Rogue Banking

A History of Financial Fraud in Interwar Britain

M. Hollow

• Publisher: Palgrave Pivot
• Year: 2016
• ISBN:
  9781137360540
• Topic: Storia
• Subtopic: Storia britannica

Since the turn of the millennium, the British media has been awash with stories of bankers and financiers caught engaging in acts of corporate wrongdoing and financial skullduggery. But just how different are these crimes to those committed in the past? And, is the threat of financial fraud greater today than in bygone years?In this book, Matthew Hollow begins answering these questions by providing an in-depth historical overview of some of the most significant frauds that took place in the British financial sector between 1919 and 1939. Using extensive archival evidence, he reveals the variety of tactics that were employed by interwar fraudsters to conceal their underhand transactions and dupe the British public into handing over their money. He goes on to explore the different factors that motivated these fraudsters many of whom had previously had blemish-free records to engage in these acts of deception and deceit.Rogue Banking is a unique resource for history and finance researchers and students, both in the UK and around the world, who are interested in questions relating to corporate fraud and white-collar crime. This book's interdisciplinary approach also makes it an accessible and informative tool for professionals in accountancy, management and criminology.

1

Pillars of Society? Financial Crime in the British Banking Sector, c. 1919–1939

Abstract: This chapter outlines some of the most significant acts of financial fraud that took place in the British banking sector during the interwar years. In academic terms, this is an area that has generally received scant attention from historians. This chapter starts to fill this gap in the literature by providing an in-depth insight into the main perpetration strategies and the chief motivating factors that were involved in these acts of fraud. Ultimately, what it shows is that despite some notable improvements in auditing and training, the threat of mismanagement and embezzlement still continued to remain a very real one for British depositors during this period.

Keywords: bank fraud; banking history; banking regulation; British history; corporate crime; embezzlement; Farrow’s Bank

Hollow, Matthew. Rogue Banking: A History of Financial Fraud in Interwar Britain. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137360540.0004.

To even the most casual of observers, it is clear that the reputation of the banking profession has taken something of a battering in the years since the global financial crisis of 2007–2008. This is apparent not only in Britain, but also elsewhere around the world, as the massive financial burden of the huge state bail-outs provided to many of the leading banks in the aftermath of the crash (combined with the seemingly never-ending stream of scandals and tales of excessive greed) continues to cause resentment and widespread public outrage to be directed at the so-called gangster bankers or banksters supposedly working behind the scenes to rob the innocent of their money.¹ Indeed, so low has the reputation of the banking industry slumped that, according to one contemporary survey, it is now held in lower esteem than the pharmaceuticals industry, the big media conglomerations, the oil industry, and the telecommunications sector.²

Yet, clearly, it has not always been this way. In fact, for much of the twentieth century, those employed in the British banking profession were actually often criticised for being too risk-averse and unadventurous (Johnson, 2000: 302). Some indication of this difference in perspective can be gauged from the novels and plays of this period, in which the figure of the banker is predominantly depicted not as a despicable and soulless villain (as they had been in many Victorian plays and novels), but as a somewhat dull character who was both scrupulously upright and wholly incorruptible in both his private and his professional life (Michie, 2009: 104–105).

Perhaps because of these stereotypes, there has often been an assumption that, by the early years of the twentieth century, the British banking sector had largely cleansed itself of the sorts of fraud that had so tarnished its reputation during the nineteenth century. And, in part, such assumptions are correct. By comparison with the turmoil of the 1840s and 1850s, the early years of the twentieth century were undoubtedly both far more tranquil and far more stable, with far fewer major bank failures or financial crises (Collins, 1991; Goodhart, 1972: 120–125; Michie, 2003).³ Nevertheless, it would be both misguided and erroneous to suggest that this relative decline in bank failures simply meant that financial fraud ceased to be a problem for the British banking sector. Depositors were still vulnerable to the threat of embezzlement, and banks did still continue to fail throughout this period as a result of reckless investment strategies on the part of their directors and managers (Robb, 2002: 56; Taylor, 2013: 257). Likewise, despite the obvious warnings provided by the various speculative ‘manias’ of the nineteenth century, there were still more than enough gullible investors willing to invest their money in even the most shadiest of enterprises in the hope of achieving high returns (Kindleberger, 2000).

This chapter aims to make a start at addressing this aforementioned historical oversight by providing a detailed historical overview of the most significant cases of financial fraud in the British banking sector during the interwar period. As with the other sections in the book, the focus will not only be on the perpetration strategies that were employed in these acts of fraud, but also on the variety of factors that motivated the individuals involved in these acts of deceit to act as they did. In this way, it is hoped that the analysis will be of relevance to the burgeoning literature on financial fraud and corporate wrongdoing in the British banking sector, both past and present.

Before moving on to look in more detail at the various incidents of financial fraud that took place in the British banking sector during the interwar period, however, it is perhaps first worth making note of the fact that, despite the major improvements that were made in bank management and bookkeeping during the latter years of the nineteenth century (Matthews et al., 1998: 160–181; Robb, 2002: 56), there were still actually quite a significant number of cases of fraudulent mismanagement in the British banking sector during the early years of the twentieth century. This is something that can often get overlooked in the historical literature on the evolution of fraud and white-collar crime in Britain as the emphasis invariably tends to be much more focussed on the mid-Victorian period and the massive spate of fraud-induced failures that rocked the British banking sector during these years (Taylor, 2007; Wilson, 2003).

Amongst the more noteworthy of these early-twentieth-century incidents of financial fraud in the British banking sector was the widely reported case of the Charing Cross Bank, which failed in October 1910 as a result of the reckless business strategy pursued by its founder, Alfred William Carpenter. The Bank itself had been set up in 1886 and, right from the start, actively sought to attract small-time savers by aggressively advertising its generous interest rates (6–10 per-cent on current accounts) in both the national and local press and in a series of specialist periodicals and theatrical programmes (Robb, 2002: 77).⁴ Thanks to this extensive promotional work, it was able to substantially increase its customer base and, by 1910, it had over 40 separate branches throughout England and Scotland.⁵

Unbeknownst to those who chose to entrust their money to the Charing Cross, however, was that, rather than engaging in the usual moneylending business of a conventional bank, Carpenter was in fact using his depositors’ money to invest in a series of highly speculative overseas mining and railway-construction ventures. When these investments subsequently failed to provide any significant returns, Carpenter started to use the money coming in from those opening new accounts at his Bank to pay the interest owing on the existing accounts – in effect, turning his business into a ‘Ponzi scheme’ (Allen, 2003: 23–25). In order to hide these fraudulent transactions, Carpenter simply lied about the true state of the Bank’s finances in the annual reports and published balance-sheets, artificially writing up the value of his various overseas assets and conjuring up fictitious reserves to make it appear as if the Bank was still in a healthy position.⁶ Inevitably, though, this façade could not be kept up forever and, after an initial investigation by a chartered accountant from Deloitte, Plender and Co., the Bank was officially shut down by the Director of Public Prosecutions on 18 October 1910 with a loss to shareholders and depositors of over £2 million.⁷

Given the scale of the losses involved, not to mention the number of people who suffered financial distress as a result of the failure, the Charing Cross case inevitably attracted a great deal of attention from the national and local press.⁸ Nevertheless, whilst it may have grabbed all the headlines, the Charing Cross Bank was far from the only bank to suffer as a result of fraudulent management in the years prior to the outbreak of World War I. For instance, in 1909, the little-known Glasgow Mutual Bank was forced to shut its doors after it was revealed that over £9,000 of depositors’ money had been lost through a series of unsecured loans to the Bank’s management. Again, the Bank’s unfortunate customers had been kept in the dark about the true state of their bank’s finances thanks to the publication of a series of fabricated balance-sheets, which seemed to suggest that the organisation was in good health. Indeed, as the auditor appointed to look into the Bank’s finances after the failure subsequently demonstrated, the value of the Bank’s investments actually fell short of the stated total by some £9,318.⁹ For these crimes of misinformation and embezzlement, sentences of 3 months’ imprisonment were handed out to three of the Glasgow Mutual Bank’s directors, whilst the Bank’s general manager was also given an 18-month sentence.¹⁰

Similar disregard for the conventions of banking was also shown by the management of the Civil Service Bank, who – like their counterparts at the Glasgow Mutual Bank – were just as guilty of treating their Bank’s funds as their own personal property. The Civil Service Bank had officially been registered in 1892 at 10 Charing Cross Road, London, and was modelled along similar lines to a conventional savings bank.¹¹ However, rather than investing their depositors’ money in low-risk liquid securities (as would be the norm in a legitimately run savings bank), the three men in charge of the Bank – James Southgate (Chairman), Harry Cooper (Manager), and Edwin Wilding (Chief Accountant) – had, instead, simply provided themselves with a series of unsecured loans.¹² As a result of this mismanagement, it was estimated that, by the time of the Bank’s eventual closure on 19 December 1914, there was a deficiency in the Bank’s accounts of ove...

Table of contents

• Cover
• Title
• Introduction
• 1  Pillars of Society? Financial Crime in the British Banking Sector, c. 19191939
• 2  From Speculation to Devastation: Securities Fraud and Company Promotion Fraud in Interwar Britain
• 3  Rogue Financiers: Fakers, Confidence Tricksters, and Share-Pushers in Britain between the Wars
• Conclusion
• Bibliography
• Index