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LRB, Vol. 38 No. 1 · 7 January 2016
Phantom Gold
by John Pemble
Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern
Finance by Ian Klaus
Yale, 287 pp, £18.99, January, ISBN 978 0 300 18194 4
An MP and financier dead from poison on Hampstead Heath; the secretary
of a life insurance company in his office with his brains blown out; a
stockbroker with his throat cut in a railway carriage in Grosvenor Road
Station; a diamond magnate jumping overboard from a passenger liner in
the mid-Atlantic: lurid with suicide, Victorian capitalism got a very
bad press. In 1776 Adam Smith had argued in The Wealth of Nations that
free-market capitalism was a force for material and moral progress.
Capitalism left to itself, he insisted, must produce the best of all
possible worlds, since a capitalist pursuing self-interest makes life
better for everyone. ‘The study of his own advantage naturally, or
rather necessarily, leads him to prefer that employment which is most
advantageous to society.’ He is ‘led by an invisible hand to promote an
end which was no part of his intention.’ Independently of Karl Marx –
little known and never influential among Victorian intellectuals – a
great many critics fustigated this way of thinking. Fire and brimstone
evangelists like Carlyle, agonised agnostics like Matthew Arnold, Arts
and Crafts socialists like Ruskin and Morris, and vegetarian Fabians
like Shaw and the Webbs accused capitalism of betraying what was best
for all by bringing out the worst in each. In Victorian fiction its
heroes are few, and overshadowed by its villains. Disraeli’s novels
glorified Nathan and Lionel de Rothschild as the Sidonias, father and
son – the one a great Jewish financier who rescues kings and princes and
saves civilisation, the other a paladin who combines the wealth of
Croesus, the wisdom of Solomon and the beauty of Byron. But their
glamour is pallid beside the turpitude of Dickens’s Nickleby, Dombey and
Merdle, or Trollope’s Melmotte. Even Disraeli reckoned that capitalism
of the sort that came to Britain with William of Orange (‘Dutch
finance’) was detestable: it had resulted in ‘the degradation of a
fettered and burthened multitude … made debt a national habit … credit
the ruling power … introduced a loose, inexact, haphazard and dishonest
spirit in the conduct of both public and private life; a spirit dazzling
and yet dastardly, reckless of consequences and yet shrinking from
responsibility’.
Even allowing for sensationalism, dottiness and theatricality, it’s
still possible to read the history of the Victorian age as the story of
a society blighted by capitalism at every level, not just in those lower
reaches where men, women and children were dehumanised by wage slavery
in mines and mills. Virginia Woolf described a typically bourgeois sense
of insecurity when she recalled the attitude of her father, Leslie
Stephen, to money: ‘Not all his mathematics together with a bank balance
which he insisted must be ample in the extreme, could persuade him, when
it came to writing a cheque, that the whole family was not “shooting
Niagara to ruin”.’ The ruling elite was fearful of the social unrest and
threat of political revolution that accompanied the growth of
capitalism, and racked by the headache of what Burke had described as
‘one of the finest problems in legislation … what the state ought to
take upon itself to direct by the public wisdom and what it ought to
leave, with as little interference as possible, to individual discretion’.
Why had capitalism become such a problem, even a malediction? It had
been around since biblical times, and a part of European history since
the Middle Ages. But in London in the early 18th century, when the Stock
Exchange became fully operational, it had lost its reputation. Suddenly
it was all about ‘bubbles’ and boom and bust, and the suspicion grew
that it was more likely to deliver nightmares than realise dreams. The
suspicion became certainty when the Indian dream collapsed, amid
scandalous revelations of corporate laxity and iniquity, in the 1770s
and 1780s. The chronic insolvency of the East India Company scuppered
all hope of redeeming the national debt with tribute from India, and
launched the first run of a now all too familiar scenario: Parliament in
shock, a government hostage to the City of London, private profit and
public loss, fat cats and rogue traders, howls of outrage and demands
for retribution and regulation. Combining mercantile, industrial and
financial capitalism with a vast apparatus of empire, the East India
Company was far too big to be allowed to fail. The government had no
option but to come to its rescue by advancing loans, underwriting the
dividend and, in 1833, transforming the delinquent behemoth into a
non-trading Indian civil service under parliamentary control. The crisis
drove Burke to deliver a blistering diatribe against the company’s
employment of ‘the falsest principles of mercantile speculation’, and
his eight-year legal vendetta against Warren Hastings, its chief
executive in India, fixed the stereotype of the capitalist as a cold,
ruthless autocrat corrupted by money and power.
The ugly face of capitalism became uglier still when massive and rapid
industrialisation, combined with relaxation of Tudor legislation
concerning wages, apprenticeship and manufacture, transformed northern
England into a landscape of devastation and despair. The general easing
of regulation made capitalism potentially ruinous for all Victorians.
The progressive reduction and lifting of restrictions on joint-stock
companies meant that the growing number – mostly single or widowed
middle-class women – who relied on investment income were plagued not
only by the investor’s perennial worry about buying too late and selling
too soon, but also by fear of bank failure, company crime, dishonest
advice and shady stockbroking. In a financial world left to regulate
itself, you either swam or sank, and if you sank you drowned. There were
no mutualised losses. A few measures were taken: the government anchored
sterling to gold, prohibited any bank other than the Bank of England
from issuing paper currency (1844) and introduced limited liability for
investors (1862). The ‘invisible hand’ of self-interest, and the warning
‘caveat emptor’, were left to do the rest. The consequences are part of
the Victorian legend.
Banks and companies – railway companies mostly – mushroomed and
collapsed, and the two most overworked words in journalists’ jargon were
‘soar’ and ‘plunge’. Many of the companies floated in the railway boom
of the 1830s existed only on paper and never laid a yard of track. In
the second mania, ten years later, George Hudson followed a spectacular
trajectory from rags to riches, then from riches to penury and disgrace.
The overweening monarch of the midland and north-eastern networks,
friend of Prince Albert and snapper-up of country houses, he devised the
ruse later known as the Ponzi scheme – inflating the price of shares by
boosting dividends with capital. The aggregate losses of the inevitable
crash amounted to some £80 million. By 1854 only half the railway
companies still existing in England and Wales were paying a dividend of
more than 5 per cent; many were paying no dividend at all.
The blackest Victorian decade began in 1856, when the Tipperary Bank
collapsed and the chairman’s brother, John Sadleir, a serial swindler up
to his neck in debt, made the headlines with that suicide by poison on
Hampstead Heath (thereby achieving immortality as Merdle in Little
Dorrit). A sequence of failures followed: the Royal British Bank, the
Western Bank of Scotland, the Liverpool Borough Bank and, in 1866, the
flagship merchant bank Overend, Gurney and Co. This had just converted
from a private into a public company, assisted by a falsified
prospectus. The directors knew that the firm was bankrupt, and
conversion was their last desperate gamble to stave off administration
by pulling in investors’ cash. When partnerships failed there were no
shareholders to bear the cost, and since there was no limited liability,
the partners lost even their personal assets. When Barings went bust for
the first time, in 1890, its chairman, Lord Revelstoke, lost his country
estate, his art collection and most of his private fortune. Many who
suffered weren’t in the game of getting rich quick. Often the push not
of greed but of need weakened the pull of fear. Credulity was no doubt a
part of the equation; but, as Ian Klaus’s Forging Capitalism makes
clear, in the Victorian City of London if you weren’t credulous you were
very smart indeed.
Klaus swims against the current of neoliberal vindication of Adam Smith.
He sees the ‘invisible hand’ as a figment of Enlightenment optimism; the
free individual motivated by true self-interest as a theoretical model,
not an empirical discovery; and freewheeling capitalism as demonstrably
not a force for moral as well as material progress. Klaus is a policy
adviser in the US Department of State, and his ideas about capitalism
are very close to those that Keynes held in the 1920s and 1930s.
Capitalism is the best system on offer, but it realises its beneficial
potential only if regulated by the wisdom of the few. Laissez-faire
doesn’t work because self-regulation fails. Business that’s ethical and
less competitive is overtaken by business that’s more competitive and
less ethical, and corruption becomes pandemic. Like Keynes, Klaus wears
the livery of Burke, and at times Burke could be dictating what he
writes: ‘We encounter, again and again, the darker forces of greed and
deception that prosper in new frontiers of commerce’; ‘We have entered
the age of the accountant, the actuary and the medical examiner.’ And
the age of chivalry is gone, that’s for sure. ‘If polite Victorians –
honest, sexless, Christian – still live in your historical cupboard,
throw them out,’ he writes. ‘We don’t like them anymore, and they never
existed anyway.’
Klaus uncovers the sordid reverse of the Victorian financial fabric.
Fast long-distance trading, made possible by the electric telegraph,
stoked illegal speculation in commodity futures – especially cotton.
Unscrupulous company promoters and credit-brokers unloaded worthless
equities and junk bonds onto markets struggling to cope with a
constantly mutating virus of deceit. Methodically dissecting a selection
of high-profile swindles, Klaus shows how confidence tricksters, ever
more ingenious and plausible, simulated trustworthiness. ‘There
emerged,’ as he puts it, ‘an arms race between the means of deception
that enabled fraud and the means of verification that enabled trust.’
Bogus news reports, bogus reputation, bogus social status, bogus
exchequer bills, bogus bills of lading, bogus documentation of identity,
bogus prospectuses and bogus expertise in a bogus financial press, all
these were used to embezzle millions thanks to a phantom colony in
Nicaragua, phantom mines in Mexico, phantom British government debt,
phantom North American cotton, phantom Latin American railways and
phantom South African gold. There were many victims but few criminals
and outcasts, because governments were shy of legislation, juries of
conviction and high society of ostracism. Everybody knew that the
managing editor of the Financial News, Harry Marks, was a blatant
fraudster who had made a fortune by promoting sham companies –
including, most notoriously, the Rae Gold Mining Company in the 1880s.
He went on nevertheless to become a member of the London County Council,
a Tory MP and member of the Carlton Club, a magistrate and a member of
the Royal Cinque Ports and Royal Temple Yacht Clubs.
*
Klaus’s picture of rampant dishonesty and hypocrisy is immensely
plausible. But is it true? Because it’s all so familiar, there’s clearly
a risk of reading as paradigmatic what might just as well have been
exceptional. Klaus leaves it to us to make comparisons, but it’s
difficult to read what he writes and not think of similarities between
then and now. His book is in contrast to David Kynaston’s four-volume
history of the City of London, which takes up the idea of ‘gentlemanly
capitalism’ and portrays the Victorian era as a relatively sane and
sober interlude.* Kynaston explains the hands-off policy in terms of
esprit de corps. The governing elite and the financial elite came from
the same upper crust and in many cases from the same families; they had
been to the same schools, belonged to the same clubs, followed the same
rituals on the same social circuit, swapped honours for directorships
and directorships for honours. Here was an exclusive, unhurried,
like-minded ‘world of its own’, valuing stability above growth, and
better informed about Argentina and the Transvaal than about Manchester
and Newcastle. In the cosmopolitan upper echelon of merchant banks,
everybody knew everybody else and business was a matter of mutual trust,
mutual favours and mutual insurance. Mavericks were checked by the gold
sovereign, which was an unbreachable barrier against currency
speculation, and by the governor of the Bank of England, who kept
monetary policy tight. The big-time gamblers, swindlers and ephemeral
millionaires were exotics at the margins – literally in some cases. In
the 1890s, the larger than life Barney Barnato – a company promoter,
banker and self-crowned diamond king – operated in the street outside
the Stock Exchange, from which he was excluded. He inflated monstrous
bubbles in South African mining shares before his preposterous empire
collapsed and he made his leap into the Atlantic, just off Madeira.
Kynaston reckons that this civilised world lasted until the 1930s, when
everybody realised that the gold sovereign had gone for good. The era of
floating currencies and open social frontiers had arrived, and the way
was cleared for Americans, baseball caps, casino speculation in
financial futures and the expectation of endless growth. American
historians especially have been taken with the idea of a British brand
of gentlemanly capitalism – it was discussed by Martin Wiener in his
controversial English Culture and the Decline of the Industrial Spirit
in 1981 – and sometimes Klaus too finds himself driving in this lane.
‘Social virtues, such as being frugal or honest,’ he writes, ‘are
translated into social capital. Communities rich in social capital tend
to be rich in trust. They also tend to be rich.’ If this is true, then
it follows, surely, that since the Victorians were rich, they were
probably trustworthy.
Klaus writes about 19th-century financial capitalism and it needs to be
made clear that this was a category apart. His book sometimes creates
the impression that capitalism was generally at this time about
triumphant laissez-faire and the minimal state. In fact, whereas
depositors and investors weren’t protected by the state, consumers and
workers were. When it dealt with manufacture and retail, 19th-century
policy piled on Blue Books and red tape. It liberated industry and trade
by abolishing wage controls, monopolies, apprenticeship laws, navigation
acts and food tariffs; but restricted them by multiplying rules and
regulations for factory owners, mine owners, builders, shopkeepers and
ship owners. The Victorian statute book became notoriously cluttered,
first with discretionary then with mandatory legislation, and central
and local government – in the role of inspector, prosecutor, tax
collector, employer and provider of public works and services – sent up
the blood pressure of ardent individualists. ‘Dictatorial measures,’
Herbert Spencer fumed in 1884, ‘rapidly multiplied, have tended
continually to narrow the liberties of individuals … Regulations have
been made in yearly growing numbers, restraining the citizen … and …
lessening that portion of his earnings which he can spend as he pleases,
and augmenting the portion taken from him to be spent as public agents
please.’ Twenty years later the legal historian A.V. Dicey warned of
imminent collectivist tyranny: ‘The time is rapidly approaching when …
wherever any man, woman or child renders services for payment, there in
the track of the worker will appear the inspector. State control … has
begun to take in hand the proper management of shops. A shop girl has
already acquired a legal right to a seat.’
The Wealth of Nations was never ditched, but it was gradually adapted.
There’s a strain of Burkean chivalry in the interdiction of female and
child labour. There’s a good deal of Bentham’s felicific calculus in the
legislation for consumer protection and public health and safety. In his
Manual of Political Economy, written in 1795, Bentham reaffirmed that
state intervention was ‘generally needless’ and ‘generally pernicious’,
but he allowed for an ‘Agenda’ of laws against antisocial activity, and
this led inexorably to the maximal state as capitalism expanded and
became politically sensitive. After the Reform Act of 1867, when for the
first time ever men without property were allowed to vote, the
well-being of the industrial proletariat became a priority for
policy-makers. The days of dark satanic mills and children down mines
were over by mid-Victorian times; thereafter the failure of capitalism
was visible as unemployment, and it was in order to rectify this that
Keynes expanded the Benthamite agenda into a full-blown Burkean
programme of state management. As another Burkean who wants to bring
back regulation, Klaus is, again like Keynes, more of a Victorian than
he cares to admit.
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