The writer is a top-rated historian and so the latter description ought not to come as a surprise. The fact that finance is fast entering the realm of ‘real’ historians is a telling sign. Once they wrote of battles. Now they are writing about the bond issues that financed the battles.
The thing about this book and its predecessor, Money’s Prophets is the manner in which they successfully destroy the current wisdom that our current moves towards globalization are somehow unique. The picture Ferguson draws of the 19th century – with the fantastically powerful Rothschilds moving money around – is stunningly similar (minus the internet) to our own. As we return to pure capitalism, we go full circle to the 19th century and the purest capitalists of them all, the Rothschilds.
In their 50 year heyday the Rothschilds acted like the IMF, policing the financial system. On page 345 the book describes the firm’s leverage over Brazil. When the Brazilians suspended payment o their existing bonds in 1898, the financiers from New Court – then the Rothschild HQ – stepped in. Writes Ferguson: "The new Funding Loan issued by Rothschilds was secured on the customs receipts and the government was compelled to to pursue a rigorous programme of retrenchment spelt out in a stern letter from New Court to President-Elect Campos-Salles, which was published in the Times for all to read." Almost reminds one of Camdessus standing over Suharto, grinning.
Also poignant is the description of the bail-out of Barings in 1890 which was almost identical in many respects to the LTCM fiasco. Between the Bank of England’s moral suasion and the Rothschilds good sense as policemen of the global financial system, a severe crisis was averted – again at the expense of moral hazard. It is for this reason that anyone who has any interest in the history of finance should have an interest in the Rothschilds.
The Rothschilds issued the first Eurobond in 1819 – for Prussia – and in real terms it was worth $7 billion. They also did the first ‘securitization’ deal in Spain in 1830. They were 30 times more powerful than Goldman Sachs is today and held sway versus belligerent monarchs representing the interests of stability – declining to issue bonds to those who might make trouble and thus depress yields on bonds via a general war.
The book should be interesting to an Asian audience for its relevance to family business (the rise, and the seemingly inevitable decline), the growth of nascent capital markets, and the striking elements of crony capitalism that the book identifies – not, however in Asia.
Particularly pertinent is the description of Gladstone’s purchase of Suez Canal-related loans that amounted to 37% of his entire portfolio prior to ordering the British takeover. He was in at 38 (par being 100) and saw his portfolio rise to 91 thanks to his occupation of Egypt by military force. As Ferguson points out: "When we speak of Victorian hypocrisy, Gladstone’s repressed attitude to sex often springs to mind; but it was his attitude to imperial finance which was truly hypocritical."
The other stunning thing about this book is to compare Britain’s role in capital formation with America’s today. Needless to say the NYSE, Nasdaq and the Yankee bond market are important. But, as Ferguson points out, Britain was responsible for "something like 44% of total foreign investment on the eve of the First World War." In fact, no nation in history has exported such as high proportion of its income as Britain between 1850 and 1910. The fact that it reduced its national debt simultaneous with capital export on this scale is a remarkable fact.
It was the Rothschilds who dominated this export of capital – only beaten by Barings in Russia and Hongkong Bank in China.
As Ferguson also points out, the greatest strategic failing of the Rothschilds was its failure to establish a family member in the United States. It sent Alphonse for a few years but he disliked the place and returned to Paris. This error would later cost the House of Rothschild dear.
Indeed the latter chapters – which deal with decline – are a sobering look at family businesses at their worst. One employee, George Tite, was once heard to make the memorable quip, "This, my boy, is the best club in London. We really ought to be a paying a subscription instead of receiving a salary." Another passed a job interview after the staff manager asked him to spell ‘parallel’ and ‘acknowledgement’.
This is financial history at its best. But if you are currently doing day trips to Seoul to pitch for mandates – this might be one to save for the next cyclical lull.
Reviewed by Steven Irvine
Rating: 4 stars
