THE LOANS OF POST-CIVIL WAR AUSTRIA
Rothschild loans bonds Austria Roubaix conference credit system 19th century
My survey on these loans from 1849 to 1855 is based on Austrian government files, from the financial authorities and the council of ministers and not on the Rothschild banks’ files, so they shed a light on the Rothschilds’ participation in Austrian loans from outside.
For the same reason I also have to refrain from introducing into the other activities that the Rothschild bank empire exercised for the Austrian government, as there are:
1. The payments that the Rothschild bank made for the Austrian government in Frankfort, for paying its representatives’ salaries and the contributions of Austria to the German Federation, such as expenses for building fortresses along the shores of the Rhine, troop transports with the Bavarian railways, or salaries for Austrian representatives in the German Federation’s parliament. Likewise the other Rothschild bank houses paid bills for the Austrian government in London and Paris, and even in such distant places as Rio de Janeiro (1) and Tripolis.(2)
2. The business of acquiring and selling foreign bills of exchange, or issuing bills of exchange themselves on their respective houses in other countries, or discounting other traders’ bills – all in order to stabilize the Austrian currency – with little success, by the way.
3. The special task of the Frankfort bank house to send bills of exchange to Milan where they were discounted. These transfers were probably made in order to enable the Austrian government to pay the troops stationed in Italy and their civil administration, as the Italian citizens refused to accept the notes emitted by the Austrian National Bank.
4. The tobacco imports from Cuba and the United States.
5. The acquisition and transfer of silver in coins or bars by the Paris bank in 1850 in order to stabilize the Austrian currency. This was done with the funds Austria received from Sardinia-Piedmont as a compensation for the war of 1848/49, which Sardinia lost. In the peace of Milan of 1849 it had to agree to the payment of compensation.
6. The other loans in which the Rothschilds participated, as the domestic loans of 1849 and 1852, the Lombardo-Venetian loan of 1850 or the forced loan of 1854.
7. The foundation of the Creditanstalt.
As a beginning I have to introduce you into the state of affairs that the Austrian credit system was facing after the insurrection of 1848-49 had been suppressed successfully – with the help of the Russian troops.
The Arnstein & Eskeles bank, though, despite being one of the main creditors of the Austrian state before 1848, had been on the verge of bankruptcy at the beginning of 1848, – for various reasons I cannot explain in this context. If this bank house had crashed, this would have had a fatal impact on several minor Viennese banks who were their debtors. It would have had affected negatively the National Bank who was their main creditor. It would have paralyzed the construction of a railway between Milan and Como that was an enterprise financed by them, and contributed to a certain confidence-building between the population of the Italian provinces towards the Austrian dominion.(3)
The situation between 1849 and 1855
Perhaps one should mention what the notion ”bank“ expressed in those days.
The banks of Austria were called ”bank houses“, ”bank and trade houses“, or ”exchange houses“, and were family enterprises. With the exception of the Greek Sina bank they were mostly Jewish. In former times there had been Swiss bankers in Vienna but they had vanished, partially already in the 18th century.
Those private bank houses were engaged in trade with raw materials, which in many cases had been the origin of their wealth and prosperity. They had been trading in cotton from the Balkans, in wool from Hungary, in tobacco, in salt and firewood, in iron ore and coal. During the first half of the 19th century many of them had engaged in transport enterprises, as the Danube Navigation Company, in the construction of railroads, artificial canals and bridges.
The Austrian government did not want to allow institutional banks based on share property in order not to endanger the monopoly of the National Bank, but surely to a certain extent also on pressure of the private banks. By the end of the civil war in 1849 there was only one bank based on shares in the whole monarchy, the Hungarian Commercial Bank in Budapest, founded by the Hungarian Jew Moritz Ullmann and secretly, but strongly supported by the Vienna Rothschild bank house, then under the leadership of Salomon Rothschild. It had been founded in 1842. Its performance was poor, for lack of investment possibilities.
Prague, though being a more important commercial centre than Budapest, never was granted a bank, despite various efforts by its merchant community.
The post-revolution era
At the moment of the suppression of the 1848-49 unrest the Austrian emperor Franz Joseph was very young and very new. The authorities evidently did everything to hide the true state of affairs from him and please him with optimistic reports about the recovery of the economy. So the files from the years from 1849 on have to be understood as only partially resembling the reality.
Salomon Rothschild had fled Vienna in disguise across the Danube, perhaps inspired by Metternich’s sinister prediction: ”If the devil comes to fetch me he will get you too!“(4) He didn’t return to Austria, at least not permanently. From this moment on the affairs of the Austrian Rothschild bank were led by his son Anselm, most probably upon instructions from Frankfort and other Rothschild banks. It is evident that in the 6 years after 1849 the initiative for all kinds of participation in all affairs concerning the Austrian Finance Ministry came from Frankfort, Paris or London and the Vienna bank house rather had the role of a mediator.
The Austrian bonds
Austria had a long tradition of bonds. The Austrian stock exchange market had been founded as a bond market in the 18th century, in order to have a fixed place for this trade, instead of the back rooms of restaurants, the so-called ”Winkelbörsen“. Only in the 30-ies of the 19th century other, not state-issued values started to appear in the Austrian market.
During the Vormärz the bankers had managed to persuade the predecessor of the Finance Ministry, the Hofkammer, to start issuing two main kinds of bonds: such ones on the name of the owner, and anonymous ones that were issued on the bearer. Originally only the ones on the name had been emitted, but this had inconveniences for the owner. Many clients for the placing of loans were members of the nobility who bought the bonds as a secure investment and stored them in a drawer. When they died complications arose for the heirs who often lived in different places. When the bonds were purchased by merchants, the ones issued on name could not be used in commercial transactions, as a means of payment.
Sometimes an owner of a bond turned to the Rothschild bank house in order to have one or more bonds changed, either from name to bearer, or from a large sum that was being split into separate bonds, or both. This was often the result of death and inheritance. Sometimes it was also the other way round, a bond formerly in the name of a parent was issued on a child’s name to make sure that upon marrying (in the case of girls) it would be part of the dowry, or growing up and studying, or entering state or military service, in the case of boys, there would be funds to cover the costs arising from this.
From the requests of the Rothschilds to have one or the other bond changed we get a certain insight into the geographical circulation of the Austrian bonds. For the citizens of Austria or the states of the German Federation no request was necessary, as they were considered nationals. We can only assume that they circulated there in abundance.
Another topic that frequently arose between the financial authorities and the bankers is the place of paying interest. This had to be decided before the issuing of the bonds as this was printed on the bonds and the coupons. Partially as a result of the Rothschilds’ international net of bank houses the normal domestic loans of Austria – the ”metalliques“ as they were called because the currency in which the interest was payable was linked to silver – were sold in Frankfort and Paris.
London doesn’t seem to have been a market for Austrian bonds. Either they had too strong competition there or the British government restricted the access of foreign values on the domestic market. In 1852 James Rothschild was praised and hailed by the Austrian financial authorities as he had created an „Austrian Fund“ which united the bonds of various elder and newer Austrian loans and with this mixed portfolio also attempted to enter the British value market.(6)
It was not the Rothschilds alone who had the privilege to circulate the Austrian loans in those two cities. Most probably there were one or two other bank houses in Paris that also had been commissioned for the payment of interest for those bonds dedicated to foreign markets. In Frankfort traditionally the Bethmann bank house was in charge of these payments and the Rothschild bank only after repeated requests was granted this right in 1850.(7)
Once in the possession of this assignment the Rothschilds immediately tried to monopolize it, but in vain. Various requests were made to remove the right of paying interest from Krieger (9) in Amsterdam, later from Bethmann and from another Frankfort bank house called Goldschmidt. These requests were rejected.
The conversion loan of 1849
The Dutch loans and the Amsterdam stock exchange
The main occupation of the Vienna and Frankfort Rothschild banks in 1849 was the handling of the elder Austrian loans on the stock market, or perhaps more correctly, bond market in Amsterdam.
The Amsterdam stock exchange had emerged in the 17th century as a share market for the East Indian Company. Later, during the 7-years-war from 1756-1763 in which almost all important powers of Europe were involved, Holland remained neutral, but traded with all the belligerent countries. This also had an effect on its stock exchange market where all the foreign bills of exchange with which the merchandise was paid, circulated.
Many of the value traders in Amsterdam were specialized in bonds. Between about 1810 and 1820 Austria emitted loans with the trade houses Goll and Osy in Amsterdam.
I haven’t been able to find out the exact year, nor the amount of the loans, neither how many of them were issued.
After 1820 the Austrian government resorted more to Vienna traders and the Rothschild banks to cover its financial needs. The reason for this change is not quite evident. Some books on Austrian financial history state that the international markets rejected the Austrian loans, some other place the initiative with the Austrian government which found enough powerful traders on its own territory and wasn’t dependent any more on the foreign creditors.
Anyhow, those elder loans originally negotiated by the Amsterdam bank houses Goll and Osy seem to have had an extremely long repayment period and were still circulating in abundance in 1849. A trade house in Amsterdam named Sichel was in charge of the handling of these old loans. Either the original trade houses had vanished or they had declined the further handling of the loan. The Frankfort Rothschild house acted as an intermediary between Sichel and the Austrian financial authorities. I assume that already before 1848 they had offered themselves to organize the further management of the Dutch debt and chose Sichel as one of their traditional partners in the Netherlands.
There must have been an entire department at the Austrian Finance Ministry, and perhaps at the Rothschild’s, too, in order to keep pace with the handling of these old loans. Sichel in Amsterdam effectuated the payment of interest. Each bond had a number, and coupons for each interest payment, also numbered. The bonds were in various series, from A to G or even further. Some of the series had also numbers. There was at least one loan emitted with Goll and Osy, and one with Goll alone. Whenever Sichel paid interest he sent the coupons to Vienna where they were crossed out in some register. Interest was paid every month, depending on the series. The money for the payment was sent to Sichel by Rothschild in Frankfort in the form of bills of exchange, payable in Amsterdam, Augsburg or Frankfort. Rothschild got the money spent for the acquisition of those bills refunded in Austrian currency from the Finance Ministry, also in monthly rates, in the form of an advance against receipt. Later in the month the Rothschild bank submitted a calculation about the exact payments made and submitted the next advance demand.
The loan of 1849-51
The Austrian Finance Ministry in 1849 decided to simplify the whole procedure by the means of a loan conversion. The Finance Minister Krauss argued this in a paper from June. The first reason he gives for a conversion should be a mere service for the creditors: As these loans had been issued in a time of relatively stable conditions on the money market the currency had not been determined and they were repaid in instable banknotes, thus suffering a loss up to 20% towards the Conventional or silver Florin.
This would have many positive effects, as Krauss further explained in his expertise:
1. It would raise the confidence in the Austrian credit system enormously.
2. The value of the coupons and then of the bonds, too, would rise, thus further strengthening the credit of Austria.
3. The state would avoid payment now und delay it until later.
4. The exchange rate of the Austrian currency and the Austrian bills of exchange would rise, which would have a xxpositive effect on the Austrian economy.(11)
Though the Minister doesn’t mention it I assume another desired effect would have been a certain unification of these older Austrian loans. Though originally the measure only aimed at the interest coupons later it evidently was extended to the bonds themselves.
The measure was agreed upon in the government and in July a circular letter was sent to all provinces in which the possibilities were named where people could exchange their old bonds against new ones. Outside Austria this could be done at the Rothschild bank house in Frankfort, at the Sichel bank in Amsterdam, and at the office of another Amsterdam trader, Krieger, who was also Austria’s consul in the Netherlands. The commission conceded to all those involved in the conversion was 1/8% of the sum of the exchanged bonds.(12)
What followed was an Austrian operetta. The authorities had only been worried in keeping the three collaborating banks’ commission low, but had failed, for example, to notify Krieger in due time about his involvement and his duties-to-be. After clients had been coming to his bank house he sent a letter to Vienna asking what this was all about. Only then was a contract made with him.
Both Sichel and Krieger drew the Finance Ministry’s attention to the fact that in Holland values were subject to taxation, and they were not allowed to circulate bonds on which this tax had not be paid. The Austrian government did everything to deny this fact, with the excuse that they were not issuing new bonds but only converting old ones.(15) (Later Austria introduced the same kind of tax itself, to the distress of the Rothschilds who tried everything to get an exemption – in vain, of course.)
In the last minute a trade house in Antwerp named Cahen was also commissioned to take part in the conversion.(18) It later turned out that it had been recommended by a rival of the Vienna Rothschild house, the Arnstein & Eskeles bank.
While the Austrian authorities did everything to evade their obligation to pay a tax for the obligations, they already started to be exchanged without tax, evidently by Cahen in Antwerp who had no idea about the tax problem, and were being effectuated on the Amsterdam values’ market, to the distress of the Dutch trade houses.(19)
In the course of the exchange of old bonds for new ones further confusion arose about the fact that the various agents in Holland and Belgium exchanged their amount of bonds when one of them was in danger of running out of them as the Vienna Finance Ministry was rather stingy in supplying them, and insisted that the transport and sending of the bonds had to be done from Vienna and at the Finance Ministry’s expense.(24) An attempt from the Frankfort Rothschild house to send some bonds by their own messengers (who regularly travelled between Frankfort and Vienna anyhow in the own Rothschild affairs) was rejected by the Finance Ministry for fear that extra costs might arise from accepting such a service.(25) Of course it would have been a lot more economical, reliable and quicker to use the Rothschilds transport system but the Finance Ministry was always eager not to pay too much to the bank houses for their services, not to become too dependent on them, and preferred to use more complicated and expensive transportation systems, as the postal services or own messengers.
The conversion of the old loans, as it seems, had their ups and downs. In January of 1850 the only banks where a significant number of old bonds and the respective interest were exchanged for new ones were the ones in Amsterdam,(27) despite the fact that in the meantime the interest for the new ones could also be collected in Frankfort.
The final stage of the conversion. Conclusions
While originally only Amsterdam and Frankfort had been determined as the places to pay interest and therefore to negotiate the conversion loan, in the course of time, as we have seen, also various traders in Brussels and Antwerp were entitled to manage the conversion. In January of 1851 James Rothschild also asked for the permission to participate and was granted it.(34) His request came after another Paris bank house had announced in a newspaper that it would convert old loans into new ones, with guaranteed currency. This bank house evidently had made a contract with the Austrian Finance Ministry through another bank house in Vienna, presumably one of the mentioned above.
In March of 1851 an employee of the Austrian Finance Ministry, together with an aid, was sent to Amsterdam to help with the final stage of the conversion. Evidently more people were anxious to convert their old bonds as the deadline for their exchange approached.
As a first conclusion from these data it can be said, for the part of the Austrian state:
1. The Austrian Finance Ministry tried everything to avoid spending, but by very inappropriate means which in the end proved more costly.
2. Because of the bad organisation of the conversion loan it spent a lot more than necessary, for transport, extra postage and perhaps fines for infringement of the Dutch laws.
This had been a typical feature of the Austrian loan policy for decades already, and for decades to be: by trying to save on small change while spending huge amounts in florins. The Austrian finance politicians main aim had always been to restrict private bank houses’ gains by rather strange measures while spending a huge amount of money without any consideration on bureaucracy, administrative costs, transport costs, and so on.
As for the Rothschild’s gain, first they surely earned some thousand florins only in the provision for the converted bonds. The indirect or long-term gain was far more valuable: they attracted new clients for the Austrian bonds and this way enlarged their own business.
First, their handling of the conversion gave a guarantee to the clients that the Austrian bonds were trustworthy – despite the fact that the state might have given signs of weakness. But the credit of the private traders-bankers had not suffered and became the base of the national credit and currency.
Second, the conversion attracted clients who on appearing with their old bonds – which certainly in most of the cases had been bought by their predecessors – could eventually be convinced to invest anew in bonds of more recent loans.
This is the text of a paper presented in a conference at Roubaix in November, 2006 "The Rothschilds and Eastern Europe"
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