Financiers and the Nation

A review of the book The Financiers and the Nation by Rt Hon Thomas Johnston PC, published c. 1937.
The Privy Councillor reviews the major frauds permitted by Bank of England and City merchants in 19th and early 20th centuries and ends with a few proposed remedies.

1/ The Steam Power Speculators:
It was in about 1825 that newspapers began to publish money articles[1]. That was when the first big Stock Exchange crisis developed out of the mad financial speculations in the application of steam power to industry. The use of James Watt’s great discovery was accompanied by a scramble of company-promoting in foolish and occasionally bogus enterprises; and while the capital savings of the nation were swept into the clutches of plausible crooks, a generation which ought to have benefited from the new power of wealth production, was suddenly engulfed in ruin.

In 1824, 156 companies were formed with an issued capital of £48 millions to manufacture a variety of products with steam power. By early 1825 the number of companies was 624 with an issued capital of £379 millions; imports of raw cotton rose by 61 million lbs. Values of South American shares rose fabulously and the London Stock Exchange (LSE) which held the national monopoly on the marketing of public companies, thought silver was so plentiful in Peru that the natives used it for cooking utensils. Then came the bust.

283 steam companies survived with a joint capital of £40 millions. 70 banks closed, six in London, and a run on the Bank of England (BoE) caused Huskisson, then President of the Board of Trade, to say the country was within hours of a state of barter. Fortunately the Bank Governor found £600,000 in one pound notes in the closet which was sufficient to save the situation. The Bank of France (BoF) lent £2 millions in 3-month bills and the BoE weathered the storm. Nevertheless, in Feb 1826, 60 banks stopped payment, thousands were ruined, all the South American and Mexican investments dwindled to nothing and confidence did not return until the end of the year. The Great Crash of 1825-26 impoverished hundreds of thousands not because of their own speculations but because their Bank Directors had invested their money in crazy schemes.

Henry Fauntleroy, managing director of bankers March Sibbald Stracey & Co, was found guilty of forging signatures and stealing £170,000 and was hanged outside Newgate in November. Remington Stevenson Bank failed with £500,000 debts. The Chairman was Sir William Cuningham-Fairlie, MP for Leominster, Treasurer of Bart’s Hospital and he personally took £200,000. When detection became certain he took another £50,000 and left for Savannah, USA.

In the days of Queen Elizabeth a state lottery was held. Later the British Museum was built partly from the proceeds of a national lottery in 1753. Lotteries continued popular until banned in 1826. Those lotteries might be considered as gilt-edged investments compared to the private banks of early 19th century. The banker had limited resources and the collapse of any one of his loans might put him out of business. These bankers traded before the great political indulgence of limited liability which Pitt had started with BoE and which all other bankers demanded too. That concession exempted merchants from most of their debts whilst preserving their profits to them.

2/ Foreign Loan Panics:
The second mania of the century occurred in 1835 due to bank losses on foreign loans. In the first 25 years of the century, London bankers had ventured £100 million abroad, mostly after Republican France was defeated[2]. Rothschild pioneered loans to Prussia, Spain, the Two Sicilies, Argentina, Colombia, Guatemala as well as holding the preponderant share in Russian and Danish loans. Of this sum, £25 millions disappeared without trace. Of the balance of £75 millions, Argentina defaulted in 1833, Colombia and Guatemala paid nothing for years. Mexico borrowed £3.2 millions from Goldsmit Brothers at 5% in 1824 and defaulted whereupon the world learned that Mexico had actually agreed to receive £58 for every £100 borrowed. Eight US states borrowed £15,040,000 and paid neither principal nor interest – Louisiana £2.6 millions, Mississippi £1.74 millions North Carolina £1.6 millions, South Carolina £2.7 millions, Alabama £1.2 millions, Arkansas £1.4 millions, Florida £2.6 millions and Georgia £1.2 millions. By 1930 arrears of interest on US loans equalled £52.34 millions.

In 1832 London banks were fighting a filibustering war in Portugal. Our protege for King of the country was Dom Pedro. We supplied him with money and British officers and military stores in an attempt to capture the Portuguese throne. This was not extending the blessings of civilisation – we were gambling for plunder. Admiral Napier was put in charge of the Portuguese fleet by the banks and when he seized Oporto we got first £800,000 and then £2 million of Portuguese bonds. We were not at war with Portugal but we took the money to allow the port to continue import / export trade[3]. We found the Portuguese bonds were insufficiently secured and off-loaded them onto the investing public in London. Dom Pedro’s predecessor as King (and brother), Dom Miguel, left Portugal and things looked promising but then the ungrateful Pedro imported German and Belgian mercenaries to secure his position and paid neither principal nor interest to us on the loans we had given him to stage his coup d’etat. As a result Portuguese access to the London market was stopped until 1856. The big Dom Pedro loan was for £2 millions at 5%. He actually received £48 for every £100 so the interest rate we charged him was over 10%. He responded by levying 15% import duty on the military uniforms and equipment we sent to him.

The rebellion for independence in Colombia was financed by the bankers Herring, Graham & Powles in 1820 with a loan of £2 millions at 10% interest with £84 actually paid for every £100 of debt. The London bank deducted 18 months interest (£150,000) from the loan up-front so the actual payment was £1,530,000. By 1824 the insurgency was progressing under Bolivar who prescribed death for any Spaniard caught helping the colonial government. Goldsmits raised a further £4.75 million for Colombia that year at 6% with £88 paid for every £100. By 1826 both loans were in default.

Exploitation of Honduras caused repeated disputes between New York and London. Bischoffsheim and Goldsmit led the London banks on a 10% loan that paid £80 for every £100 borrowed, secured on the country’s railways, mahogany forests and customs revenue. Default started in 1827 and the business was considered by a Commons Select Committee, see below.

Nicaragua paid nothing on her loans from 1827 – 1874 when she offered to pay 14% of the principal full and final. Two English groups retained the liquor and tobacco monopolies for the country until 1910 when both monopolies were declared ‘unconstitutional’.

After 1825, the entire country of Brazil belonged to the Rothschild bank.

Argentina was funded by Barings, Murrietta, Stern Brothers and Erlangers. A 6% loan raised in London which paid £85 for every £100 was in default by 1830.

Paraguay paid 8% but got only £64 per £100, perhaps because we could not get a gunboat up the river to Asuncion. British investors in this loan were told the country would be paid £80 but the banks deducted £16 per £100 in fees. This loan also defaulted.

There was a fight between money lenders in London and Berlin over Guatemala’s coffee warrants, with each group claiming precedence in taxing the farmers. This created ill-will between these two European countries that contributed to the contention leading up to the War of 1914.

Ecuador was for long unable to pay on its debt.

Greece got an ‘independence’ loan in 1824 of £800,000 but received £280,000. In February 1825 a second loan of £2 millions at 5% was made, of which the Greeks got £56 per £100. None of this money went to Greece – it was all applied to the manufacturing cost of two British-built frigates. Greece paid nothing on the loans from 1827 – 1879 but Rothschild was still willing to make loans in 1830s, secured on the national customs receipts.

Only two London financiers absented themselves from the usual South American business – Rothschild (except Brazil) and Barings.

The grandson of a Lutheran pastor in Bremen was the founder of Barings. From him descend the noble houses of Northbrook and Ashburton.

Of the Rothschilds, Nathan arrived in Manchester with £20,000 and thrived on cotton deals. Napoleon entered the German states along the Rhine and the Elector of Hesse Cassel, who supported the monarchical cause (i.e. an opponent of Republicanism), had to flee. His wealth derived from selling his able-bodied male populace to Britain as mercenaries. The Elector left £600,000 in care of Nathan’s Dad. The Elector’s own father had amassed £8 millions from the same source. Nathan in England applied the Elector’s money that his father sent to him to investments in the City of London and, most rewardingly, to funding Wellington in the peninsula where the ministry was unable to deliver gold and silver for the payment of our guerrilla force and regulars. Contemporaries valued Nathan’s income from this activity at £150,000 p.a. for eight years (1806 – 1814). His brother in Paris funded the French effort in the Peninsula from his share of the same Hesse Cassel funds and at similar profits. By 1812 Rothschild was acting for the British Royal Family (the Rothschilds have an estate on the lake adjacent to Balmoral). In 1814 he funded the Bourbon return to Paris and, after Waterloo, he was financing every crown in Europe. It was well known that he received news from insiders in every capital via his own couriers and usually knew more than the governments he financed. This enabled him to report or not report news that influenced investments and added spectacularly to his wealth. The £20,000 he started with multiplied 2,500 times in the following five years. He focused on the funds (i.e. government securities for loans, often called ‘gilts’ these days) and seldom entered the joint-stock market unless there was an irresistible attraction (as with the 1832 purchase of Spanish and Austrian mercury mines – the only known sources were then in Spain and North Italy and mercury was the essential ingredient in refining precious metal). The metal was also used as medicine. His mercury monopoly doubled the cost of that metal to consumers. Nathan’s son Lionel participated in 18 UK Government loans, French and Italian railways and Disraeli’s Suez Canal speculation. Lionel was elected MP for the City in 1847. He lost his seat in 1874 when he supported a tax on surplus wealth which his City constituents could not support. He opposed Gladstone’s attempt to abolish the income tax and lost his seat. (Historical Note – Peel had introduced Income Tax on British workers in order to repeal the Customs and Excise taxes on British business)

3/ Railroad Ramping:
In about 1836, repeated bad experience in foreign loans turned capitalist attention back to the home country. That year 42 new joint-stock banks were incorporated of which three quarters issued their own bank notes. The money in circulation increased by 50% that year but no new ventures were founded in which to invest this new capital and runs on the new banks caused a new crash. Almost immediately, banks started pouring their deposits into railways. Activity on the London Stock Exchange boomed but elsewhere in the country the economy was in recession. Ten railway corporations collapsed leaving their shareholders £78 millions poorer. The leading organiser and Railway King of the day was George Hudson who amalgamated some small firms into the Midland Railway Company which, by 1844, was operating 1,000 miles of track. He later added many other railway companies. When Gladstone sought to nationalise the railways, Hudson became MP for Sunderland and led the political opposition to Gladstone. Hudson accumulated £1.5 millions from stock transactions and little or nothing of this fortune came from railway profit. He paid dividends from capital until in 1847 when his venture collapsed. Hudson got away without penalty. But railway shares were unsellable for years.

4/ The Truck Acts:
These laws were enacted to restrain employers from paying their employees in items of their own manufacture, usually unprofitable items of low demand, instead of cash. Trucking was first legislated against in 1465 but still resurfaced from time to time, even four centuries later. The clay pipe trade for tobacco smokers was centred on Glasgow where workers were required to take a basket of pipes for their weekly wage in lieu of cash. A variant of the basic ploy, was to pay cash to workers but require them to spend it at the employer’s shop within the factory before going home. There they could buy food, clothes, whisky and bibles but at high prices. No other shop was permitted in the factory. The system operated throughout the iron and coal districts in 1860s. Wages were paid monthly (the nail-makers of Dudley were paid three monthly) and advances of wages attracted high interest payments. Employers justified themselves by noting that pay day was characterised by debauchery and they were mitigating that. A Commission of Enquiry found prices in the factory stores were generally 20% higher than the High Street. In Staffordshire they were 40% higher. Some Estates of deceased shop managers were valued at over £10,000 indicating how remunerative they were – high prices, poor quality, short measure and adulteration characterised their business. On pay day little cash was needed. The worker attended the pay window, received his wage, moved along to the shop window and paid his bill. The shopman passed the money through to the Pay Office who doled it out to the next worker. Parliamentary responses were frequent and ineffective. Law was enforced by Justices of the Peace who were often the owners of factories themselves.

5/ The Vultures:
The mid-19th century was the time of the Globe Assurance frauds. In 1844 Walter Watts earned £200 p.a. as a clerk in the pass-book department of Globe Assurance. Insurance payments by policy-holders were recorded in Pass Books and clerks verified receipt of payments by stamping the book. Watts’ son exhibited great wealth which he publicly attributed to good information given him by King Louis Philippe of France. He also worked as a clerk. After spending about £700,000 the son was arrested in 1850, tried, convicted and sentenced but soon hanged himself whilst detained in Newgate. The Globe concealed the facts but information seeped out. The pass-books were the basic information on which the company’s accounts were constructed. Watts’ MO was to understate payments received from policy holders and overstate payments out for claims. This simple scheme, which relied on management not checking the pass books, escaped detection for years.

Sir John Paul, the evangelical banker of Strachan Paul & Gates, failed in 1855 to an amount of £750,000 and all three partners of the bank were transported for 14 years.

The Royal British Bank started in 1850. McGregor MP for Glasgow and Humphrey Brown MP for Tewkesbury directed the bank and controlled its funds until 1856 when the shareholding fund of £158,000 and the deposits of £250,000 had all gone. Those two were gaoled for a year each.

John Sadleir was a banker and Junior Lord of the Treasury who killed himself in 1856. He made his entry to public life as MP for Carlow representing many Irish estates. He had access to the title deeds of estates belonging to the Irish church and forged copies to secure loans. He became chairman of the London County Bank and the Tipperary Joint-Stock Bank. In 1853 he became Junior Lord of the Treasury in Lord Aberdeen’s ministry. In 1856 his forgeries became known. Tipperary Bank failed to £400,000 and his other ventures likewise to an immense loss. The case is unique in that an unrelated third party had bought the Manor of Hampstead and claimed, as his precedent feudal right, the estate of Sadleir before other creditors. King Edward VI’s Letter Patent gave him all property of felons on the Estate and Sadleir’s suicide within it made him a felon.

The panic of 1857 started in USA and was enhanced by over-speculation of British banks. When nervousness spread and loans were called in, the financial market collapsed again. All banks holding American cotton bonds failed, the inability to pay spread and Disraeli announced 85 firms closed with losses of £42 millions. BoE issued notes in excess of its legal limit to stem the panic.

The last four decades were the same as the first six – boom, slump, boom, slump – causing the appearance of savings being removed repeatedly from the economy (or transferred to more canny investors). In 1866-67 a great crash was presaged by falling railway shares. Overend Gurney & Co., the greatest London bank of the time and second only to BoE in the extent of its dealings, failed with losses of £19 millions and, for the third time since enactment, the Bank Charter Act was broken and unauthorised money was printed to restart the wheels of commerce.

In 1875 a parliamentary Select Committee enquired into foreign loans after an estimated £60 millions had disappeared abroad. This revealed all sorts of fraud in the money market. Loans made to South and Central America countries at this time generally paid £60 actual cash for every £100 borrowed on contract. The banks responded to the Select Committee’s criticism by unleashing the press, both politically and financially, on Sir Henry James, chairman of the Select Committee and today there is no record of this matter available in the national archive. The Commons was cowed into inaction and boom and bust continued. The banking response to non-payment of loans was to recruit the Royal Navy to seize ships and goods of the defaulting country on the high seas or in the country’s ports. In 1903 bondholders in Germany, Britain and Italy sent gunboats to Venezuela to shell ports and sink ships until USA intervened and decreed that it would not recognise any seizure of Venezuelan land. British Naval officers claimed 30% of customs receipts at the main ports. The debts were eventually settled at The Hague for a small amount.

Ernest Terah Hooley was the most charismatic and entertaining fraudster of the century. He published “Mr Hooley’s Confessions” describing how he did it. He was first a lace manufacturer in Nottingham. He collected £100,000 from his business there and went to London in 1895 where he built a £7 million fortune which then slipped through his fingers. He was bankrupted three times and twice imprisoned for fraud. His procedure was to buy a small prosperous business and float it on the London Stock Exchange, adding to the value with notional goodwill until the share price was many times the former value. His first big project was the Dunlop Tyre Co which he bought for £3 millions and floated for £5 millions. He did the same with Schweppes, Singer Sewing Machines and Raleigh Bicycles. The combined nominal capital of his firms in 1897 was £30 millions and it was all perfectly legal – that’s how the City works.

Hooley pioneered the purchase of famous names on his boards. With Dunlop he found an agreeable Earl and contracted to pay him £10,000, same as a Duke, although a lesser noble was worth only £5,000 on his tariff. The identities were irrelevant so long as they were well-known. That brought-in the Duke of Somerset and some others and business grew faster. He was accepted for membership at exclusive clubs – Carlton, Badminton, Royal Thames Yacht Club, met King Edward at Sandringham, was appointed High Sheriff of Cambridgeshire and presided at the county assizes. In 1900 he floated the Siberian Goldfield Development Co. Ltd. for £1 million. He said he paid £75,000 to the Russian Embassy in London but this was later denied by Moscow. He took 10,000 sovereigns to the Embassy (156 lbs of gold) and the deal was approved. Hooley paid large sums to peers and smaller sums to London newspaper editors. He said these were the cause of his bankruptcies.

Li Hung Chang, the strongman of China in 1860s, sought for £16 millions to crush a rebellion in return for which Li offered Hooley a monopoly of the China cotton trade. This irritated the Rothschild and Baring families who believed they jointly owned China and they complained to the Foreign Secretary who told Hooley the government would not guarantee the loan.

Hooley’s procedure was simple. He bought peers to sit on the boards of his companies; he attended closely to the prospectus for each new issue which was always beautiful produced and reassuring and it had the names of numerous baronets, etc., on the cover. This procured the impression of solidity and safety necessary to separate investors from their money. Finally he collected the investments and supplied the share certificates. Hooley merely promoted companies and never involved himself in their management or operations. He got what he could out of them and left the actual running of business to others.

Concerning bankruptcy, Hooley had original ideas. He recalled that life went on after bankruptcy the same as it had been before and concluded it was not a bad idea to have a thorough clean-up once every ten years to ensure ancient claims would not return to disturb him. This annoyed his victims and in 1898 the Lord Chief Justice (Russell of Killowen) publicly noted that fraud was rampant in the City, widespread in its operation, touching all classes and causing great pecuniary loss to the community, particularly those least able to bear it.

Hooley’s method was duplicated after the Great War by many speculators most particularly in cotton mill shares (NB the 20+ years of war with French and American Republicanism was called the Great War in 19th century until the briefer First World War when that had the same name bestowed upon it). These businesses were bought for cash, floated on the LSE at whatever price was deemed possible by the involved broker and generally did well for a year or two before the crash. Each crash cost about £10 millions at that time. That is the system operated by the City and it is not repudiated by City merchants or institutions. The lives and fortunes of many of the population are involved.

6/ Usury in the Great War:
In August 1914 the BoE held £9 millions of gold. This was the reserves of all the provincial and national banks in the country who are obliged in the British financial system to hold the approximate amount of their monthly drawings with their London correspondent bank. Those lesser banks feared the fact of war would presage a run on BoE and, as their deposits were all out there circulating somewhere, they might quickly be obliged to cease payment. Lloyd George as Chancellor of the Exchequer allowed the banks to pay out paper instead of gold. The paper was Treasury Notes backed by the credit of the government, like Lincoln’s Greenbacks in the American Civil War. They were accepted by the people. Not since 1697 had the government issued its own notes (they were made legal tender for payment of taxes thus making them acceptable for all exchange). On this occasion £320 million of notes were issued, valid for all payments. The banks co-operated fully. In terms of the way the UK financial economy works, the issue was effectively an interest-free war loan from the people for an unlimited period. The proceeding was legitimised in the Commons by passage of the Currency & Bank Notes Act, 1914. Government redeemed over £70 millions between 1920 – 26.

Having saved the banks, Lloyd George was soon implored by them to issue no more Treasury Notes because they were interest-free and the banks could not profit from them. The Treasury agreed to open a War Loan at 3%. As each War Loan concluded, the creditors transferred into new loans at higher interest. The process is described in the Report of the Cunliffe Committee of 1927 (on National Debt and Taxation). The BoE created new money out of nothing for the banks to lend to the country at interest at a time when a generation of British youth was being sacrificed in Flanders. Interest rates increased through the war whilst the banks created an estimated £2 billion and lent it at 5% giving them effectively £100 millions of profit from the domestic economy every year. The first War Loan paid 3% and provided £100 scrip for every £95 lent to government. As Britain did not have £350 millions (the amount of the first loan) the BoE received pledges of credit from individuals and corporations. In June 1915 the 2nd War Loan at 4% was called and holders of the earlier scrip were allowed to transfer into the new one. So the new loan of £176 millions was actually mainly a transfer from 3%s into 4%s. Actually £138 millions of the new 4% holders exchanged 2% consols or 2% annuities for their new holdings making a gift to them of £4 millions of public money in extra interest. The bankers got a pledge from the then government to permit them to exchange their 4% stock into any higher subsequent loan. The 4%s were for £901 millions. Lloyd George believed the increase in British nominal capital reserves and the restriction on overseas investments meant the money might have been procured at 3%. Had investors declined to subscribe there would have been a clear authority for the conscription of their capital in the same way we conscripted their manpower at about that time. This was such a good deal, the banks invited customers to borrow at 3% and use the money to buy holdings of War Loan at 4%. This ensured the full amount would be subscribed. It would give the banks a louder voice to raise against the government’s prudence. Such financial dodges organised by the City (and complied with by the Treasury) were paid for by the people. In March 1916 the BoE said “If you cannot fight, help the country by buying the new 5% exchequer bonds. Unlike the soldier you run no risk.” The 3rd War Loan of January 1917 was 5% (or 4% free of income tax until 1942) and all the old war stock, plus £130 millions of Treasury Bills and £280 millions of Exchequer Bonds, could be converted into it. Again for every £95 received, a certificate for £100 was given. Thus the new 5% loan secured only £844 millions of new money with the balance of rolled-over money to £2,075 millions total loan. Finally investors in the 5%s were exempted of Income Tax if they chose to live abroad. These loans added £4 billion to the national debt and required 12 years of deflation (to 1930) to get interest rates back to 3%. The high rate also meant that all other money transactions (company loans, mortgages, etc.) were made at 5% at best.

In June 1919 the Joy Loan was offered. It required £80 to buy each £100 certificate paying 4% (i.e. 5% on the actual investment) to a total of £409 millions. . Of this loan, £120 millions was money converted from lower rates which added to the government’s burden. This loan ran to 1960 at 5% whatever the prevailing rates in the banks might have been. Finally this stock, bought at £80 per £100, could be used at the higher value for payment of Estate Duty. That summer of 1919 the Victory Bonds were also issued – £100 face value for £85 investment, interest 4% – to a total issue of £359 millions of which £71 millions was conversions from lower rated stock.

In summer 1921, holders of £632 millions of the War Bonds at 5% were invited to exchange to 3% notes with each £100 exchanging for £160 – £183 of the new scrip. This was thought by the banks to be the limit they could get on loans business and they then changed to a new policy. Unitedly with the New York banks, the City of London started to deflate prices. The method is always the same. Call-in loans and overdrafts to push debtors into selling their assets in settlement of their loans thus reducing asset prices. At the same time government was preparing to sell-off all its war materials – clothing, shoes, etc. – which would exacerbate price falls in those commodities. This would do two things – make many assets very reasonably priced and thus lower wages and, more importantly, if prices fell by half, the value of interest would be doubled (it would buy twice the amount of ‘stuff’). This would provide excellent returns on the war loans the bankers held. This policy of deflation was government policy until 1932 when the minister (the great Neville Chamberlain) introduced a ‘voluntary’ scheme to reduce interest on £2 billion from 5% to 3%. The bribe to get this approved was £20 millions or approx one year’s interest saving. Stanley Baldwin donated £150,000, said to be 20% of his fortune, to set an example but the City gentlemen were unimpressed.

(Note – This repeated plundering by the banks when the country was  in extremis provides a complete justification for government being the sole creator of money as has been consistently requested recently by of UCL and by a small handful of MPs.)

7/ Post-War Prosperity:
“….. and I shall be delighted to learn who, save you and yours, have gained by Waterloo” Lord Byron’s letter to the Iron Duke in 1815.

When WWI began, the belligerents carried national debts of nearly £6 billion Pounds (£5,775,000,000). At the end the figure was £40 billions. The City bankers said Germany must pay us back. In 1919 a Reparations Committee chaired by Australian Prime Minister Hughes said Germany should pay £24 billions. In 1921 this figure was halved. In 1922 it was further reduced to £6.6 billions. In 1924 it was again reduced by General Dawes and in 1929 the Young Plan cut it to £1.7 billions. In spite of big loans to Germany, even this reduced amount was not paid. Did we care? In 1919 – 1920 a great Stock Market boom was created in expectation of Germany paying. The Deutsche Mark had fallen to 8% of its pre-war value; the Lira to half.

In 1913 there had been new capital issues in the London Stock Exchange of £36 million for UK companies; £76 million for empire companies and £1.4 million for foreign companies. In 1920 these figures were £328 millions, £370 millions and £7.7 millions respectively. The banks were squeezing the manufacturers for repayment of loans and, to meet the cost, industrialists floated their companies on LSE. Effectively the banks called-in their loans and the manufacturers transferred ownership of their businesses to the investing public. This was a policy agreed between New York and London. Once the banks had their money back, the illusion of prosperity was abandoned. By Autumn 1920 stock prices were falling. Manufacturers were unable to get loans and sold-off their stock as soon as possible which collapsed prices. Industry slowed, workers were laid-off. It was like the 1820s again (after the Great War with France). Business failures numbered 2,286 in 1920, 5,640 in 1921 and 7,636 in 1922. Some of these failures did not repay their bankers but in this campaign to raise the value of money and lower the value of goods, risks had to be taken and the bankers’ gains well exceeded their losses. Note the sequence for it is always the same – first the boom, recapitalisation, watered stock and bonus shares; then, after the new listings were unloaded onto ordinary investors, deflation starts, prices and wages fall, divvies reduce and small investors sell-out.

8/ Farrow’s Bank:
This bank was brought-down by the deflationary acts of the big bankers. Farrow opened his doors in 1904 with £27,000 issued capital. He paid interest on deposits of 6-7% and this good rate produced £4 million of deposits. He published Farrow’s Bank Gazette which targeted religious people and carried articles by Tory MPs attacking government policies. The bank grew to 72 branches. It induced Sir Samuel Chisholm, a former Lord Provost of Glasgow, to chair its Advisory Board. Then in December 1920 the bank closed. The Director of Public Prosecutions said for 9 years the bank had made losses which now totalled £2 million but the accounts had all along suggested the firm was profitable. In June 1921 the Chairman, Secretary and Accountant were tried for fraud. The value of the cement and clay companies the bank owned were found to be greatly overstated. No assets remained to the shareholders. The fraud came to light when the Directors planned to offload the bank to some uninformed investor before its parlous state became more generally known. A New Yorker named Read of Norton Read & Co had concurrently come to London to sell shares in Caltex Oil of Mexico. Read was induced to buy the bank with £150,000 cash and to introduce £500,000 of new capital. It was the international aspect that caused the thorough investigation.

In 1931 the MacMillan Committee on Finance noted that London banks had created the ruse of passing large sums between themselves for a day so their accounts at end of the financial year were each sequentially improved by the new sum. This satisfied their auditors and was reported in the bank’s published accounts. Day-by-day the same money circulated bank to bank and was shown in all their accounts. The bankers call this ‘dressing’ and consider it an amusing prank. The amount of overstated assets due to ‘dressing’ was £75 millions at that time. This is what ‘good’ banks do, not bad banks like Farrows.

9/ Municipalities:
Plymouth, Rotherham, Chesterfield, Grimsby, Wakefield, St Helens, Bath, Poole, Doncaster, Bristol, West Hartlepool, Bradford, Swansea, Wolverhampton, Sunderland, Ealing, Newcastle, Nottingham, Blackpool, Sheffield, Eastbourne, Wigan, Southampton, Hastings, Tynemouth, Brighton, Stoke-on-Trent, Walsall, Doncaster, Birmingham and Gloucester – all these towns raised their municipal loans through Clarence Hatry and his group of speculators. Not all lost everything.

Wakefield had borrowed £422,000 repayable in instalments. It actually received £100,000 whilst Hatry has issued £350,000 of stock on the loan. Wakefield’s indebtedness was thus £672,000 and required a 30-year loan for the town to recover which added a farthing to the rates. Swindon sought for £500,000 and received £250,000. Hatry issued a further £220,000 of stock so the loss to the city was £470,000. Gloucester received £250,000 for a £500,000 loan whilst Hatry had printed extra stock of £217,000 so their total loss was £467,000. Britain lacked a National Investment Board or a Federation of Municipal Banks that might have proclaimed if not encouraged honesty.

Hatry started with Jute Industries, an £8 million joint stock company, which he later cut to the loss of the shareholders. He then started the Commercial Bank of London which folded in 1923 with losses; next was British Glass Industries which he floated with an immense sum on the accounts denoting ‘goodwill’ in the prospectus. It soon crashed thereafter. Despite the consistent history of failure, he was always welcomed by banks and provided with new credit! There followed the Drapery Trust, Austin Friars Trust, Automatic Machines, Corporation and General Securities, Oak Investment Corp, Retail Trade Securities – all of which were eventually blacklisted on LSE in 1929. That year he promoted Allied Ironfounders and contracted to buy £8 millions of shares in various steel companies to create a steel combine. The steel venture broke him. He borrowed to fund the share purchases but used some of the money to keep his other shares from collapsing in the Autumn 1929 market crash. At that time, between Sept – Nov, £8 billions was lost in NYSE listings. The exchange opened only 3 hours a day 5 days a week but the collapse continued. When the storm reached London, 365 public firms lost £349,775,000 of their value. Hatry’s response was to print his own municipal bonds to pay-off his creditors but when his liabilities exceeded his assets by £20 millions he gave up and confessed the forgeries.

10/ Lee Bevan:
In 1922 G L Bevan was Chairman of City Equitable Insurance and senior partner in the venerable stock-broking firm of Ellis & Co. (In the British financial system it is bankers, insurers and stock-brokers who control the markets.) He was also a Director of Leyland Motors, South American Stores, South Brazil Electricity and Agricultural Industries. He was a member of that group of businessmen that dictate economic policy to government. City Equitable had assets of £3 millions. Its £1 shares were 3/9d paid-up (3/9d refers to 3 shillings and 9 pence from the days when there were 12 pence to the shilling and 20 shillings to the pound) and they traded on LSE at £3 each. Dividends of 10/- were annually paid on the fully subscribed shares and Bevan was a City hero. His balance sheet assets were largely fictitious, his company was insolvent and he was personally enmeshed in all sorts of financial fakery. In 1921 he offloaded 250,000 preference shares that paid 8% – the issue was oversubscribed. At the same time he allotted 464,000 shares to existing holders in Greater Britain Insurance Corp and City of London Insurance. In Feb 1922 he fled the country, was caught in Vienna 4 months later, brought back, charged, convicted and imprisoned for fraudulent trading. The myriad transfers on his companies’ accounts baffled the auditors. The Jurors concluded that the frauds were possible only through the dereliction of duty of the other Directors – those peers and peeresses who had joined the Board for the Directors’ fees they received.

11/ Horatio William Bottomley:
In a City like London where ‘something for nothing’ is the guiding morality and a persuasive line of tattle will separate a fool from his money, lawyer Bottomley became a journalist and founded Hansard Publishing Union. It lost its capital of £1 million and Bottomley was prosecuted but defended himself brilliantly and was acquitted. He then founded the Joint Stock Institute and became rich in West Australia gold mining speculations. In 1906 he became MP for South Hackney. Between 1885 – 1895 he promoted 14 limited companies with total capital of nearly £3 millions. By 1906 all of them had disappeared – either liquidated, cancelled or ceased business. Between 1896 – 1906 he floated 43 companies. 13 were gold miners; others produced rubber or copper or speculated in land and petroleum. The nominal capital of these 43 companies was £21,751,000 but paid-up capital was not recorded. By 1906 30 of these companies had ceased trading. In 1908 he was again prosecuted and again acquitted. He was then harassed by his victims who launched many civil actions against him, one of which won damages of £50,000 and forced an apology from him in the Commons. In that case it was judicially established Bottomley had made false representations as to the value of shares that were actually worthless. In 1911, deserted by his former creditors and facing large legal bills, he found himself in the Bankruptcy Court. The following year he resigned his seat in parliament (MP for Hackney South). From 1906 – 1921 he entered new markets in timber, canals, printing and some investment trusts in which he found new investors willing to take a chance. He opened 19 companies at this time with nominal capital of £3 millions but soon 13 were in liquidation. This period covers the war years when everyone else was making great profit. In 1915 he started the War Loan Club Sweepstake and patriots were invited to buy certificates at 2/6d each. 90,000 people responded to the chance to get a block of War Loan stock as prize. A £1 investment in the sweepstake gave the chance of winning £20,000 in war bonds. Actually the investors did not get a prize, they got 3d back in the liquidation for every pound invested. Bottomley made three patriotic lectures to influence his targets – one on ‘King and Empire’; another on ‘Land of Hope and Glory’ and the third on the ‘Prince of Peace’. This last address was shaped to influence religious people and those who had lost sons. Thus were 90,000 patriots separated from their money. By 1915 – 1917, the public had become better aware and Bottomley felt the need to head-off complaints. He set upon an immaculate plan. He arranged a friend to re-publish the fraud accusations (only six copies of the accusations were printed). He then sued the friend who pleaded guilty and apologised. Bottomley paid all expenses of trial and gave the defendant a gratuity of £100. This slowed his victims down. Unfortunately 4 years later Bottomley fell out with the intermediary who had produced the ‘friend’ (the libel defendant) and he spilled the beans in a court action. Amusingly, the Judge in both cases was the same man. Bottomley’s biographer totalled his appropriations over his whole career at £4.5 millions gross.

12/ White & Loewenstein:
The City denied James White was ‘one of them’. When he killed himself in June 1927 his Times obituary called him ‘a particularly bold speculator’. White himself said he was friendly with peers and politicians, raised £150 millions for business and ran a racing stud. At age 19 he had amassed savings of £100 and bought a travelling circus. After 2 years he sold out. He organised boxing matches, ran theatres (Chairman of Daly’s Theatre), Director of companies, financed cotton mills in the boom, organised the group that bought the Covent Garden estate from Duke of Bedford for £8 millions, bought the town of Shaftesbury and the site of the GPO at St Martin le Grand, floated many companies. He loved gambling and it was a gamble on oil shares that finished him.

He launched British-Controlled Oilfields, a £9 million firm with Sir Edgar Edgar and one of the Mitfords as co-directors. Between 1924 -26 the shares fluctuated from 53 to 253 and White bought more shares on the drops, expecting to ultimately sell-out to Americans who were just starting their love affair with oil. Unknown to White, his partner Sir Edgar Edgar off-loaded huge blocks of shares just as White was engineering a boom. He failed to settle with the brokers and killed himself. He had just contracted to buy Wembley Stadium but left nothing but debts, including £1.7 millions due to the tax man.

Loewenstein disappeared over the Channel in his private plane in July 1928. A post mortem found poison in his stomach. His Int’l Holdings Company had sustained a £12 million loss of value on the exchange but he was still able to bequeath £5 millions to his wife so he seemed solvent. He employed many personal servants. His father was a stock-broker from whom he learned the business of speculation.

He floated electricity companies in South America and Europe and tried to get control of British Cellulose (later British Celanese) which made artificial silk, but quarrelled with the Dreyfus Brothers who had invented the process and sold out. In 1926 he offered the Belgian Govt a loan of £10 millions interest-free for a year with secret terms believed to be the grant of a monopoly in Belgium for some commercial purpose. He did the same to France but was turned down by both countries. In 1928 a syndicate of European banks concerted their efforts against him and worked the shares in his Int’l Holdings down by 40%. Why they attacked him is unknown, but he certainly taxed all silk stocking buyers and electricity users in South America which should be remembered.

13/ Kreuger:
When investors are fleeced in a new way, that way becomes public knowledge and cannot immediately be used again. The confidence trick must be continually up-dated to be successful. The Swede Ivar Kreuger offered loans to European governments after WWI. Many governments were impoverished by war and receptive. His Modus Operandi was to forge Italian Governmentt bonds and deposit them as security for cash, mostly with Swedish bankers. Kreuger offered to make loans to these impoverished governments in return for a monopoly on the sale of matches in each country. He had already amalgamated many small match manufacturers. By 1919 his match company had a capital of £20 millions. He paid divvies of 12-15% and within a couple of years his corporate capital was £40 millions. He shot himself in Paris in 1932 and the examination of his affairs involved audits of over 400 companies, including the Ericcson Company.

In 1929 the Young Plan for the financial rehabilitation of Germany involved the German Government in raising a loan of £25 millions. Kreuger offered to provide the complete sum himself in return for a match monopoly in Germany. For every £100 of loan, £93 was actually paid and Germany agreed to pay 6% annual interest on the greater sum. Kreuger set up a German company with 50% shares in his control. Germany allowed him to make 8% profit and anything over that was to be shared between the Governmentt and Swedish Match Company (Kreuger’s company). The retail price of matches was increased to 3d per ten boxes which increased their cost to German consumers by £700,000 each year.

He printed Italian government bonds and deposited them in banks he owned. He then borrowed depositors’ cash against the security of these forged bonds. He told fellow Directors they should not discuss the bonds as it would embarrass the Italian Government. Another loan to the Spanish Dictator Prima de Rivera was in process when Kreuger died and was not paid to Spain although it did appear as a Kreuger asset in one of his companies. Kreuger had paid £66,000 to a Spaniard to procure government approval in Madrid but the intermediary fled with the money and threatened Spanish ministers with publication if they prosecuted.

One accounting entry described an asset of 34.6 million Florins in International Bank & Finance of Danzig (Gdansk) but the bank itself did not have an account or the money, so they said. The insolvency was estimated at £67 millions by Price Waterhouse and that was never traced. So, not only were a great many frauds perpetrated to get the money but these frauds were never detected by great capitalists and the money was said to have completely disappeared. Not one of the involved businessmen knew where it had gone. It did transpire that Kreuger was one of the first businessman to recognise the value of political contributions. He paid not only Swedish Prime Minister Ekman, but all the parliamentary factions and the press in Sweden. Presumably he did it everywhere. How else can one explain the silence of the world’s newspaper editors? In France matches were a state monopoly but he did get a monopoly on matches made of aspen wood. In return he raised a £15 million loan for France in America. He also tried to enter the Russian market but, not only did they deny him, but they sold Russian matches everywhere at 50 – 75% of his own prices. It was Wall Street that toppled him. An American banking cartel urged President Hoover to give Germany a year off interest payments to establish a sinking fund. Another cartel which had part-funded Kreuger’s loan to Germany urged Hoover to exempt the Kreuger loan from the moratorium on interest payments. Hoover went with the first group and did not approve the exemption. In March 1932 Kreuger killed himself.

14/ British Thrift:
The Macmillan Committee on Finance and Industry selected 1928 for review of investment results in public companies. In that year British people subscribed £117 millions for shares / debentures in 284 companies. By May 1931 those investments were valued at £66 millions. Actually the loss was greater as many shares had been sold at a premium. Of those 284 companies, 70 had been wound-up and 36 others were totally insolvent. These 106 companies had apparently lost £20 millions resulting from the activities of the Hooleys, Hatrys and Bottomleys in the City. Astonishingly, capitalists say it is socialists who confiscate capital!

After WWI the gamblers focused their attentions on the Lancashire cotton industry putting those manufacturers under immense bank debt. In Jan 1928 Professor Daniels told the Royal Statistical Society of 129 cotton companies with paid-up capital of £19 millions which were bought by speculators in the cotton boom of 1920 for £38 millions. Six months later those companies were in debt to £17 millions with additional overdrafts of £5 millions and debenture loans of £1.2 millions. This is the business model of today’s KKR and the rest and its been going on uninterruptedly for a century.

In 1927 the Commons learned that 200 mills were under bank direction and 90% of those mills were responsible to just four banks. Dividends on 210 of these over-capitalised cotton companies fell to 3% a year whilst 65 mills that had escaped bank reconstruction were paying 7-8% per annum. The bankers looked at the accounts and demanded wages be cut to reinstate the capital they had removed. The Balfour Committee on Industry and Trade noted a great staple industry had fallen victim to speculators and company promoters.

On foreign adventures, the Macmillan Committee reported that the City is often more organised to provide capital to foreign companies than to British business. It is repeatedly supposed that British capital in foreign countries always serves our ends by providing third countries with our capital goods to develop their exports and increase the buying power of their people. This is untrue. Our arms sales, our booze and tobacco smuggling, our financial support to cheap labour jurisdictions mainly bolsters reactionary and oppressive dynasties.

In 1919 the Chinese Government raised a loan at 8% to buy aeroplanes and build airports, all to be supplied by Vickers Ltd with funds provided by Lloyds Bank. The bank actually paid £98 for every £100 of capital loaned to Vickers. This loan was quickly in default and the investors (existing shareholders of Vickers were preferred) found their money gone, nevertheless, arming foreigners is a sought-after field for British speculators. And a reason can be seen in the Japanese naval bribery trials in 1914 wherein British arms manufacturers were shown to have bribed the Japanese Admiral.

In Turkey in 1913 the Armstrong Vickers Group contracted with the Turkish government to reorganise the naval arsenal and docks on the Golden Horn. A couple of years later a great many British men died at the Dardanelles. Again, some British ships were sunk in the Med by Austrian submarines. The torpedoes were made in the Whitehead works in Hungary of which business Vickers were large shareholders. The Whitehead factory also made seaplanes and submarines that were used in anger against us.

In March 1926 National Provincial Bank raised £2.5 millions at 7% for the Skoda steelworks in Czechoslovakia thus enabling strong competition with our domestic steel industry. The loan was guaranteed by the British & Allied Investment Corp of London (a species of export credit insurance business). The same year Hamburg solicited a loan from London offering £100 for every £93 and paying 6%. It was heavily over-subscribed. In Oct 1926 Belgium asked for money offering £100 for every £94 and paying 7%. Subscriptions flowed in and reached £300 millions.

On the other hand, when our colony of New South Wales sought for £4 millions from London at 5%, only a third of the loan was taken up. A few months later NSW asked again offering to pay 5% and accept £97 for every £100 of debt but still the City gents only took up 15% of the offer. Something was apparently missing from the Australian business.

Sir Arthur Salter, economic director of the League of Nations, noted that in 1927 – 28, the two years immediately before the Great Depression, Germany borrowed from UK / USA about £400 millions, approximately five times the amount due from Germany in WWI reparations. South America and Australia were also heavy borrowers at that time. The US Congress discovered the President of Peru had been bribed to promote loans of $100 millions to the Peruvian government. Salter recalled that when war broke out between Paraguay and Bolivia in Dec 1928, an investigation showed Bolivia had received a loan for railway construction but had spent the money on guns. Nevertheless, the same bank gave a further loan to Bolivia when it was already apparent the two countries would fight. This seems to have been ‘business as usual’ for the banks although it encouraged and enabled violent solutions. Salter also mentions the Brazilian Moratorium. Since WWI the Brazilian federal government, the individual states and some cities, had issued long-term loans to $800 millions. The purposes of most loans were never achieved and the country pleaded poverty over repayments.

Colombia also borrowed heavily to build a railway through a tunnel between two valleys separated by a 9,000 feet range of hills. Both valleys had existing outlets to the sea and thence to world markets. The Federal government started on its tunnel through the hills whilst the local government built a road along the valley at the same place. These absurd investments were duplicated in Europe throughout the years after WWI. City bankers borrowed in London at 3% and lent to Germany at 8% and, when repayment was unavailable, the City petitioned the Treasury for public money, attributing their ‘poverty’ to unemployed workers who were receiving the dole. The Royal Institute for International Affairs attributed cause to British banks borrowing short and lending long. The extent of failed loans in Germany was quantified at £70 millions. Government and Press both lamented the adverse trade balance in loans but the banks continued the practice. In November 1930 it was revealed that German factories borrowed from London more cheaply than British factories trading on overdraft, then set at 5%. Of £250 millions of acceptance credits given by the City, three quarters went to foreigners. Usually the German loans required repayment to start after three months; after that they renewed with another bank and got another three months. In this way they got credit at better rates than the overdraft rate used by many British factories. German factories then extended their London credit to their customers making them formidable competitors in world markets.

Having reviewed the Privy Councillor’s lamentable history of repeated City frauds, we now come to his proposed remedies:

15/ A National Investment Board (semi-nationalisation):
During WWI the government set up the Capital Issues Committee to scrutinise all offers to borrow money from the public for long-term loans. Listed companies had to obtain a licence from the Treasury to solicit new loans. This limited the chances of a fraudulent or unnecessary loan being offered. In Feb 1919 the Committee was reconstituted to preserve capital during reconstruction after WWI. This caused those capital issues, that had been stopped on LSE, being offered through banks over the counter directly to public subscribers. The bankers then arranged for some issues to be listed on continental exchanges. The government surrendered its attempt to preserve capital and abandoned its supervision of the home capital market. This facilitated the post-war boom.

A system based on persuasion was substituted whereby BoE refused facilities for some foreign loans but large amounts of capital nevertheless went abroad. In the first half of 1931 money was going out in this way whilst unemployment at home was increasing. Two thirds of the London Capital issues at that time were for overseas account – £9 millions for foreign loans and £35.5 millions for India and the Colonies. In 1930 capital loans in London were £35 millions for foreign and £61.5 for India and colonies as well as £12.5 overseas loans placed through the LSE. In this year the Board of Trade calculated UK balance on international account at £39 million. By the first half of 1931 the balance was zero.

Against this background, Keynes suggested a National Investment Board of nominees working under the Chancellor of the Exchequer (CotE) should collect all resources in the hands of the various government departments (Post Office Savings Bank, National Insurance, etc.) into one fund to finance all government. The Board was to attempt to lower the interest rate payable on the national debt. This Board was strangely unauthorised to protect municipalities from City speculators; small investors were also left out, whilst, on the other hand, the Board was permitted to loan to non-state entities. The main effect of Keynes’ initiative was to introduce the concept of reasoned planning of capital resources as opposed to unregulated market forces.

Paine of Lloyds Bank welcomed the move but feared a check on competition. He wanted a committee of banks and the LSE to control new issues i.e. the City would decide, not the nation. A further idea was for the Board to publish every licence application that it had refused, so investors could see and assess their own risks. This was also declined by the banks as a handicap to business which would tend to make the City’s capital raising more expensive. In any event the Board likewise did not agree to make guarantees of sound administration or payment of dividends by those companies they approved. E H Davenport in New Statesman (10th Oct 1931) noted average costs in promoting a new public company was 10% of the issue for listing and 50% to buy-out former owners.

A result of this unregulated market was too much capital entering promising trades as occurred in silk weaving, safety glass and gramophones. This required the market leaders in each industry to cut prices to below cost and force the excess capacity out of business. Savings accruing in Britain were either reinvested or put into the long-term capital market. Davenport says c. 38% was reinvested, mainly by mortgage sellers and building societies which collected money specifically for house-building and c. 12% was reinvested in other types of business. The remaining 50% entered the unregulated long-term capital market where profit was the sole motivating policy at home and abroad. The annual amount of investment into this market was regulated by the banks to engross the available capital – municipalities bidding against municipalities, utilities against utilities until the market had been emptied of capital, interest rates increased and the cycle recommenced. This describes the domestic investment scene.

For the foreign market more or less all loans to public authorities in debtor countries (those not recommended by League of Nations or Central Banks) were completely lost. All this international business should be under the control of an international regulator. This would be opposed by the arms industry but would nurture and better utilise our capital. Then we might exchange gluts of silk garments for better maintained ports, roads and railways.

Some say that capital cannot be controlled and always flows to the investments providing the best return. In fact in 1924 the Treasury was restricting public lending to only approved countries. It tried through BoE to place obstacles against other foreign investments. For example in 1933 the Treasury only approved a loan to Denmark to build a bridge if the construction materials were British. The idea of capital automatically flowing to the best return is also contentious. When Credit Anstalt failed in 1931 a creditors’ meeting was held in London and every single bank in the City turned up. It transpired they had all been individually tapped by the Austrians. There was a new phenomena at this time – the private placement – whereby a London bank brought up the entire share capital of a new company, sold off some to insurers, other banks, etc., and then found an accommodating stock-broker to quote it on the exchange. By 1932 these private placements on LSE were valued at £15.5 millions.

Apart from a National Investment Board, it was also proposed to stimulate provincial banking, promote the Post Office Bank and nationalise the BoE. These three proposals would have further restrained the speculative ventures of the City.

16/ A Nationalised BoE:
At time of writing (c. 1937) the BoE publishes a weekly return of its accounts. There is no balance sheet, no revenue account, no Annual Report – nothing else. It appears to still be a private company but no longer identifies its shareholders or how Directors are elected and it has the monopoly on issuing money in England. MPs may ask no questions about its ownership. It lends to foreign countries that compete against Britain. It administers all British debt and holds 85% of the cash reserves of the total liabilities of British banks. It controls inflation, deflation, wages and employment at the direction of its board of merchant bankers. It buys and sells paper in the open market and increases or decreases the market supply of cash. It has a capital of £14.5 millions and pays 10% every year to shareholders (between 1922 -1932 the dividend was 12%). The Bank of England is the heart of the skin game. The Governor of this private company (Montague Norman), when he travels abroad, uses a passport under the name Professor Skinner!

This is the institution that controls our democratic society and directs the minister’s financial policies. Gladstone was unable to challenge the supremacy of the BoE but he did succeed in creating a Post Office Savings Bank that allowed him a measure of independence. As a result all the City MPs combined to frustrate his political initiatives. Lloyd George said “we ended the veto of the House of Lords but established a more sordid one in the City. Their remedy for depression is to artificially prevent plenty from alleviating need. It is the heart of reaction. No government can fulfil its representative function without confronting the money interest.” This is the price we all pay for allowing a small private company to control debts and credits.

At the time of writing only Britain and Germany (as a result of WWI and pressure of the international banking groups to control the German economy) have private central banks. Even the Fed pays 6% to the US Treasury every year. It appears all state-owned central banks are more beneficial to their countries. The bankers’ arguments against government ownership of the central bank are a/ that civil servants are too stupid compared with bankers and b/ they might inflate the currency when revenue is tight. Neither argument has merit. A government bank can regulate speculation by controlling overdrafts and loans of commercial banks; it can regulate discount houses. This would rationalise the use of British savings.

17/ The Douglas Scheme (1933)

National productivity is measured. The annual productivity increase from technology, etc., is paid directly to citizens by the state. The citizen takes his productivity dividend to the shops and the shopkeeper reduces his price for goods by their value. These tickets eventually return to BoE where they are cancelled. This increase in consumption cannot cause inflation as there is actually a reduction in price which passes back through distributors, wholesalers, manufacturers to BoE where it is written-off. The increase in national economic activity has been given to consumers and passed back up the chain of production thus stimulating employment. No more glutted markets, limited production and consequent unemployment.

In 1793 Liverpool merchants petitioned the city Mayor to get a loan from BoE to mitigate the distress of the townspeople. BoE refused but the Commons (Prime Minister – Wm Pitt Jr) enacted that the city council might issue negotiable notes for the same purpose. Total issues were restricted to £300,000. The notes were freely exchanged and by Feb 1795 were valued at £140,000. Traders got advances on all sorts of goods, land & buildings, ships on the stocks and Bills of Exchange. The panic was stayed, bankruptcies avoided and the whole sum with interest was repaid in 3 years. Sidney and Beatrice Webb described the operation as “the boldest financial step in the annals of English local government.”

18/ The Guernsey Experiment:

In 1815 the Finance Committee of the Channel Islands parliament commended acquiring land to build a market and make roads. It proposed to issue local notes to £6,000 to fund the works. In 1816 £4,000 was issued, some works were done, and the notes were then sequentially redeemed and completely destroyed by April 1818. In May 1820 the new market scheme commenced and £4,500 of new loan notes were printed, redeemable in 10 years out of import duties on wines and spirits, etc. By Sept 1821 total interest-free notes in circulation was £10,000. This success caused the Finance Committee in March 1826 to issue £20,000 to build some schools and a college. By 1837 there was still £55,000 in circulation. These infrastructural improvements increased tourism and population.

After 1826 the voice of the money usurer was heard in the Channel Islands. Bankers said notes could not be issued without the approval of the King-in-Council. The Islands’ Governor opposed this and managed to defeat it. In 1829 the bankers appealed to the Privy Council but this also failed. Bankers then deluged the Channel Islands with their own notes to discredit the local notes. The Governor buckled and, in 1836, agreed to limit his issue to £40,000. It remained at that amount until 1914 when it incrementally increased to £150,000 in 1930s. The Governor noted that his issue cost £450 a year whereas a bank loan would have been at 5% a year. The measure kept taxation down and, more importantly, benefited the whole community by being non-inflationary.

19/ Professor Soddy:
The chemist Professor Soddy, the collaborator with Ernest Rutherford and the  discoverer of isotopes, published many suggestions for the improvement of the financial economy most of which have since been adopted. He alone was willing to address the matter of national debt. He assessed that about £2 billion of British national debt was fictitious book-entries. Nevertheless, some people had surrendered securities or property for their debt certificates and it was thought too late to distinguish the precise situation. He proposed the state buy those certificates as they came on the market with new interest-free money that the state itself issued and then cancel them. The country would then be free of £100 million in interest payments annually.

20/ The Gesell Theory:
Silvio Gesell is little-known in UK. He spent his retirement in Switzerland promoting interest-free money. He thought, whenever a public body undertook public works, it should issue its own currency notes to the value of the contract. These notes would lose value at 5% per annum. This would discourage hoarding and cause the notes to circulate quickly. The holder can pay his bills or taxes with these notes. The velocity of Gesell notes is accordingly greater than bank notes which depreciate these days at 2-3% a year. Inevitably they both stimulate consumption / employment and relieve the community of interest on debt. This is like the commission charged on Postal Orders if presented late. The system was tried successfully in Bavaria and Austria in about 1932 but the latter country’s Central Bank prosecuted for infringement of its monopoly on note-issues. Since then many US towns have operated on interest-free money too.

21/ The Post Office Savings Bank:
At end 1932 there were 10 million deposit accounts in this UK government bank that Gladstone had been able to get passed the City bankers. Those accounts held about £325 millions including interest due. The Post Master-General (PMG) was then the largest banker in the world based on the number of accounts and amount of deposits, particularly when the depression drove money out of industry and into joint-stock banks. A similar operation called the Trustee Savings Bank, operating under government supervision, without profit to shareholders, had 2 million accounts with £202 million deposits. All deposits were guaranteed by the state.

These banks were continually opposed and hampered by the joint-stock banks from Gladstone’s time on. The merchant bankers succeeded in seducing MPs to impose many prohibitions and restrictions on Savings Banks. For example, until WWI no depositor could deposit more than £50 a year or exceed a total credit balance of £200 i.e. the savings banks could not exceed the national debt in deposits. Cheques could not be received or issued; Scottish bank notes were disallowed; dividends and sight bills were forbidden; no interest might be paid on small balances or holdings of less than a month.

The Fabians succeeded in removing many of these restrictions and, by 1933, the situation was somewhat improved. Deposits up to £500 could be made by 1934 but larger depositors were obliged to use a joint-stock bank. Withdrawals continue to be limited to £3 per day. The most irritating restriction – the prohibition on cheque payments between the 10 million account holders – remains in spite of continuous political lobbying by the Post Office Clerks’ Association, due to the intransigent opposition of the Treasury on behalf of the City banks. The state pays 2% on these deposits whilst it pays 5% on war loans. Its a no-brainer, as all European countries know. They permit cheque payments between accounts and everyone (except Germany in 1926) is profitable. If the restrictions required by private banks were removed from the Savings Banks, the Post Office Bank would command the market for money for domestic exchange.

22/ Municipal Banking: (c.f. The book “Britain’s First Municipal Bank” by J P Hilton.)

Birmingham got statutory power to form a municipal bank in 1916. The original Private Member’s Bill of E S Montagu was to authorise any town of 50,000+ residents to form its own municipal bank. This alarmed the City who demanded through their captive MPs that the Bill be withdrawn, which it was. (NB – the City has its own unelected representative in the House of Commons known as The Remembrancer, who sits near the Speaker, to observe and report on the deliberations of the representatives. The City owned about 60 votes in the Commons at that time.) Then Birmingham persisted for itself and the Municipal Savings Banks (War Loan Investment) Bill, with many amendments, was passed. It was then found the amendments made the Act unenforceable, e.g. the Treasury paid 3% for the bank’s deposits but required the bank to pay 3% to its depositors.

The Birmingham City Mayor, Neville Chamberlain, almost single-handedly forced through the issue against the private bankers (almost single-handedly, as his father Joseph Chamberlain was CotE at the time). He promoted a private bill in 1919 and steered it through the Commons. This allowed the Corporation of Birmingham to operate a bank under Treasury guidance which meant a restriction on use of deposits – the Treasury required 50% of deposits be invested with government and only the balance used for municipal purposes. Despite other orchestrated restrictions by the City bankers, the Birmingham Bank was a signal success. This was Chamberlain’s egregious fault in the eyes of British state historians but his municipal bank is unmentioned in their criticism – instead they protest his later success in delaying war with Hitler, which they called ‘appeasement.’ As an ‘unsound’ man, Chamberlain has been written-off by academic historians. He should be remembered for this popular triumph in banking which was a joint venture between himself in the Commons and his father as CotE. Later when Neville Chamberlain was himself CotE, and in command of the Treasury, he was unable to extend the scheme to any other municipality, such is the independence of the City and its power over the staff of the Treasury. By 1932 the number of Birmingham depositors was 356,000+, one third of the town’s population. Swansea (1920) and Wigan (1921) tried to emulate Birmingham but could not afford the costs of a Private Bill that was necessary to introduce the subject in the Commons. Sheffield (1928) however paid for a Private Bill but learned that unless the provision for a municipal bank was withdrawn from it, the Treasury would oppose it. Bristol was treated equally contemptuously in 1926 by the Treasury on the same grounds. Altogether 19 large municipal corporations tried unsuccessfully to make their own banks but were rebuffed by the money-lenders acting through Treasury officials like Sir Otto Niemeyer.

In Scotland, local officials found their law allowed them to form banks without central government oversight. A Scottish town council forms itself into a Municipal Bank Ltd., with limited liability. Subscribers (the Councillors) agree the bank’s trading name, that its shares may only be held by town councillors, that no councillor may have more than one share which he must surrender to his successor when vacating office and that no profit or dividend will be paid, neither may a ‘director’ claim remuneration. Flotation costs are obtained from the town’s common fund (in England that would come from the Mayor’s salary and expenses or indeed from any one of myriad other sources). The bank contracts with the Town Council for use of office space and staff at a nominal sum. The bank’s shingle is put up, ledgers and passbooks printed and ‘off you go’. The bank pays 3% which is more than the P O Savings Bank and invests only in municipal departments which have the security of the rates behind them. The town then incrementally pays-off its 5% loans from the City banks, substituting the credit of the town’s new bank, and thus supplies cheaper services to the people. These Scottish banks not only received savings but also took time deposits at slightly better rates than the City banks. Every year the councillor, acting for the time-being as bank manager, totalled the interest paid to depositors, the amount of deposits and his working expenses and sent the account to the Town Council. He asks for no profit so the bank pays no income tax. 1+% is saved annually on the rates. It is a distinctly socialist experiment (i.e. in the interests of society) which might explain why the word ‘socialism’ is so hated by the financial sector. These experiments occurred through a period of global depression but municipal banks sustained no runs. In spite of widespread unemployment, deposits steadily increased. Account holders knew there can be no panic for it was their own money circulating within the community and not being sent off to London to be taxed.

The City bankers and Treasury responded by obtaining a revision of the Companies Act 1929. An amended Clause 17 addressed ‘the peril of cheap money’ by forbidding the use of the word ‘municipal’ in a bank’s name. When Kilsyth Corporation started its own bank it was Kilsyth Bank. Interestingly no Town Councillor ever proposed disbanding a municipal bank – not one. Every Pound raised from citizens for their own business is a Pound removed from the private speculator in finance.

23/ Co-operative Banks:
The Co-operative Wholesale Society (CWS) Bank is banker to all Co-operative Wholesale Societies and almost all retail Co-operative Societies. It is the banker of the Labour Party, of most Trade Unions and of their approved Health Societies, of some Friendly Societies, and (as of Jan 1933) of 43,000 individuals. The assets of the Co-operative Wholesale Society underwrite the bank. It provides no services to those competing with the Co-operative Movement. It is not a clearing bank. It has no account with the BoE. Customers must use a high street bank to pay-in or withdraw money. The rate of interest on deposits is determined in arrears every 6 months when the available surplus is calculated. It varies from 2-3% depending on the period of deposit. Three month’s notice of withdrawal is required.

The bank makes no profit and pays no dividend. All surpluses are shared between borrowing and lending customers – lower interest to borrowers; higher interest to lenders. CWS Bank started in 1872 making loans and taking deposits from amongst members. In 1876 legislative restrictions were removed and it functioned as a bank. Its business increased beyond the promotion of CWS trading requirements and it started investing in government bonds, municipal bonds, railway mortgages, etc. By 1933 its credit balance was £65+ millions.

We now consider the relationship between the nation on one hand and the joint-stock banks, City magnates, Acceptance Houses, Discount Bankers and the London Stock Exchange on the other:

In 1886 there were 109 joint-stock banks with £38+ millions capital and £229 millions deposits. Amalgamations reduced the number of banks to 35 but their capital increased to £48 millions and their deposits & current accounts were worth £900+ millions. These steps towards cartelisation alarmed many Chambers of Commerce and in 1919 the Treasury forbade further amalgamation without government consent.

By April 1933 there was still an apparently competitive banking system made up of the Big Five (Barclays, Lloyds, Midland, National Provincial and Westminster) plus 4 more clearing banks, 5 county banks, 2 West End banks, 9 Irish banks and 8 Scottish banks (totally 33 banks). Their total deposits were £2.55 billion. Co-operative banks had £65 million deposits and two private banks (Barings & Hambros) also accepted deposits. The structure is not as competitive as it appears. Four Scottish banks were controlled by one or other of the Big Five whilst the other four had close working arrangements with the Big Five. All Scottish banks had by then committed to not out-bid each other for deposits or loans. Coutts had become part of National Provincial; William Deacons swapped shares with Royal Bank of Scotland; Belfast Bank sold out to Midland and Ulster Bank to Westminster, but both continued trading as apparently independent entities. Only the minatory attitude of the Treasury preserved the illusion of competition.

A single control of banking would seem efficient – many bank buildings were redundant as was competitive advertising and all major banks had 20 – 40 expensive Directors. These Directors were all old men, long retired from business, some ex-government officials and a few peers. Almost all of them were devoted to country pursuits and unwilling to spend much time away from them. Charles Addis opined that the banks were virtually government guaranteed as the insolvency of one would affect them all. Yet despite the wasteful organisation of the industry, they feared further amalgamation might antagonise the public and help those who would nationalise banking. In 1932 the Big Five made £11.5 millions profit and paid 12-16% dividends. Other banks’ results were comparable due to absence of competition.

The case for nationalisation:
Control of credit is as fundamental to a nation as control of its armed forces. If private companies can exploit the national credit for profit, the surpluses accruing to them should rightly accrue to the state.

It is now known that banks do not profit from deposits costing them 3% interest which they lend-out at 6%. This small profit is completely consumed in administrative cost. Bank profit derives from credits created out of nothing on which borrowers pay 5-6%. By granting loans or buying investments, a bank creates a credit in its books which is equivalent to a deposit of almost the same amount. By repeatedly re-lending these credits the bank grows their value to about nine times their amount. A small amount (in this example 10%) is unencumbered as a solvency margin i.e. exactly as today’s (2014) Basel III requirement.

If the state nationalised the banks, they would be left with short-term loans to private enterprise. Deciding who gets a loan and who does not is not a business that a government should enter. State banking should provide long-term loans to state enterprises, safe deposit of money & valuables for citizens, exchange for every currency and the maintenance of customer accounts. All these services merit fees. A state bank should not lend to competitive private business.

Buying-up the shares of joint-stock banks would be loss-making at their exalted and illusory values. Confiscation is unthinkable. What about foreign banks doing business in Britain? What about the media campaign against government that the City establishment and its dependants would inevitably start? On the other hand, allowing the fabrication of money credit for private profit seems unjust; permitting banks the power to withhold loans and conceivably stop national trade seems unwise.

BoE can control the amount of credits issued by private banks by its ‘open market operations’. It can purchase any amount of securities thereby increasing the amount of cash in the market. It can sell securities and remove cash from market. Banks can only create credits to (at the time of writing) nine times their actual cash. Clearly the volume of credits in the private banking system is controlled by BoE. The BoE also sets the interest rate which in turn fixes the interest rate on loans. If BoE belongs to the state, it is government that creates the credits for national administration. If the Post Office Bank operated a chequeing system, there would be little left for the private banks to manipulate.

Economic sabotage:
Banks need to retain the goodwill and favour of the industrialists and traders who choose to use their services.

Nationalising joint-stock banks becomes more difficult when nationalising Acceptance Houses and Discount Houses. The 20+ Acceptance Houses guarantee payments in international trade. The 3 Discount Houses and 17 private discount firms borrow from BoE or a joint-stock bank and discount Bills of Exchange for a commission. Those Bills are already guaranteed for payment by an Acceptance House. This all concerns international trade. The market has been entered by government via its Export Credits Department which insures British exports to risky countries. It guarantees up to 75% of invoice value and never endorses the Bills so they cannot be negotiated in the money markets. As a basic rule, international trade is conducted by individual willing buyers and sellers and the City is probably as good as anyone in financing that sort of thing. NB – it remains true that BoE controls the Discount market and might, if it wished, control all dealings in foreign money.

In summer 1931 the Labour Government was toppled by the City. There was no Bankers’ Plot to manipulate the money market for political ends but government policy was curtailed and amended by groups of political enemies in the City whose influence on the 30-odd Directors of BoE caused that institution to collapse the system of international lending of other peoples’ deposits by private groups. This was then attributed by the City’s London Press Editors to the government rather than the intentional act of the politicians.

Austria had already been dismembered at Versailles. Her few remaining industries were greatly indebted to banks who called-in their loans forcing Austrian industry to sell-off its production cheaply to repay. Interest on bank loans rose to 12%. Small traders collapsed first bringing down the bigger ones and manufacturers. The decrease in business caused by dismemberment made the bank in Boden insolvent and Credit Anstalt assumed its risks. Within a year Credit Anstalt’s losses equalled its share capital and reserves. The Austrian government through its central bank (Bank of Vienna) guaranteed a loan of 89 million Schillings and Rothschilds produced the money but by May 1931, when Credit Anstalt issued its accounts, a run started and by the end of the year the Economist Intelligence Unit estimated c. 800 million Schillings had been withdrawn from Austria. Credit Anstalt’s capital was written-down from 177 millions to 1 million Schillings and its foreign assets were taken-over by a shell company in Monaco. Most other Viennese banks were similarly reconstructed and the crash was complete.

In June 1931 BoE advanced £4.4 million to Austrian banks, courtesy of the British tax-payer (it was later reimbursed by the Treasury). President Hoover proposed a moratorium on international debts for a year. This froze £11 millions of British debt with foreigners and had predictable effects on the domestic economy. The problem was manifestly not due to Ministers but the London Press blamed them. German investments in Austria were disproportionately affected. The Fed, BoE, BoFrance and BIS jointly placed £20 millions with the Reichsbank (German central bank). London money traders were fearful as they held 23% of German short-term debt which they had welcomed earlier when a bankrupt Germany had agreed to pay 7% – 8% for funding. By mid-summer all foreign investment in Germany looked endangered and on 14th July all German banks were closed by government decree. They re-opened in August with the discount rate set at 15%. German government loaned 445.5 million Marks and became the owner of all the banks in Berlin except the smallest one. The City knew it was exposed to attack from its European investments. London held £400 million of foreign short-term funds on loan.

When the lenders saw their money had been re-invested in Germany and Austria they called-in their loans. That started a river of gold flowing from BoE into Europe. Gold reserves fell from £164 millions to £132 millions, trade slowed, businesses failed, unemployment increased, revenue fell, poverty intensified. On 31st July Sir George May’s Committee urged cutting £66.5 millions from social welfare to the employed rather than reduce interest on war loans that the banks were then receiving. Not even a voluntary reduction of the War Loan rate was considered, as had been done in Australia. Ministers were prepared to tax imports of manufactured goods (a revolutionary step since Peel facilitated free trade a century earlier); to restrict manufacture of armaments and do almost any other thing rather than cut unemployment support.

The Governor of BoE (Montague Norman, Governor from 1920 -1944) had gone to Canada and could not be contacted. He remained overseas until the change of ministry had been completed. The Deputy Governor made daily predictions of disaster – ‘next week old age pension payments will have to stop,’ etc. The CotE approved an issue of £15 millions unbacked by gold. That caused the moneymen who had been withdrawing their gold from BoE to offer to return £45 millions to BoE at higher interest. But overall the drain continued and the £45 millions was entirely consumed. BoE thought another £80 millions was necessary to maintain the exchange rate and averred the government must itself guarantee the loan to assure its success as the guarantee of BoE alone was inadequate. City intermediaries said the Fed and BoFrance insisted on the government guarantee, giving the appearance of foreign financiers dictating the terms of a British budget, which later appeared to be untrue. The cabinet resigned. Ministers recognised the problem stemmed from a breakdown of the money system but the elected representatives had long before been warned not to interfere so a precise understanding was never achieved.

The in-coming Tory President of the Board of Trade, Walter Runciman (1931 -37), declared that the poor had consumed a large part of the assets of the Post Office Savings Bank and caused the problem. The choices facing the nation were either to renegotiate a lower rate of interest on public debt (and end the de-rating subventions paid to the City) or to borrow abroad. The new coalition government borrowed £80 millions at 4% plus onerous commissions and cut social welfare. Thus was the crisis solved.

Many thoughtful people concluded that the creation of money should not be left in the private hands of BoE and that support should be given to encourage municipal banking. It was especially noted that City advice had been wildly and ludicrously wrong and the private bankers were not the oracles they believed themselves to be. They had been wrong about reparations from Germany, they gave wrong advice to Churchill about the gold standard and they were wrong in insisting that the suspension of the gold standard in 1931 would have ended civilisation.


Footnotes    (↵ returns to text)

  1. During the Great War (the wars with Revolutionary France) Sterling had been devalued about 30% by successive ministries. This burden was heaped on the British people by withdrawing gold and silver from circulation and substituting paper notes for their exchange allowing the government to use the national supply of bullion and specie for its own purposes. It took about ten years after 1815 to reduce the note issue and restore value to domestic exchange. This uncertainty underlay the gambling tendency of the British people at that time.
  2. In 1815 the United Kingdom was in debt to about a billion pounds. That is about 7,000 tons of gold. The debt was unpayable and the political decision was to have the bankers of London bring every other country onto the same debt-encumbered level. This preserved a level playing field in international trade and exposed all those countries to manipulation of their currency values on their own stock exchanges.
  3. Porto handled the trade in port wine and cork products whereas Lisbon handled the colonial trade. It was Porto’s trade that went to Europe and thus attracted British banking interest.

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