Who else wants the secret of Rothschild?

In case you're wondering about the title, I've combined two of the suggestions from a site dedicated to showing bloggers 'formulas' for blog headlines. Admittedly the site is aimed at online marketers, and I have nothing to market apart from a few poorly constructed posts and armchair social observations. Nevertheless I've combined two of them ('who else wants..' and 'the secret of..') so the formula should be twice as powerful! (That’s how it works right?) I have also decided, in the wake of the flooding of articles relating to the financial crisis, to stop writing about the financial crisis (and the minutiae that accompanies it). After this post.

All this financial tumult has provided plenty of watercooler chatter, and everyone’s throwing around buzzwords of the day. These include (but are not limited to) the following: Recapitalisation, mark-to-market, credit default swap and negative equity. Recently we've also seen the re-emergence of a fancier term for 'pyramid scheme', the Ponzi scheme - which when thrown into watercooler chat also allows one to use the names Bernie Madoff and Charles Ponzi, the mail fraud maven whom the term is named after.

Additionally, those interested in sounding interesting seem to have suddenly become interested in the history of finance, similar to when they suddenly took an interest in previous presidential speeches during the Obama campaign (followed by e.g. 'That was Kennedy right?'). That's not to say that keeping in tune with topical conversation is a bad thing, but the speed at which false historical accounts spreads through word of mouth (office or elsewhere) is alarming - perhaps there should be a section on the email/internet hoax site snopes.com for word-of-mouth hoaxes and misinformation. The most recent one going around has inspired me to get history straight so that at least the 10 or so people that might read this will be able to spread the correction. Namely, the story going around involves that 'Napoleon of finance' Nathan M. Rothschild. Of course the Rothschild’s were a wealthy family by the time Nathan entered the family business, but it was he who took them from moderately wealthy to stratospheric heights of wealth not seen till perhaps the Rockefeller dynasty.

So this week I heard the same story twice, on opposite ends of the city, that Nathan Rothschild created his family's banking powerhouse by being able to receive news of Napoleons loss at Waterloo before everyone else (he had extremely fast couriers, which is true), at a time when Napoleon was surging through territories voraciously enough that many thought the British would also suffer defeat. In this version of the story, Rothschild, having early knowledge of Wellington's victory, buys up British sovereign bonds at a low price (the price being low because of speculation of a Napoleon victory) and sells them a year later for a massive return after British victory and financial stability returns - government borrowing reduces after the war is over, sending bond prices up and the Rothschild fortune in the same direction. This version of the story, heard across two areas of the city (not in the exact same words naturally) was enough to make me go back and check its validity. Now some may say this is not a representative enough sample - but if those two people tell another two people and so forth, you can see how this inaccuracy can be a problem - it's like when everyone at the White House thought there were nuclear weapons in Iraq, that’s how that started. This is actually far from the real story, and neglects a few key details. Now it's time to launch into history mode, SMRM style.

Nathan Rothschild was, according to the 4th Lord Rothschild (his great-great-great grandson, which makes him very great indeed) 'short, fat, obsessive, extremely clever and wholly focused....’ Meyer Rothschild had ran a moderately successful antique dealing and bill-brokering business, and in efforts to expand he expatriated his sons across Europe with Amschel (Frankfurt), Salomon (Vienna), Calmann (Naples) and James (Paris) spread across mainland Europe, and Nathan sent to London to conduct business. After arriving in 1799, making most of his business purchasing textiles and sending them back to Germany, Nathan entered the banking business in 1811 not through his own directive, but being fatefully approached by the British Government themselves. Napoleon was at this time conducting his efforts in earnest, setting up a blockade imposing trade from Europe to England. The British Government approached Nathan as he had acquired valuable experience smuggling gold to the Continent, often in breach of these blockades. Britain’s Commissary-in-Chief, John Herries, was authorised to employ Rothschild to (confidentially of course) collect the largest quantity he possibly could of French silver and gold from Germany, France and Holland within 2 months.

Nathan and his brothers stretched their trade channels and executed the commission well enough that by May 1814, he had advanced £1.2 million to the Government (almost twice the expected target) and collected hefty commissions for himself in the process. The Rothschilds, being spread out across Europe, were now in a great position to exploit price and exchange rate differences between markets (arbitrage). Rothschilds also handled 12.6 million francs of subsidies to be paid to Continental allies, as such Nathan was 'a very useful friend' according to the Prime Minister Lord Liverpool. When Napoleon famously left his exile in Elba, deciding to revive his Empire (March 1, 1815) Nathan Rothschild responded by buying up all the gold and coins him and his family could get their hands on - totalling almost £9.8 million. In this purchase, they had assumed the war would be a long one, the gold necessary for its funding. This proved to be an almost fatal miscalculation, as the belated arrival of the Prussian army dismantled Napoleons chances at Waterloo, to the exaltation of Wellington (he of the boots) and co.

Thanks to the speed of his couriers, Rothschild received the news 48 hours earlier than the official dispatch sent to the Cabinet. However, unlike the urban legend suggests, this news was hardly positive from Nathan's standpoint. Now the family was 'sitting on top of a pile of cash that nobody needed - to pay for a war that was over' (Ferguson, 2008). With the coalition dissolved, and the armies disbanded, there were no more soldiers’ wages ant no need for subsidies to Britain's wartime allies. During the war when Government borrowing and demand were high, gold prices soared, but now they were bound to have a post-war fall. Rothschild was faced with heavy and growing losses.

It was under this predicament that Nathan made one of the most audacious trades in financial history. Using much of the gold Rothschilds acquired, Nathan made an enormously risky bet on the bond market, buying up great purchases of 'stock' (as reported in the Courier 20th July, 1815, meaning Government bonds). The idea was that a reduction in government borrowing following victory at Waterloo, would soon escalate the price of British bonds (upwards escalator, not the one going downwards that is more stressful on the knees and which old people claim is more difficult to get on). Nathan bought, and as the price of consols began to rise, bought some more. I think N*Sync's 'Buy, Buy, Buy' is about shopping, right? - think of this song as the soundtrack for this part of the event. Despite his brothers' desperate calls to suppress the gamble and realise faster profits, Nathan held his nerve for another year, eventually selling his stock in late 1817 when bond prices were up 40%. As historian Niall Ferguson notes 'Allowing for the effects on the purchasing power of sterling of inflation and economic growth, his profits were worth around £600 million today'. Now that’s alot of breadsticks.

Why? Why have I derided a site dedicated to interest and mockery of small oddities and anomalies of our activities, and suddenly turned history professor? Because now when you hear the inaccurate version of the story, you can be that annoying woman/man who uses one finger to correct her/his glasses (from the middle), then raises her/his finger slowly and begins with 'Actually...what happened was...' and proceed to regale them with some enlightenment. This is for all of the correctors, and if someone started a sentence with 'Actually...' in the White House 8 years ago, who knows where we'd be, a better place I'd like to think. And after you're done correcting them with the Rothschild story of wealthy to swealthy (that’s stinking-wealthy), no doubt you'll find yourself with a captive audience around you, and so you can ask 'Who else wants the secret of Rothschild?'