Chapter 29: The Rothschilds
The Industrial Revolution in Great Britain made the surprising success story of the Rothchilds possible. And the Rothschilds, in turn, made the Industrial Revolution possible across the rest of Europe. In this episode, we’ll cover:
Mayer Amschel Rothschild’s business in the Frankfurt ghetto
Nathan Rothschild’s activities in industrial Manchester
The big gamble the Rothschilds made against Napoleon
How Salomon and James Rothschilds brought the railroads and other industry to the Continent
Sources for this episode include:
Dunham, Arthur L. “How the First French Railways Were Planned.” The Journal of Economic History, vol. 1, no. 1, 1941, pp. 12–25.
Ferguson, Niall. The House of Rothschild: Money’s Prophets. Volume I (1798-1848). Penguin Books. 1999.
Weightman, Gavin. The Industrial Revolutionaries: The Making of the Modern World, 1776-1914. Grove Press. 2007.
Reminder: Footnotes for the transcript are available to Patreon supporters. To become one, go to Patreon.com/indrevpod to sign up.
Throughout the Middle Ages, Europe was fractured across a myriad of lands controlled by warriors bound by vassalage to different chiefs and monarchs. But in that chaotic environment, the people of Europe remained united – in spirit, as it was believed – by the power of Christendom. The Roman Catholic Church connected the many peoples of the Continent as the body of Christ in the world.
But from the earliest days, there was a minority group among them who did not fit into that body. The Jews. As outsiders to that Church community, they faced every imaginable discrimination – legal and social. They were often forced to wear clothing that made them stand out as Jews and, subsequently, get ordered around by non-Jews and generally harassed.
In the towns where they lived, they would be secluded to a particular neighborhood – or “suburb” as it was called back then. But we know these neighborhoods by the Italian word for “suburbs” – “borghettos” – or “ghettos” for short.
Medieval Jews were allowed to practice business and, as merchants, they were not subject to all of the same laws that Christians were. Most famously, they were exempt from usury laws – they were allowed to charge interest when lending money. As a result, they were protected by some rulers who depended on Jewish merchants for loans. Yet, contrary to popular opinion, this did not allow them to grow exceedingly rich, as Jews were also subject to way, way higher taxes in return for that protection.
This was the case in the free city of Frankfurt in the Holy Roman Empire. Standing smack dab in the middle of the Continent’s crossroads, Frankfurt evolved as a center of trade during the transition to modernity. Coinage from across the Empire wound up there, and so there was a flourishing money-changing and banking sector. Jewish merchants were among the many merchants of the city who participated in this financial market.
A couple times during the Middle Ages, Frankfurt expelled its Jewish population, only to let them back in again in the mid-15th Century. Even after Frankfurt adopted Lutheranism as the Protestant Reformation divided Christian Europe in the 16th Century, the Jews there remained outsiders within the city.
They were confined to a one-street ghetto called the Judenstrasse (literally, “Jewish Street”) which was meant for 500 residents but housed at least 3,000. To leave these cramped conditions required an expensive permit, and residents were subject to a poll tax, costing them double the taxes paid by local Christians. The entrance to the Judenstrasse included an official mural commissioned by the city of Frankfurt. It portrayed several Jews suckling from the teat of a sow, while another eats the excrement coming out of the sow’s posterior. None other than Satan watches the act approvingly.
Born into this humiliating and hideously anti-Semitic setting was the Rothschild family. They were fairly typical Jewish merchants in the 1500s through the 1700s. And this family may have been little more than an unremarkable footnote in an obscure academic history of Frankfurt had it not been for the Age of Revolution and Europe’s transition into economic modernity.
The Industrial Revolution in Great Britain made the surprising success story of the Rothchilds possible. And the Rothschilds, in turn, made the Industrial Revolution possible across the rest of Europe.
This is how it happened.
This is the Industrial Revolutions
Chapter 29: The Rothschilds
Okay, a few administrative notes before we begin. First of all, my apologies for the delay of this episode. I have been a little side-tracked lately getting some bonus episodes recorded. Those will be coming out in a few weeks.
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Finally, new listener John has been catching up on old episodes and sent some me some corrections that I want to share with you.
First of all, for draughtsmen I was saying “droughts-man” rather than “drafts-man” – my bad. The spelling mixed me up, but I guess it makes sense if you think about the spelling of draught beer. I also mispronounced Dr. Edward Jenner’s hometown. In the U.S. we pronounce this word as “Berk-lee” (like the University of California-Berkeley) but apparently in England it’s pronounced “Bark-lee”. I didn’t know that.
The other pronunciation corrections he sent me are due to my accent. I’m from the Midwest in the United States and my Midwestern accent is kind of strong, thus my pronunciations are a little lazy.
For example, I do not say “lay-say fair eee-conomics” I say “lah-sai-fair eh-conomics” (because that’s how we say it where I’m from). When I say “Glasgow” apparently it sounds like I’m saying “glas-gow” rather than the more accurate “glas-go”. When I say “Birmingham” the “ham” is more pronounced than I realized. A Brit would pronounce it more like “Birming-um”.
And then there is the Scottish capital. I’ve been getting this from a few people, in fact. Now, I’m not Scottish and I have a tendency to butcher a lot of Scottish words and names. And “Edinburgh” is one of them. I promise I am not trying to say “Edin-borough” it just kind of comes out that way. It’s more like “Edin-bruh”. My apologies to my British listeners. I will work harder to pronounce these places more like a native going forward.
Thank you, John, for sending those notes. I appreciate it.
Mayer Amschel Rothschild was born in the Frankfurt Judenstrasse around 1743 or 1744. Very little is known about his family, but it seems they had lived in Frankfurt since at least the 1500s. They were merchants who dealt primarily with cloths. Other than that, at some point they lived in a house decorated with a red shield – or “rotschild” in German – which is how they came to be known by the Anglicized name, Rothschild.
His father was apparently a man of great piety, deeply committed to their Jewish faith. He sent young Mayer Amschel to Jewish schools to study the Talmud.
But when he was 12-years-old, both of Mayer Amschel’s parents died as some sort of epidemic swept through Frankfurt. At that point, his new guardians sent him off to Hanover to study business as an apprentice to one of his father’s contacts there – Wolf Jakob Oppenheim, a lender to the local royal court.
This experience with court life gave the teenage Mayer Amschel a new path. He became dealer of rare coins and medals, a popular interest with the aristocracy. He then became a court agent to the Hereditary Prince of Hesse-Kassel and got married in 1770. With that marriage came a dowry of 2,400 gulden, which was put to use in his growing business, expanding into other antiques. He published a catalog of such goods for his clients.
Over the next 20 years the business slowly grew and, by 1790, the prince himself had become a regular customer. The profits from this antique business would serve as the capital to begin a lending practice.
During these years, he and his wife had a total of 19 children (10 of whom survived into adulthood), including five sons who were brought into the family business. They all lived together in a house which, while large for the Judenstrasse, was incredibly cramped by the standards to which the boys would later become accustomed.
Slowly, Mayer Amschel got into banking during the 1790s, lending small amounts of money here and there. Between that and the success of his business selling medals, his wealth nearly quadrupled in the mid-1790s. Suddenly, he was one of the richest men in the Frankfurt Judenstrasse by the turn of the century, with his credit spread across Germany and even cities as far west as Amsterdam and London, in the form of various government bonds and business loans. Depositors we’re putting hundreds of thousands of gulden into his “bank”.
In fact, the business grew so fast that Mayer Amschel was unable to properly keep track of it. His bookkeeping remained primitive and he had sacks of money lying around on the floor at any given time, with hardly any security.
Like many other German businessmen of this time, Mayer Amschel saw a uniquely profitable opportunity in the onset of the First Industrial Revolution. With the mass production of cotton goods in Britain came lower prices for cloths in Europe, and businesses like his made money by financing the importation of textiles from Britain.
By the turn of the century, several German businesses were sending employees to Manchester to live and work as export agents. And so, Mayer Amschel would send his third son, Nathan Mayer Rothschild, to Manchester by 1799.
At first, Nathan was exporting cloths at the direction of his father in Frankfurt, but gradually he came to trade on his own account too. Like his father, he was incredibly disorganized, sending shipments off to the Continent without proper record keeping.
Where he succeeded though was in seeing the many opportunities of profit to be found in the Industrial Revolution. Nathan not only exported finished goods to the Continent, he also became a supplier of dyes and raw materials to the textile manufacturers. He was an excellent bargainer, and he often boasted to his father (and anyone else willing to listen) that he was one of the lowest-cost middle men around. As he told one customer, “if you will do any business with me in the future, you may depend that I shall send you goods as cheap as any person in the whole world.” By 1803 he had import customers all over Western Europe and even one as far as Moscow.
Nathan also diversified a bit, exporting “colonial goods” to the Continent after they were imported to the UK from around its empire. All the while, he dealt with London bankers, constantly shopping around for the best terms for loans. As he did, he gradually started transforming from a merchant to a merchant banker, as he passed his own lending terms onto his British Industrial customers and Continental import customers. This transition to finance would become important for Nathan and his family as the Napoleonic Wars created challenges for international trade – at certain times, outright embargoes.
The Rothschilds kept their import-export business alive, though, by smuggling goods from Britain to the Continent. In October 1810, a raid in occupied-Frankfurt (by the French authorities) found 60,000 gulden of contraband held by Mayer Amschel, sent by Nathan in the UK. It was confiscated and Mayer Amschel had to pay a penalty. At that point, the family’s import-export business started winding down, leading to a greater concentration of their business in the financial sector.
This was just as well, as finance was what Nathan really wanted to be doing anyway. By this point, he was already attracting investors who made “deposits” with him, and several customers to whom he made loans. By 1811, he had abandoned the textiles trade entirely, and re-located from Manchester to London, where he began a financial practice in the City.
Mayer Amschel passed away in 1812. But before he did, he re-established his business as a partnership, between himself and his three adult sons in Frankfurt. But he also made it clear that he intended all five sons to continue working together after his death. According to legend, he explained that a single arrow could be broken, snapped in half – but a bundle of five arrows could not be so easily broken. And after he did die, his sons spread their partnership across Europe.
The oldest, Amschel Mayer, remained in Frankfurt. The second son, Salomon, re-located to Vienna. Nathan remained in London. The fourth son, Carl, moved to Naples. And the youngest, James, would establish one of the family’s most successful branches in Paris. Together, the five Rothschild sons created a pan-European financial network – a precursor to a modern multinational bank. They pooled their resources and created a scheme to share the profits with each other.
But they were not yet the famously wealthy family we know them as today. That fortune was made possible thanks to the downfall of Napoleon.
According to legend, the Rothschilds made their fortune through duplicity. Nathan received an early warning that Napoleon had lost the Battle of Waterloo. He went to the London Stock Exchange and told everyone that Napoleon had won, creating a panic in the stock market. He then bought up as much stock as he could at bargain prices. Then everyone realized Napoleon had won, the stock values went back to normal, and the Rothschilds came out the financial victors.
This legend is false, though. The fortune was neither the result of duplicity (at least not this kind) nor a single battle. It was the result of the Rothschilds taking great risks at a time of international crisis.
From 1793 to 1815, the British spent over £800 million fighting the French. Even with new taxes, more than three quarters of that spending had to be paid for with loans. The Bank of England had to let the pound float because of the limited availability of gold and inflation soared. The City banks were still reeling from financial shocks: The Crisis of 1810, caused by the Bank of England’s attempt to reign in the pound; and the collapse of the Amsterdam market, following Napoleon’s annexation of the Netherlands.
As a result, the traditional credit sources the government relied on were running dry. This made things difficult for the Duke of Wellington – the British general taking the fight to Napoleon – who struggled to feed his army and keep it supplied for battle.
Into this financial vacuum stepped Nathan Rothschild.
Nathan was all too happy to take advantage of the situation. For years now, he had been hoping to challenge the dominant positions of the established London banks. This was his opportunity.
So, when a friend of his – John Charles Herries –was appointed Commissary-in-Chief in October 1811, Nathan had a man on the inside to help. Herries secured the Rothschilds as lenders to the Wellington campaign.
Nathan’s experience as a smuggler also helped. He bought discounted gold from the East India Company and had his youngest brother, James, smuggle it to France and deposit with Paris financiers. The banknotes the Rothschilds received in return would be transferred to Wellington as he moved his army through French-occupied Spain. And for these transfers, the Rothschilds would, of course, earn a commission.
The Rothschilds were gambling on British success and they went all-in against Napoleon. It paid off well. And since Nathan was the one in London, he effectively became the leader among his brothers – the “general” as the others called him.
And with his brothers moving across Europe, Nathan effectively had agents across the Continent to convert currencies in the financing of the war effort. They pulled it off by bribing officials in foreign governments, particularly the Russian government. This was of course beneficial to them, as they pocketed huge profits from favorable exchange rates, but also to the British government. As the Prime Minister, Lord Liverpool, remarked in 1815, Rothschild was “a very useful friend.” “I do not know what we should have done without him last year.” Napoleon was defeated.
But then Napoleon escaped Elba and, for about a hundred days, went on a warpath to recapture his empire. The Rothschilds resumed operations, gathering as much currency as they could to supply Wellington as the climactic Battle at Waterloo approached.
Contrary to popular opinion, Waterloo was by no means decisively positive for the Rothschilds. So chaotic were Napoleon’s hundred days that the five brothers couldn’t keep great track of their finances. They gathered way more money than was necessary and the relatively quick end to Napoleon's hundred days nearly ruined the family. But thanks to a shoring up of their capital in the aftermath, with wise stock market investments and the purchase of government debt, they managed to double their holdings between 1815 and 1816, and then nearly doubled them again by 1817.
In 1818, the Rothschilds made a loan to the Prussian government, which had the effect of creating an international bond market with London at the center. And in the aftermath of the Crisis of 1825, in which their holdings were hit not nearly as hard as other investors, they more or less took the role of a European Central Bank, advising governments and helping coordinate their monetary policies.
By 1828, their collective wealth was more than 8 times the principal. This was in large part due to their constant reinvestment. Unlike their rivals, such as the Barings brothers, who routinely paid dividends to their partners, the Rothschilds were committed to the constant accumulation of capital. Between 1818 and 1832, Nathan Rothschild’s branch held approximately 38% of all European public sector debt. James Rothschild would soon hold a near monopoly on French public debt.
While government bonds were their first love, their business was still somewhat diversified. They also invested quite a bit in commercial bonds. And Nathan, in particular, profited from offering bills of exchange to British manufacturers and merchants at lower rates than his competitors, making up for it by his ability to take advantage of exchange rates, thanks to his brothers’ presences across Europe.
Among the commodities they specialized in for such trade was cotton (the key crop of the Industrial Revolution), tobacco, sugar, copper, and mercury. They procured mercury mining monopolies in Spain and the Balkans. They also dabbled a bit in iron, wool, and wine. They built a strong insurance business to accompany the banking. Nathan even worked somewhat successfully to break the monopoly held by the Lloyds cartel.
But even though he got his start in textiles and working with manufacturers, Nathan had little to no interest in industrial pursuits. Like many in the City of London, he thought he was above all that. And save for an aborted mine in North Wales, he never invested in any industrial enterprises. Once he made the transition from manufacturing and trade to high finance, he never looked back.
So when Railway Mania took off in Britain, Nathan ignored it. This greatly disappointed both his wife and his brother, James. When James visited northern England in 1843, and saw the line between Manchester and Liverpool, he said, “had I come here earlier we would most certainly have built this railway. It must yield enormous sums.”
Now, in Nathan’s defense, the railways were selling stock to the public at large, putting bankers in the role of intermediaries. That wasn’t a huge part to play. As such, Nathan might not have seen much need for said investments, as he wouldn’t be able to capture profits from multiple points like he did with the international bond market.
But on the Continent, his brothers would use the immense capital they built up from Nathan’s early triumphs to build these futuristic railroads.
Salomon Rothschild was the first of the brothers to get involved in the railways. The 1830 project came at the suggestion of a Vienna Polytechnic Institute professor, Franz Xavier Riepel, who believed the railroads would add benefit to mining operations in the Hapsburg Empire. Yet the government, led by the reactionary-conservative Chancellor, Klemens von Metternich, was weary of this.
Metternich feared that the breakings-down of internal customs barriers, along with the development of the railroads, would bring the German peoples closer together – which not only disrupted the traditional social order of feudal Europe, but could also delineate Austria’s dominance over other German territories.
But eventually, Salomon and Professor Riepel convinced the government to approve the creation of a joint stock corporation, charged with constructing a line between Vienna and Bochnia. This railway would be named after the emperor, to appeal to his vanity and keep the project in his favor. Metternich and the imperial treasurer would be made board members of the company.
The railroad ended up being 67% over budget, but the stock price of the company shot up high enough during the initial public offering that it all worked out. By 1839, the railroad was transporting freight and passengers. Business picked up slower than expected, but by 1841, as many as 10,000 people were regularly traveling between Vienna and its suburbs. By 1845, the stock price had more than doubled.
To pull this off, Salomon conceived the industrialization of the Hapsburg Empire. He wanted the raw materials – particularly the iron rails – to be produced in Austria. He set up an ironworks on land leased by the Archbishop of Olmütz, in partnership with another banker. It became the first ironworks in the Hapsburg Empire to use the process of puddling, made possible by Henry Cort nearly a half century earlier in Britain. (Shout out Chapter 6!)
But while the Continental Rothschilds appreciated the many benefits that railroads would bring to Europe, it was the short-term financial returns they’d yield that attracted their investments—namely, by issuing railway shares to the public at a time when governments were issuing fewer bonds. In some cases, it was by financing government bonds that were specifically used for railroad construction. Belgium and some states in southern Germany, for example, would issue bonds for their railroads and the Rothschilds would underwrite these loans.
In other states (like France), meanwhile, the government would license private companies to build the rail lines and the Rothschilds would underwrite the issuing of shares in those railways. As the family (particularly James in Paris and Salomon in Vienna) got more and more involved in the financing of railroads, they naturally became more and more caught up in the planning of the railroads too — getting state approval, finding land, projecting passenger traffic, etc.
In France, another Jewish banker by the name of Émile Péreire was working on the capitalizing railroads in his native country, and to do it he courted James Rothschild. The Péreires and Rothschilds were rival families which had very different worldviews. But they understood the gains to be made in railways and they understood it would require their cooperation, because building these lines in France would be very expensive. In fact, the enterprise ended up costing 11 million franc, more than twice what was expected. And the volume of traffic fluctuated much more than they thought it would. But it was completed ahead of schedule and the Péreires managed to get operating costs down to 44% of gross receipts.
It was this success that convinced James that the family should go big into railroads. As he wrote to his nephew in 1836, “I am certain that in twenty years’ time...people will only travel by train. I am in love with the railway.”
After France’s July Revolution of 1830 (in which a liberal monarchy replaced a conservative monarchy) the new regime brought in a guy named Emile Legrand and made him Director-General of French transport. Recognizing the future importance of railways, he pushed through the adoption of “Legrand’s Law”, which gave the government the power to purchase rights of way and construct rail lines and other infrastructure – and then lease them to railway companies.
But this only slowed down rail development. You see, the bankers wanted their rail companies to have monopolies on the lines. And the government couldn’t raise the funds to buy the land and build the infrastructure without the bankers’ selling French bonds. Nobody was better at heaping this pressure on the government than the Rothschilds.
Finally, the French government caved and gave James Rothschild a near-monopoly to build an intentional railroad across Northern France and Belgium — what James called “the Nord.” Additionally, James invested in lines from Paris to Lyon, Lyon to Avignon, Paris to Strasbourg, and Bordeaux to Cette.
By the end of the First Industrial Revolution, Rothschild capital accounted for nearly 40% of the total capital in Europe’s railroads — making them by far the biggest players in their construction and operation. In the process, they also brought considerable indirect industrial development to the Continent – particularly in metalworks and engineering.
And because of the impact railroads would have on the lives of ordinary people, this work of theirs brought greater attention to the Rothschilds family — attention they were trying to avoid. Especially when things with the railroads went wrong, as was the case with the Nord line soon after it opened. Part of the railroad ran along a marshy lake and the tracks stood on top of a muddy embankment. On July 8th, 1846, a train running north on the line was derailed when the tracks slipped. Thirteen carriages came off the tracks and three sank in the lake. Upwards of 40 people died.
Rightfully, people questioned the safety precautions taken by the Rothschilds’ company. But when they did, they slipped into the visceral anti-Semitism typical of the age. And, in fact, it is during the 19th Century – because of bankers like the Rothschilds – that anti-Semitism transitioned from a mostly religious bigotry to including the shameful associations with exploitative capitalism, finance, and international conspiracies. In time, this would lead into the very worst atrocities against the Jewish people in history — the Russian pogroms and the Holocaust.
But that this Jewish family could rise from the ghetto to a position of great riches and power is a testament to the world the Industrial Revolution made possible. And before the five brothers passed away, they made sure to use their wealth to secure a great legacy for their family.
There’s this story about Kaiser Wilhelm I visiting the Château de Ferrières and saying, “No kings could afford this! It could only belong to a Rothschild.” He was right – it did.
As Niall Ferguson put it:
“Strictly in terms of their combined capital, the Rothschilds were in a league of their own until, at the earliest, the 1880s. The 20th Century has no equivalent: not even the biggest of today’s international banking corporations enjoys the relative supremacy enjoyed by the Rothschilds in their heyday – just as no individual today owns as large a share of the world’s wealth as Nathan and James as individuals owned in the period from the mid-1820s until the 1860s.”
As the financiers of governments – from Europe to the Americas – the Rothschilds in many ways had power over the rulers themselves. They always kept a close eye on politics and tried to stay in the center of political life so as to have an edge over their competitors, in terms of knowing when to buy or sell government bonds. It’s also why they worked to increase the speed of information from their agents to them and vice versa.
They also offered a range of “personal banking services” to a select group of customers—usually Royal and aristocratic individuals whom they wished to cultivate—from large personal loans (as in the case of Metternich) to a first-class private postal service (as in the case of Queen Victoria). They also had massive industrial holdings — the railroads across the Continent they financed and many, many mines across the world, producing precious metals, mercury, and jewels.
The way they cultivated politicians and influenced politics in the 19th Century was a major reason for their success. It also proved the many socialist voices of the age correct in asserting the power of finance capitalism over the state – especially the autocratic regimes of the Holy Alliance.
As early as 1816, the Austrian Emperor, Francis, elevated the Rothschilds into the nobility, and later granted them the title of Barons. Salomon could now go by Salomon von Rothschild. James would go by James de Rothschild. They had a coat of arms drawn up, bought enormous, beautiful manors, and invested in wine, jewelry, and fine art.
As new generations of Rothschilds took over, their name became associated with luxury. Much like the monarchs of Europe, cousins from one country would go to marry their cousins in another, keeping the wealth inside the family as much as possible. They also became among the first modern philanthropists. Thanks to their funding of scientific research, a huge number of plant and animal species are named after them.
Despite their rise into the traditional European aristocracy, they retained their Jewish identity. And even though this attracted a new form of anti-Semitism, the Rothschilds also used their new power to push for Jewish emancipation in kingdoms across Europe.
The Rothschild family shouldn’t go without criticism though. They financed and supported some of the most egregious colonial activities of the 19th Century – from Cecil Rhodes and the De Beers Company to the horrific Belgian expansion in the Congo – and reinforced the power of reactionary regimes that violently crushed democratic movements. Their immense riches were often the result of profits made through the oppression, torture, and exploitation of other peoples across the pre-industrialized world. And they didn’t really care.
And yet, their capitalist intuition helped make so much of the modern world possible – starting with the development of the European railroads. But before they could finance the development of rail infrastructure, someone was going to need to come up with the technological innovations that made it possible. Someone was going to need to invent the locomotive – next week, on the Industrial Revolutions.
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