disapproval of the Governor. You should always take into consideration that whatever you don’t do, others will not hesitate to do. Was Baring too timid to take some gold out for America?” “Send Gold as long as it answers,” echoed Lionel, “and [do] not bother yourself with the Governor of the Bank but pay him off.” This was an allusion to the fact that the London house owed the Bank at least £300,000, money borrowed in December 1835 and not due for repayment until October, as well as a short-term advance of £120,000 negotiated on June 1 “in consequence of a pressure on the Money Market.” On returning to Paris, James promptly committed himself to supplying the Banque de France with silver, while expressing scathing criticism of the Governor in London for allowing his own gold reserve to sink so low. It was not until the end of November that he acted to send gold to London. Not long after that he was alarmed by a rumour to the effect that

What he meant, of course, was that it would be a great misfortune for France if England began to compete with her for silver as a reserve metal: when the Bank did start buying silver in the summer of 1837, James immediately threatened to stop sending gold to London. On the other hand, he, James, accused the Bank of indecision when his offers of gold (at a price) were not immediately accepted: the Governor, he complained, “changed his mind from day to day and tomorrow he may think differently again.” Worse, he seemed to be ignoring James’s advice “that under no circumstances should he allow any American House to collapse.” Timothy Curtis, the former Governor of the Bank, wrote an emollient letter, assuring James of his “sincere wish to co-operate with your nephews in everything relating to the foreign exchange” and “to act as nearly we can in union with your House,” but firmly insisting that “it is your interest as well as ours that the Bank should possess a good portion of silver.” The damage was done: by March the following year James was convinced that “your English Bank is out to destroy our business.” Nor was the fence mended by a loan by the Bank to the London house of £200,000 in silver dollars the following December.

The culmination of this feud came in 1839, when the Bank of England turned to the Banque de France for assistance in replenishing its reserve, now reduced by the American crisis to £3.7 million. When he heard that the Governor of the Banque, comte d’Argout, was offering assistance, James was initially wholly opposed:

Did the Rothschilds really believe that the Bank of England might be about to suspend payments? It seems unlikely. What was really at issue was whether the Banque and Bank between them could resolve a monetary crisis without recourse to Rothschilds. However, if James thought a Rothschild boycott would suffice to undermine the agreement reached between Curtis and d’Argout, he was badly mistaken. Realising that the deal was unstoppable and that the profits would be substantial, he was forced to execute an abrupt volte-face, now resolving “to go into the business with the Bank as far as I possibly can.” He had left it too late, and the business was entrusted to Barings and a consortium of Paris houses.⁵ This was the last straw for James:

This, however, was bluster. Although James talked of spoiling the market for the bills on London Baring would need to buy, he knew full well that, with the Bank of England as Baring’s client, “everyone will therefore lick his backside to get the business.” There was no realistic way of starting a “war with the Bank, at least not for the time being,” because, as he had to admit, “they are stronger than us.” All he could do was ruefully assess what had gone wrong and fantasise about revenge:

In truth, the row had been allowed to grow out of all proportion: as Nat sensibly observed in its aftermath, “I think the only advantage of a [central] bank is in being able to get out money whenever you want it & that it is folly to care about what people say.” In his determination to get the better of Baring and to establish the Rothschilds in a pre-eminent position in the United States, James had lost sight of that. The net result of his enthusiasm for America—an enthusiasm his nephews had never wholly shared—had been a large amount of bad debts from the defunct Bank of the United States; and a comparable quantity of bad feeling at the Bank of England.