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Prussian loans business

The Prussian loan of 1818

Origins of the loan

In 1818, the Prussian Ambassador in London in 1818 was William von Humboldt, the philosopher and scholar, whose private finances were managed by N M Rothschild & Sons. That year, when the Prussian Government was having difficulty finding bankers interested in raising a loan, Humboldt reported to Berlin:

"If the loan is to succeed here [London], this can be managed, in my opinion,.only through Rothschild ... Rothschild is now easily the most enterprising business man in this country [...] He is moreover a man upon whom one can rely and with whom the Government here does considerable business. He is also, as far as I know, just, exceedingly honest and intelligent. On the other hand, I must add that if business is given to him to carry out, it will be necessary to fall in with his ideas, for he has acquired the independent habit of mind developed by riches and a fairly long sojourn in this country."

The 1818 Prussian 5% Government loan of £5,000,000 was issued by N M Rothschild & Sons. This loan was to finance Prussia's chronic public debt and was negotiated with Prussian Commissioner of Finance, Christian von Rother.

An innovation in sovereign lending 

Although the five sons of Mayer Amschel Rothschild had arranged many loans for sovereign governments before 1818, the one issued by Nathan Rothschild for Prussia in May of that year is considered by many to be the true precursor of the public borrowing which transformed the international capital market in the nineteenth century. Government bond issues following this model were the mainstay of the business of NM Rothschild & Sons in London until the Second World War and a significant feature of the business of the other Rothschild banking houses in Paris, Frankfurt, Vienna and Naples. 

The significance and novelty of the 1818 Prussian loan is several fold. It was raised in sterling, and the interest could be payable in sterling in London. This made it convenient and attractive for British investors, although in the event much of this issue was taken up by investors on the continent. Prussia also agreed to follow English practice and set up a sinking fund to amortise the loan, with regular remittances to London from the government to repay the capital. These repayments were effected by purchase of the bonds in circulation: if the bonds were being traded 'above par' - that is, if their actual value was greater than their nominal value - then lots would be drawn to determine which bonds would be compulsorily redeemed at face value only. This would be the pattern for future bond issues from the bank.

A successful piece of business

However, the loan nearly failed to materialise. Nathan had been working in association with Barandon, the London representative of the Prussian Seehandlung bank, who had inexplicably made the terms of the loan public before the contract was signed. The Prussian government withdrew from the negotiations to avoid the humiliation of being seen in need of credit on what had been revealed to be rather unfavourable terms. Nathan's brother Salomon berated him for working with a "coffee house gossip" and for having "risked our excellent name with a public circular sent in conjunction with a stranger and a brandy dealer". Nevertheless, Prussia had emerged from the Napoleonic wars £32,000,000 in debt and the government ultimately found no better offer than that of the Rothschilds. Salomon entered into some intensive behind-the-scenes negotiations with Prince von Hardenberg and Christian Rother, respectively the Prussian state chancellor and its finance minister, and the terms were modified in Prussia's favour. The bond issue in March 1818 was a great success, and indeed Rother's name features prominently in the ledger of subscribers to the loan. The first tranche of the loan was sold at 70 per cent of its nominal value, and was soon trading well above that price. Within a month James, the youngest of the five Rothschild brothers, found the bonds in great demand in Paris and resolved to refrain from selling them until the price rose even further, writing to his brothers that "I shall throw away the key until they are 85".

Further Prussian loans

In 1822 Nathan won another contract for a loan to Prussia, for £3,500,000. The interest was again fixed at 5 per cent, but this time the issue price was 84, reflecting the success which Prussian credit had achieved in the international market place. The purpose of the 1822 loan was to take out of "circulation, to the amount of the loan, their floating debt of State-Bonds, as, likewise, to liquidate a debt due in Holland, and to deposit the same here, in the Bank of England". A further loan followed in 1830; the 1830 Prussian Government 4% loan was for £3,800,400. The price of issue was 98.

Archive sources

1818 Prussian Government 5% loan, £5m. A prospectus for the loan will be found in XIII/206/1/1. A copy contract 1817, and  certified copy 1818, will be found in 000/401A/1. A single Cash Book, VIII/14/1, concerning the Prussian loan 1818-1819 will be found in the Cash Books series. A further volume, VI/10/5 of 1818, kept with the General Ledger series, contains a list of names of subscribers to Rothschilds' Prussian Loan, 1818. Entries in this ledger give the name of the subscriber/client and the amount in pounds of stock purchased. 

1822 Prussian 5% Loan for £3.5m.  A Loan announcement from "A. L. De Met agent in foreign stocks"  with an attached  note: "Prussian Scrip Receipts  1822" will be found in XIII/206/1/3. Scrip receipts confirming first instalment paid and on the balance being paid, the bearer will  be entitled  to bonds for the value stated.  For £1,000,  (no. 560), £3,000  (no.155) and £5,000 (nos. 691 and 771) will be found in XII/206/1/4. A small cache of  of eleven letters, relating to applications for the second Prussian Loan, 1822 from Montefiore, John Walters, and Jeffery Cullen will be found in 000/573/23.

1830 Prussian Government 4% Loan, £3.8m. Contractural papers will be found in 000/401B/3.