Wednesday, August 31, 2011


This the second post related to a book I am reading. It is written by Niall Ferguson and it is titled "Ascent of money". This post will quickly summarize the story of how the rise of Rothschild's is represented in the book. It may or may not be entirely accurate but I found it very interesting.

Let it be reminded once again that this post is more of a mental note for myself.

Rise of Rothschilds'

The story of Rothschilds is very fascinating. For centuries the family has had significant power in the financial world. It was quite fascinating to find out that their success was preceded by a gigantic miscalculation. Any way let's start from the beginning. Or not all the way to the beginning, but to the wars Britain fought against Napoleon.

Britain had been fighting against Napoleon for several years without much success. The war efforts were financed by issuing war bonds. The problem was that the only universal currency at that time was gold and the wars where fought in regions were it was impossible to use pounds. In 1814 Britain needed gold fast and they turned to Nathan Rothschild to procure the gold. Nathan had brothers and relatives running banks in the major financial centres. This network allowed him to buy gold from all over Europe quickly. He actually was able to buy double the amount that he asked to acquire. British government paid Rothschild's commission on the gold he delivered, but there was another way how Rothschilds made money during this operation. They were able take advantage of the differences of gold prices in Europe. For example, if price of gold in Amsterdam was lower than in London Nathan would sell gold bonds (is this the right term in English, don't know) send the money Amsterdam where the money was used to buy gold. The gold was then sent back to London, the bond was redeemed and the gold that was left over was kept as profit. In April of 1814 the Coalition forced Napoleon to surrender and sent him to exile to Elba.

In 1815 Napoleon escaped because of rumours that he would exiled to a remote island in the Atlantic Ocean. Napoleon managed to gather a sizeable army and decided to go in to offensive. Nathan Rothschild thought that this meant that there would be another lengthy war and started to gather gold so that he would ready when the governments came to him asking for gold. The battle of Waterloo was a success to the Coalition. Napoleon was crushed and sent to exile in Saint Helena. To Nathan Rothschild this was a disaster he was sitting on a pile  of gold that nobody needed.

Nathan decided to bet on the government bonds of Great Britain. He evaluated that since there was no longer a state of war the government would need less money and government would not release as many bonds. That would decrease the supply of government bonds on the market and according to basic principles of market economy if the supply decreases the prices should go up. Not to mention that Nathan drove the  price up by hoarding government bonds. After one year the price of government bonds had risen by 40%. At this point Nathan started to sell and made profit of 600 million pounds in todays money (figure from Ferguson). This move basically secured Rothschilds' as the one of the leading banks in the financing sector.

I'll write more about financing if I find anything else that interest me in Ferguson's book.

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