Tuesday, February 13, 2007

Book Notes: "Bankers and Pashas" David Landes (1958)

(Note: Work in Progress)
(Note: Probably too boring for anyone but myself to read.)

1. David Landes's study of "International finance and economic imperialism in Egypt" is based on the letters between the international financier Alfred André and Eduard Dervieu, private banker to the viceroy of Egypt which cover the decade 1858 to 1868. They deal with the world of merchant banking, a tricky business based in international exchange and commercial credit and grounded in the personal relationships of teams of bankers. Groups of financiers tended to be closely tied by marriages or by religion; Calvinist and Jewish bankers were most common. Even more significant was the essential pragmatism of the financial profession.

A few developments tended to undermine these personal banking networks. For example, investment banking required larger and more heterogeneous syndicates. The Rotschilds actually split on the question of financing railroad construction, which was seen as a risky investment. In fact, railroad investment in the 1840s was the field's greatest challenge and its greatest triumph. In the end, merchant bankers were defined by their caution, thrift, and integrity. They tended to be the guardians of conservatism. "Above all, (merchant banking) was eminently sensible." (45)

2. In the 1850s, an even greater challenge arose: the finance company- a joint-stock corporation with greater capital and resources than the old private banks. It came later to England than to the continent. However, note that in the 1850s English investment was shifting away from the New World towards the East, particularly India. The American Civil War is important for this story because it forced Europe to turn to India and Egypt for cotton. The Orient needed loans and finance companies rushed in looking for high interest rates. Between 1863-1865 fifty new banks were founded in Britain alone. In 1856, following the Crimean War, a London group created the Ottoman Bank in Constantinople. By 1861, Turkish finances had totally collapsed and the Ottoman Bank had become the mainstay of the treasury. In 1863, they were replaced by the Anglo-French Imperial Ottoman. Banks rushed into the Levant to capitalize on the 12-20% interest rates!

3. By 1862, Lancashire was in agony due to the cotton shortage. (70) India filled the gap, but Indian peasants (ryots) were stubborn and its cotton of poor quality. Mohammad Ali saw an opportunity and turned Egypt into "a huge government farm." Many Egyptian peasants (fellahs) left the land instead of becoming serfs. His son Said opened the Egyptian cotton market by allowing foreign merchants to trade directly with the fellahin. "The absorption of Egypt into the sphere of European political and economic rivalries was inevitable in the aggressive, expanding character of Western technology and business." (80) The steam ship, and then the telegraph, and then the railroad came to Egypt. Alexandria was where the money was and all sorts flocked there. Especially Westerners who were used to the privilege of capitulations in the Levant. In Egypt, it was a "spoiler's field day" with countless European litigants bleeding the Pasha dry. Extra-territoriality was inherently tense. Consuls abused their privilege often, and Egyptian government was overly personal- the best concessions went to the Viceroy's personal friends. One of the opportunists who took advantage of Said's essential frivolity was Eduard Dervieu.

4. Dervieu came from a bourgeois family of tailors from Condrieu, but struck out on his own in the economic world of Marseilles, France's entry point into the Mediterranean. He cultivated connections to the Egyptian court and was in a good position as they fell prey to growing debt. For reasons that still aren't clear, the floating Egyptian debt reached £7 million by 1860. The Bank of Egypt was severely mismanaged by the house of Oppenheim and Nephew. Incredibly, Oppenheim was able to get a loan from Alfred André. Meanwhile, Dervieu was prospering nicely in this environment of easy credit and floating debt. André's house was of the conservative French Haute Banque- he wouldn't have done well in Alexandria, but was willing to loan money to Dervieu, who was well on his way to becoming the royal banker. Dervieu was an opportunist, but he was also too promising a client to turn down.

No comments: