Rogues and capitalists

“The whole life I place before myself is money, money, money and what money can make of life,” says Bella in Dickens’ Our Mutual Friend. The Victorian novelists wrote a lot about money, not just Dickens, but Mrs Gaskell (remember the bank failure in Cranford, the exigencies of factory life in Mary Barton), George Gissing (New Grub Street, The Whirlpool), Trollope (The Way We Live Now) and, across the Channel, Balzac (famously referred to by Thomas Piketty), Hugo, Zola.

Bella’s line is quoted in Ian Klaus’s Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Capitalism. An irresistible title. The book gives an account of the essential role played by trust as capitalist markets developed through the century:

“Here is a fundamental point about free market capitalism and trust within it: without social exclusion or extensive processes of verification, trust is hard to come by. Whereas other risks could be hedged or managed through new assets or new types of insurance, the risk of fraud became more prevalent as the market expanded. Simply put, trust was sometimes a market inadequacy but always a market necessity.”

Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance (Yale Series in Economic and Financial History)

This central argument is illustrated through a series of brilliant stories about both the evolution of new assets and commercial relationships but also about a series of colourful rogues and swindlers. They played on the importance of reputation to pull off their confidence tricks; in a kind of arms race, new methods of verifying information were devised, such as audits, or detailed prospectuses –  and new audacities were developed by the rogue fraternity. We ended with the modern system of ‘a series of overlapping institutions’ authenticating transactions.

The book starts with Adam Smith’s Wealth of Nations, noting its pairing with the Theory of Moral Sentiments. It ends with Friedrich Hayek’s The Road to Serfdom, a hymn of praise to markets, arguing that it has to be read alongside The Constitution of Liberty. Klaus writes: “The greatest intellectual salesmen of free market capitalism all supposed the market would be buttressed by morality. You could not possibly unleash the power of the one without the support of the other.” Unfortunately, of course, that’s just what happened in every period of turbulence in capitalism’s history, including our most recent. Now, just as in the early Victorian era, reputation is everything – because morality and institutions have let us down.

The Wealth of Nations: Books I-III  The Theory of Moral Sentiments (Penguin Classics)  The Road to Serfdom (Routledge Classics)  The Constitution of Liberty (Routledge Classics)

One final thought: will new technologies help bridge the gap? Dave Birch’s Identity is the New Money suggests the combination of ubiquitous mobile and social media means they might. Social connection, perhaps asset ownership and provenance, can in principle be verified now in a way the Victorians couldn’t have dreamed of.

Identity Is the New Money (Perspectives)

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3 thoughts on “Rogues and capitalists

  1. Dickens, trust and crises… an extract from something I wrote for Financial World at Christmas 2011.

    …On the train from San Francisco down to San Jose, though, I was reading Henry Fielding’s Tom Jones on my iPad. I’ve discovered that there are hundreds of classics that I can download to my iPad’s Kindle app for nothing. Free. Downloading these classic novels and reading them on my iPad in addition to buying physical books is really working for me! I feel as if I’ve discovered a useful balance between real and virtual. In this spirit, I was e-reading Dicken’s A Christmas Carol for the first time, when I noticed an interesting phrase. Dickens writes of something becoming worthless as “a US security”, a phrase presumably recognisable to his readers when the novella was published in 1843.

    To understand where the phrase originates, you have to remember the state of the American economy in the 1830s, a time when — as Jason Goodwin puts it in his splendid Greenback: The almighty dollar and the invention of America, “America’s money just grew and grew” — because the volume of silver in circulation was climbing, land values were soaring and the Second Bank of the United States was printing dollars. Rising land prices and easy credit (heard this somewhere before?) led to the “Panic of 1837” when Andrew Jackson shut down the Bank and commercial banks began demanding specie and refusing debased paper. This Panic was followed by a five-year depression, with the failure of banks and then-record-high unemployment levels. Hence Dickens’ disparaging phrase.

    We Brits were not, of course, immune to boom and bust at the time. Here, as “Hard Times” Dickens was chewing his pencil, the railway boom was underway (see Christian Wolmar’s fabulous Fire and Steam for a beautifully written history of this) and it led to a colossal crash in 1866. It was caused (and here’s a surprise) by the banking sector, but in that case it was because they had been lending money to railways companies who couldn’t pay it back rather than American homeowners who couldn’t pay it back.

    The British government then, as now, had to respond. It suspended the Bank Act of 1844 to allow banks to pay out in paper money rather than gold, which kept them going, but they were not too big to fail and the famous Overend & Gurney went down. When it suspended payments after a run on 10th May 1866, as frequently noted the last run on a British bank until the Northern Rock debacle, it not only ruined its own shareholders but caused the collapse of about 200 other companies (including other banks). The directors were, incidentally, charged with fraud but got off as the judge said that they were merely idiots, not criminals.

    The railway companies then held the same commanding position in the economy as companies such as Vodafone and British Gas do today, so the impact on UK plc was substantial. Bear in mind that the first railway service in the world started running between Liverpool and Manchester in 1830 and less than two decades later (by 1849), the London & North Western railway was already the biggest company in the world. When the Directors of these gigantic enterprises went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole of the British economy) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown, investment bank advisers, suspension of competition law and the tea and sympathy of 2008. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses, no matter how big they might be.
    Needless to say, the economy didn’t collapse. As you may have noticed, we still have trains and tracks. A new railway industry was born from the ruins, the services kept running and the economy kept growing. And there was another impact. Andrew Odlyzko’s paper The collapse of railway mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of financial analysis argues that the introduction of basic corporate accounting standards following the collapse of the railway companies was a significant benefit to Britain and aided the development of Victorian capitalism. You can’t make an omlette, as the saying goes, without letting the bad eggs go to the wall.

    Who knows what would have happened if Disraeli closest advisers had all been railwaymen (just as they are all investment bankers today) and had advised in favour of a bailout? Or if Dizzy had crumbled at tales of ruined widows and similar? Then a badly-run industry would have been allowed to continue and the rest of the Victorian era would have been horse powered while the management of the railway companies enjoyed vast wealth and more efficient rail-based enterprises would never have gotten off of the ground. Thank goodness we’ve learned since Dickens’ time.

    ——-
    All the best to you and yours Diane, look forward to catching up in the New Year.

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