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Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance 
by Ian Klaus.
Yale, 287 pp., £18.99, January 2015, 978 0 300 18194 4
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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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Vol. 38 No. 5 · 3 March 2016

John Pemble claims that after the Reform Act of 1867, ‘for the first time ever men without property were allowed to vote’ (LRB, 7 January). The 1867 Act extended the vote to all male urban householders and male lodgers paying £10 rent a year for unfurnished accommodation, and almost doubled the electorate to two million, but it was still built around property qualifications. It was the Representation of the People Act 1918, consequent on the war efforts of property-less men and many women, that really widened suffrage (from the 7.7 million entitled to vote in 1912 to 21.4 million by the end of 1918) by abolishing nearly all property qualifications for men.

Tony Arnold
Bacton, Norfolk

Vol. 38 No. 7 · 31 March 2016

Tony Arnold addresses a serious point about the historical link between property-ownership and the right to vote (Letters, 3 March). But he makes a common factual error that has major implications for our understanding of the franchise in Britain. The error is to suppose that the term ‘householders’ in the various Representation of the People Acts refers to what today would be called ‘home-owners’. Had that been so, none of the Reform Acts would have had much effect, if only because, until the First World War, only about 10 per cent of dwellings were owner-occupied – across all classes. The householder, by contrast, was any adult man who occupied a dwelling and contributed towards the rates: a definition excluding not only his wife but also any adult sons living under the parental roof. And in the 1832 Reform Act it had been only the ‘ten-pound householder’ (meaning an annual rent at this level) who qualified. Hence the real importance of the abolition of this threshold in the 1867 Reform Act, which applied to the boroughs, and in the 1884 Reform Act, which applied to county constituencies too.

We used to think that this system grossly under-represented the working class. After all, before 1914 only about one-third of the twenty million British adults had the Parliamentary vote and only about two-thirds of adult men. Historians now see things differently, primarily because of the pioneering work of the late Duncan Tanner, whose early death is commemorated in The Art of the Possible, edited by Chris Williams and Andrew Edwards. The fact is that when the Representation of the People Act of 1918 extended the franchise, it did so not by (supposedly) abolishing property qualifications, but by enfranchising two large categories of voter. Since all men over 21 now qualified (and under 21 if they were soldiers), there were new male voters in all social classes; and, of course, there were now female voters. But had all women been given the vote, they would now have outnumbered the men. This shocking danger was averted by stipulating a different age threshold for women, who had to be thirty, and by stipulating too that (unless property-owners themselves) they had to be the wives of local government electors. And how did local government electors qualify? In effect, as householders. So the old household suffrage lived on in this ghostly fashion, now generally qualifying a married couple, and still excluding the sort of younger women who might well have been wartime Voluntary Aid Detachment or munitions workers. The true definition of the householder is not a quibble but the key to understanding how Britain became a democratic country.

Peter Clarke
Trinity Hall, Cambridge

Vol. 38 No. 2 · 21 January 2016

In his review of Ian Klaus’s Forging Capitalism, John Pemble identifies Adam Smith as the favourite punch-bag of Victorian anti-capitalists (LRB, 7 January). But Pemble – and Klaus – perpetuate some enduring myths about Smith’s stance towards laissez-faire capitalism. He did not insist, as Pemble alleges, that ‘capitalism left to itself … must produce the best of all possible worlds.’ Smith devoted whole chapters of The Wealth of Nations to arguing for universal state-funded education and poverty relief. On workers’ rights, he posited that whenever regulation ‘is in favour of the workmen, it is always just and equitable’. He was well aware of the dangers of unfettered banking, and argued for a ban on the 18th-century equivalent of payday loans.

Reuben Binns
London SW9

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