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Civilising Mammon: Fraud and Profit in Nineteenth-Century London
From: London School of Economics and Political Science
| By:
Paul Johnson |
EDITOR'S INTRODUCTION |
In the nineteenth century, a new commercial morality settled upon the monetary, legal and political institutions of Britain.  In this article, Paul Johnson, professor of economic history at the London School of Economics and Political Science, explores two extraordinary case studies which highlight this new status quo. He reveals an era in which a campaigner against public corruption could institute stock market fraud and where the editor of a newspaper renowned for fraud busting perpetrated a financial "sting" by floating a nonexistent company. Johnson casts light on a period when the major institutions of British public life struggled to keep abreast with the bustling financial savvy, speculation and manipulation of the day. |
 n the early hours of Monday, 21 February, 1814, a man wearing a staff officer's red military tunic adorned with gold star and medal hammered on the door of the Ship Inn at Dover. The stranger demanded pen, ink, paper, a post chaise and four, together with an express horse and rider to take a message to Admiral Foley at the Deal garrison. The message was that Napoleon had been slain by Cossacks; the allied forces had saved Paris from destruction and entered the city; the white cockade (the symbol of the Bourbons) was everywhere displayed; peace was imminent. The signature was that of Lieutenant-Colonel R. du Bourg, aide-de-camp to Lord Cathcart, ambassador to the Court of Russia and British military commissioner at the Czar's headquarters. Foley attempted to transmit this news to the Admiralty in London by means of semaphore telegraph, but a heavy mist made this impractical. Meanwhile, Colonel du Bourg was proceeding to London in his chaise and four, dispensing the good news at each coaching inn, where payment for new horses was made from a large stock of gold napoleons (although the coachman at Dover, suspicious of dubious foreign coins, demanded and received payment in Bank of England one-pound notes). By about 9 a.m., du Bourg had arrived at Marsh Gate, on the south side of Blackfriars Bridge, where he transferred into a hackney carriage and made off in the direction of Grosvenor Square. |
Around midday, striking confirmation of the news of peace was brought by another chaise and four, decorated with laurels and containing three French officers wearing white cockades, which drove over London Bridge, down Lombard Street, along Cheapside and over Blackfriars Bridge. Throughout their passage, the occupants distributed small leaflets inscribed with "Vive le Roi! Vivent les Bourbons!" |
The rumour of victory and peace proved to be false, and at first sight the events of 21 February appear to be more farce than fraud. But for a short time, at least, the news of Napoleon's defeat was believed. Newspapers had been awash with speculation and rumour since late January, when Napoleon had ventured out of Paris. Reports of initial success for the allied forces filtered back to London; unsubstantiated news of Napoleon's death appeared in the Courier on 10 February. Four days later, it was clear that this was nothing but false hope; by 18 February, the Times acknowledged that Napoleon had secured an impressive victory over Blucher. The country was eager for good news; rumour piled on rumour. |
Nowhere did such rumours have a larger impact than on the Stock Exchange. Hopes and expectations had been driving up the value of government stock since the beginning of February. Consols were priced at 66 1/2 on Monday, 7 February, and within a week reached 72, before falling back to 70 on Saturday, 19 February. Over the same period, Omnium (a mixture of government stock and public annuities) rose from 191/8 to 283/4 before falling to 263/4. When the exchange opened at 10 a.m. on Monday, 21 February, prices rose rapidly on strength of the news from Dover, with Omnium reaching 301/4. The absence of official verification created some disquiet, and prices were sliding around midday until confirmation appeared in the form of the three French officers and their handbills. Omnium touched 32, but after a messenger returned from government offices in the afternoon to report that the whole affair had been a fraud, prices sank back to their level of Saturday. |
Trading on the exchange on Monday, 21 February, had been heavy, though not much more so than over the previous two weeks of extremely volatile prices. Nevertheless, the blatant and deliberate way in which the false rumour had been generated led the Committee of the Stock Exchange to instigate an inquiry. |
This investigation revealed that three people together accounted for sales on Monday, 21 February, of over £ 1.1 million of Consols and Omnium, "most of which had been purchased in the course of the week preceding." These three people were Thomas, Lord Cochrane, naval hero, radical member of parliament for Westminster and eldest son of the ninth Earl of Dundonald; his uncle the Hon. Andrew Cochrane-Johnstone, also an M.P., and sometime army colonel and governor of Dominica; and Richard Butt, former naval pay clerk, successful stock exchange speculator and financial adviser to Lord Cochrane. The Stock Exchange investigation also found that du Bourg's hackney coach had taken him to 13 Green Street, Grosvenor Square, the recently established residence of Lord Cochrane. Furthermore, it was found that four of the one-pound notes generously paid out by du Bourg on his journey from Dover had been paid to Butt by his stockbroker on the Saturday afternoon. |
An enquiry into fraudulence
The Stock Exchange was variously praised and abused for publishing the result of its enquiry, which had no legal standing and which did not take evidence under oath. However, publication of this report pressurised Lord Cochrane into voluntarily swearing an affidavit about his movements on 21 February. He acknowledged that he knew well, and had breakfasted with, Cochrane-Johnstone and Butt, that he had traded down all his Omnium, and that a uniformed officer had visited his house. His defence, however, was that he had left general orders with his broker to sell whenever the price rose to one point over the purchase price, and had issued no direct, personal instructions to trade on the 21st. Furthermore, the officer who visited him was a Captain Random de Berenger, a distant acquaintance, who had earlier contacted Cochrane about joining him on a forthcoming naval mission. |
De Berenger was a designer, inventor, rifleman, pyrotechnician and insolvent debtor of Prussian birth, currently living under the rules of the King's Bench (as was, it subsequently emerged, one of the three men who purported to be a French officer). He was arrested in Leith in early April while trying to buy a passage out of the country, and in his possession were found a number of gold napoleons, together with bank notes that traced back to Cochrane-Johnstone and Butt: De Berenger and du Bourg were one and the same person. |
With evidence in place, the Stock Exchange brought a prosecution against both major and minor players in the fraud. The case was heard before Lord Ellenborough in June 1814; the key charge was that Lord Cochrane, Cochrane-Johnstone and Butt had conspired, by disseminating false information, to raise the price of government funds "with a wicked and fraudulent intention" to "cheat and defraud" the King's subjects. The motive was made plain by the chief prosecuting counsel, the Quaker Adolphus Gurney. For several months prior to the fraud, the three principal conspirators had been speculating heavily on the Stock Exchange, invariably as "bulls"--that is, they bought in the expectation of the price rising, so they could sell out at a profit. They traded very large quantities but needed very little cash so to do, because transactions within each fortnightly Stock Exchange accounting period were settled only at the end of the account. As long as equal amounts were bought and sold, the only money that changed hands was the difference between the buying and selling price, plus the broker's 1/8 percent commission. The account open at the time of the fraud (or "hoax," as Lord Cochrane whimsically chose to call it) had begun on 8 February and was due to close on the 23rd. Cochrane et al. were speculating heavily on an increase in price. According to Adolphus Gurney, "Their purchases vastly exceeded their sales ... they had gone on plunging deeper and deeper until they were out of their depth." They had contracted to buy more than £ 1 million of stock, in anticipation of selling at a profit before the 23rd February. |
But news from France on 14 February kept prices flat, while on the 18th confirmation of Napoleon's victory depressed prices. An attempt to offload £ 1 million of stock onto a declining market would have sent prices spiralling; the trio of conspirators faced "an immense loss, perhaps irrecoverable ruin," according to de Berenger. The fraud was designed not to make them vast sums (though their net profits, seized by the Stock Exchange Committee and subsequently donated to various charities, totalled more than £ 10,000) but to prevent even larger losses. |
Despite the efforts of a strong defence team--which included the future Lord Chancellor Henry Brougham, the future Chief Justice of Common Pleas William Best (Lord Wynford), and future attorney general James Scarlett (Lord Abinger)--the special jury of city men found for the prosecution. The chief conspirators were each sentenced to 12 months' imprisonment in the Marshalsea, a fine of £ 1,000 and an hour in the pillory outside the Royal Exchange. The case is remarkable for more than just its extraordinary genesis and the ensuing lordly dispute between three generations of Dundonalds and Ellenboroughs over the probity of court proceedings and the validity of the verdict. |
The personal history of Lord Cochrane
The personal history of Lord Cochrane, the legal basis of the case and the public and parliamentary reaction to the verdict all shed light on the nature of commercial morality in the early nineteenth century. |
Cochrane had achieved both fame and fortune as a courageous and imaginative naval captain. He had been awarded the Order of the Bath for his heroic assault on the French fleet in the Aix roads in 1809, but had attracted the unbending hostility of the naval establishment by using his privilege as an M.P. to accuse his commander, Lord Gambier, of incompetence. He was briefly M.P. for the rotten borough of Honiton in 1806 before winning one of the Westminster seats in 1807, where his fellow M.P. was the radical Sir Francis Burdett. Cochrane launched a number of parliamentary attacks on the gross inefficiency of admiralty administration and on the scale and extent of sinecures paid, under the guise of pensions, to many parliamentarians. He took an unambiguous personal stand against privilege and "old corruption"; indeed, at an initially unsuccessful attempt to secure the seat of Honiton, he promised the electors that "I shall never accept any sinecure or pension, or any grant of the public money; and that I will never ask or receive any such for any person whatever that may be in any way dependent on me." Cochrane's public profile, both as naval hero and as anti-corruption campaigner, made his fall from grace all the more poignant. He had claimed the moral high ground for himself but, in the words of Mr. Justice Leblanc in the preamble to the sentence, was found guilty of "a crime, which, in its progress, was denoted by every unseemly characteristic; it was tainted with meanness, mendacity, and avarice." Furthermore, Cochrane "had not even the palliative of poverty as an apology for the sin." |
Cochrane claimed that both the verdict and the sentence were politically motivated, and that Ellenborough conducted the case with overt bias and political spite. This claim was accepted by radicals who commenced an active campaign to rescue Cochrane's reputation. The details of the case, however, hardly reveal a concerted Tory attack on radicalism. The prosecution was brought not by the government but by the Stock Exchange, and the evidence of Cochrane's intimate knowledge of the "hoax" was overwhelming. Cochrane does not appear to have viewed stock exchange speculation, or even the manipulation of stock prices through rumourmongering, as morally wrong. Although he was unrestrained in his critique of public corruption, and forthright in his renunciation of all public favours (something which his subsequent career proved to be a rhetorical flourish rather than a principled stand), he behaved in the market as he did in war, adopting morally dubious policies in the belief that the ends justified the means. |
The legal basis of the prosecution case also reveals a good deal about contemporary perceptions of commercial probity. Cochrane et al. were charged with conspiracy to defraud the king's subjects by deliberately manipulating stock prices. Yet, it was noted before the trial, "Whether it be a legal offence to spread false reports for the purpose of gaining in the funds, remains to be shewn; but if it be a legal offence, it is one which the newspaper people have been accusing each other almost every week, for 20 years past." It was not just newspapers that generated false rumours; individuals did this, too. Nathan Rothschild used the rumour mill to manipulate prices; when he possessed advance news (often from his private Paris-London pigeon-post) calculated to make the funds rise, he would sell heavily, knowing that others would follow his lead, thereby allowing him to buy in at a much reduced price before the good news arrived and prices rose. There were many ways of creating false rumours; Cochrane's scheme was more theatrical than most, but it seems certain that the Committee of the Stock Exchange tolerated many less blatant manipulations. |
However, the prosecution managed to demonstrate that Cochrane's "hoax" was not a victimless crime. On the day of the fraud, the accountant general had purchased more than £ 15,000 worth of Consols at inflated prices on behalf of the official trustee, who managed assets for public charitable trusts, orphans and other dependants. Had this purchase been made at the price prevailing on the preceding Saturday, the same quantity of Consols could have been had for some £ 340 less. The case demonstrates that, both within the Stock Exchange fraternity and among jurors in the King's Bench court, there existed a clear conception of commercial probity. Concealing privileged information from the public, as Nathan Rothschild often did when he traded on the market, was legitimate, but knowingly creating and supplying false information was not. |
The official response to Cochrane's crime was damning. He lost income, political position and social status as he was struck off the navy list, expelled from the Commons, and ejected from the Order of the Bath with ritualistic humiliation: his heraldic banner was torn down from the Chapel of Henry VII in Westminster Abbey and ignominiously kicked down the steps. The public response, however, was very different; within a few days of his expulsion from the House, he was returned again by the electors of Westminster. He was forthright in pursuing his personal grievances and claims for recompense, and in 1816 unsuccesfully brought forward in the House a charge of "partiality, misrepresentation, injustice and oppression" against Lord Chief Justice Ellenborough. From 1818 until the 1830s, he served with the navies of Chile, Peru, Brazil and Greece, but he maintained a long-running campaign to have his sentence quashed, making lengthy representations to government in 1825 and 1830. |
His perseverance paid off. In May 1832, he was granted a free pardon and reinstated to his rank of rear admiral and placed on half pay. In 1841, he was granted a naval pension for meritorious service, in 1847 was restored to the Order of the Bath, and in 1848-51 was appointed commander in chief of the North American and West Indian station. Not content with this, in 1856 he wrote to Palmerston requesting the restoration of his banner to Henry VII's chapel, repayment of his £ 1,000 fine, and restoration of half pay for the period 1814-32. This latter claim he bequeathed to his heirs, who in 1877 successfully petitioned for a Select Committee to investigate the claim. This Committee noted that his treatment since 1832 amounted to "nothing less than a public recognition by those Governments of his innocence," and in the following year the grandson received an ex gratia payment of £ 5,000 in respect of the "distinguished services" of his grandfather. |
From being the best-known fraudster of his day, Cochrane managed gradually to rewrite his personal history and reinvent himself. Although he regained his formal rank and honours, he never became fully accepted by the mid-Victorian elite. He was buried in 1860 in the nave of Westminster Abbey, but no cabinet minister or officer of the state attended the funeral. Yet, in popular standing, Cochrane was a hero rather than a fraud, and his heroism grew over time, and ultimately he was lionised in one of G.A. Henty's historical tales. In 1814, he had erred against the laws and morals of the day, but over time the public perception of his crime diminished. To some extent, his naval exploits may have atoned for his sins, but attitudes towards commercial morality were changing. As the next section shows, stock exchange fraud in the late-Victorian period was no barrier to a public and parliamentary career. |
Gold speculation
On 14 January 1887, the Rae-Transvaal Gold Mining Company was registered at Companies' House with limited liability status. This was one of many prospecting companies floated during the "Kaffir" speculation of 1886-7, and at first sight it appeared to be no better or worse placed than any of its many competitors. However, in the judgement of the Financial News, one of the leading financial journals of the day, this new company displayed "every element of success" and was "likely to prove a good speculation." So confident was the Financial News of the prospects for the Rae-Transvaal that it offered no less than 33 recommendations for these shares between 18 January and 29 April 1887. Yet the performance of the company was lamentable; it spent only £ 138 on prospecting equipment and managed to sink a shaft to a depth of just 30 feet, it produced not an ounce of gold, never made a profit, and was liquidated on 22 May 1888. Shareholders lost everything; creditors were repaid less than 5 percent of the amount owed. |
The dubious deals of Harry Marks
The fortunes of this company, and the fate of the shareholders, were far from exceptional. The intriguing part is the way in which the company was formed, floated and promoted by Harry H. Marks. In late 1886, Marks purchased a bankrupt 6,154-acre Transvaal farm for £ 10,300, and immediately sold it for a notional £ 50,000 to a company he formed for the purpose, using a dummy (a stockbroker's clerk) to sign the appropriate deeds and checks in exchange for £ 200. Marks was paid with about 23,000 of the company's one-pound shares. He then set about drawing up a prospectus for the company prior to registration and public flotation. The enthusiasm of the Financial News encouraged members of the public to apply for almost 8,000 shares, but this still left more than 19,000 shares unallocated, so Marks generated a slew of bogus applications from, among others, his brother-in-law and his brother-in-law's mistress. To encourage further public support for the issue, he ensured that the shares were quoted at a false premium in the Financial News; this created an active market, which allowed him and his dummy shareholders to offload their holdings at a profit. A total of 45,500 shares were foisted on the public, all at a price above their £ 1 par value. |
The Rae-Transvaal was just one of many dubious deals carried out by Marks. He was deeply implicated in at least one other gold-prospecting fraud, appears to have received bribes in excess of £ 17,000 from the corrupt financial empire of E.T. Hooley, and was described as "a scoundrel on his own admission" and "a dishonest rogue" by a judge in a libel case in 1903. But Marks was no ordinary company fraudster. He was, in addition, the managing editor of the Financial News, a member of the London County Council (LCC) from 1889 to 1891 and 1895 to 1897, and a Conservative M.P. for Tower Hamlets from 1895 to 1900 and for Thanet from 1904 to 1910. Born in 1855 to the prominent Jewish theologian David Woolf Marks, Harry cut his journalistic teeth in the US before bringing an aggressive American newspaper style to Britain. Under the editorship of Marks, the Financial News fearlessly exposed other people's fraud and corruption. Marks was responsible for revealing the financial misdeeds within the Metropolitan Board of Works, and it was largely for this reason that he secured election as one of the first cohort of LCC councillors. But he was not content with the rewards of an editor's salary, and he used his position, as perhaps did other representatives of the financial press, to "puff" companies in exchange for payment. In the case of the Rae-Transvaal, however, he went much further, and conducted a massive fraud on the public. |
From at least 1890, Marks's fraudulent activity was sufficiently well known to lead to public accusations and a number of (unsuccessful) suits by Marks for libel. By 1903, Henry Hess was writing openly about the Rae-Transvaal scam that "it has become a standing wonder to all who know the particulars, how Marks and those who subsequently joined him in the venture escaped penal servitude." But this invective was not sufficient to prevent Marks from re-entering parliament in 1904, having retired in 1900 because of ill health. He retained his Thanet seat in 1906, much to the dismay of a dissident group of local Conservatives who in November wrote to the Speaker of the Commons itemising Marks's past record and arguing that he was "unfit to be a member of the House." They followed this up with a pamphlet, circulated to every sitting M.P., detailing a number of court cases from 1890 to 1904 in which the fraudulent actions of Marks had been exposed. There was, however, never any attempt to prosecute him for market rigging, or to unseat him from parliament. At his death, in 1916, he owned a country estate of 200 acres in Kent, where he was a J.P.; had a London residence in Cavendish Square; and was a member of the Carlton, Royal Cinque Ports and Royal Temple Yacht Clubs. |
Nineteenth-century commercial morality
The cases of Cochrane and Marks are as exceptional as the individuals themselves. Despite the almost baroque richness of the historical accounts, which lend themselves to a form of "thick description," it would be no more legitimate to take these two individual histories as emblematic of nineteenth-century commercial morality than it would to take the careers of Nathan Rothschild and Alexander Baring as typical of the nineteenth-century bank manager. But the actions of Cochrane and Marks, and the manner in which they were treated by parliament and the law, do indicate how stock market dealings were viewed by a wider world. |
The parliamentary response to Cochrane and Marks could not have been more different. Even though every M.P. was made aware of Marks's frauds, there was no attempt either by Parliament or the Conservative Party to distance themselves from him, whereas in 1814 Cochrane had been unseated by a vote of 140 to 41. It might be easy to attribute the benign treatment of Marks to simple good fortune if his were a unique case, but in fact the mid- and late-Victorian Parliament consistently condoned dubious stock exchange dealings. One of several other cases was that of Harry Seymour Foster, an exact contemporary of Marks. Foster, like Marks, was renowned for promoting worthless companies. Yet this record was no barrier to political position; like Marks, he became an LCC councillor in 1889, sat as conservative M.P. for Lowestoft from 1892 to 1900, for North Suffolk in 1910, and for Portsmouth from 1924 to 1929. For his good service to the Conservative Party he received a knighthood in 1918. |
Identifying the reasons for a change in parliamentary attitudes to financial fraud is not a simple task, but one important factor must be the way in which many parliamentarians became direct beneficiaries of speculative company promotions. In Georgian England, stock exchange activity was largely restricted to trade in government stock by a small number of wealthy investors. The exchange had become formalised in its own building only in 1801; few people other than City professionals knew much about its workings. The railway mania of 1845 changed this; hundreds of new joint-stock companies were floated, tens of thousands of small investors were attracted into the market by the prospect of high dividends and capital gains. Lawyers were perhaps the biggest winners from this speculative boom, but M.P.s also did very well. The new railway companies, most of which never built a yard of track or carried an ounce of freight, needed "respectable" citizens on their boards to convey an appropriate picture of stability and probity to the investing public. By the end of 1845, more than 150 M.P.s had "made a traffic on their presumed responsibility" by becoming railway directors, thereby entitling themselves to advantageous share allocations and directorial remuneration. The bond between the boardroom and Parliament grew in strength throughout Victoria's reign; in 1866, 216 M.P.s were company directors, a number which had risen by 1898 to 293, representing 44 percent of the House of Commons. Parliamentarians quite literally "bought in" to the methods and morals of the stock exchange. |
In terms of the law, Marks's Rae-Transvaal fraud was more calculated and more complex than Cochrane's "hoax." Cochrane supplied false information in the hope that the market would respond in a particular way. Marks, on the other hand, carried out a "sting"--first he created what was, in effect, a false company, then he supplied false information about its prospects, using his privileged position as editor of the major financial newspaper of the day, and finally he created an artificial demand for the shares by making bogus applications. But perhaps the most important difference between the two incidents is that whereas Cochrane's fraud was a unique event, Marks's scam was just one among hundreds of spurious company promotions of the mid- and late-Victorian period. Fraudulent company promotion had been clearly identified by the 1844 Select Committee on Joint Stock Companies as a problem requiring legislative action, but the minimal financial reporting requirements placed on joint stock companies throughout the nineteenth century, and the consistent failure of the legislature to tighten the regulatory regime, allowed company promoters and directors to extract many millions of pounds from the incipient popular capitalism that was developing throughout Victoria's reign. |
Assets and liabilities
In addition to the weakness of company and stock market regulation, there was a relaxation from mid-century in the judicial treatment of commercial crimes. This had more to do with the emergence of the general joint stock company after 1844 than with limited liability. In the joint stock company, there was a necessary divorce of ownership and control, and responsibility for incompetence or fraud was difficult to locate. When the private bank of Strachan, Paul, and Bates failed in 1855 and it was revealed that the partners (including the prominent evangelical Sir John Paul) had fraudulently used depositors' funds, they were held personally liable and were sentenced to 14 years' transportation. But when, a year later, the joint-stock Royal British Bank folded, in part because the directors had granted themselves huge (and secret) unsecured loans, it was difficult to prove anything other than contributory negligence. Sentences ranged between three and 12 months, and most of the defendants managed to escape the full measure of even this modest punishment. |
Changes in social and economic circumstances always put pressure on inherited rules of morality. This tension was apparent in the 1980s when liberalisation in British and American financial markets induced behaviour that was increasingly speculative and sometimes illegal; the tension was no less severe during the commercial expansion of the nineteenth century. What is striking about this nineteenth-century experience is the ease with which the new commercial morality became accepted and adopted by middle-class society. Mammon became civilised well before the century's end, but this civilising process was not one in which Mammon submitted to an inherited morality, whether evangelical or altruistic. Rather than the Bible being enthroned in the counting houses (the Stock Exchange Christian Association, founded in 1876, had only 250 members by 1901, or just over 3 percent of those eligible to join), it was the morality of Mammon that was exported to and enthroned in the wider world. It was incorporated into the civil law, acceded to in the criminal courts, and embraced by M.P.s who boarded the speculative stock market gravy train in their hundreds. |
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