[Marxism] Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance

Louis Proyect lnp3 at panix.com
Wed Dec 23 06:51:58 MST 2015

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 

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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