White Collar Crime in Nineteenth Century Britain

Capitalism and bourgeois values

There is, perhaps a bias inherent in the teaching of this course: the perspective that the basic problematic of nineteenth century capitalist development was the management, socialisation and integration of the poor.

We looked at the general fear by the elite of the mob in the eighteenth century, and the calls for 'improvement by police' by thinkers such as Colquhoun

We saw the role of various institutions including criminal justice institutions such as the police, the courts and the prison as part of an array of disciplinary institutions (also welfare, education, philanthropy) etc. designed to integrate and socialise the working class. This socialisation required

• Habits of time and work discipline - punctuality, reliability

• abandonment of social crime and development of respect for private property

• economy of place and space - ordered lives, stable families, vacating the streets to the police etc.

But it can easily be forgotten that the ruling classes themselves changed. By looking at the issue from the standpoint of the elite (especially its more intellectual and enlightened elements)- how to solve crime and disorder and mould the habits of the working class, the fact that the elite itself needed habituation to capitalism can be forgotten.  The elite appears as a groups of social scientists, already thoroughly modern in their outlook, trying to work out how best to come to terms with the requirements of industrial capitalist society. This is what I referred to earlier, at the beginning of the course as the 'Whig' theory of history.

But the manufacturers as a class were a different kettle of fish. They did not come upon the face of the earth ready formed, any more than did the capitalist system itself. The old feudal aristocracy of the medieval world was a warrior class, used to spontaneity, hard drinking, and regular use of violence to get what it needed: relationships and loyalties were personal.

By the eighteenth century the remnants of this class who had not already gone into trade and industry or modern commercial agriculture, that is become bourgeois, but were just - after maybe a stint of naval or military service in the officer class - living off their land rents were regarded very much as socially parasitic. With their parties, drinking, duelling, extra-marital affairs etc. they were seen by many representatives of the new order as basically upper class yobs.

Closer to the bourgeoisie was the well established merchant class many of whom, over the centuries, had bought their way into the titled aristocracy. On the one hand as merchant adventurers they had from the 15th century onwards developed international trade and had accumulated fortunes which could then be invested later in manufacturing. Marx had pointed to the long period of 'primitive accumulation' that is the accumulation of wealth by a variety of methods: violation of land rights, privateering, piracy and straightforward robbery, as well as trade, which could then be deployed as investment capital.

But on the other hand the merchants had also learned the importance of restraint and trust as the two key elements of business culture. Restraint implies deferred gratification, saving the results of one's activity and reinvesting them to achieve greater profit in the future rather than spending them now on high living. Trust implies the ability to enter into relations with strangers, extend them credit etc., in the trust that they will deliver the goods. As capitalism developed beyond the stage of family firms to embrace the modern joint stock enterprise trust became central; shareholders trust the directors to run the company efficiently and honestly and not abscond with their, the shareholders' money. The failure to do so is of course precisely one of the main forms of modern white collar crime. The modern law of contract developed to regulate these relations but legal regulation can only deal with the system of trust when it breaks down, it cannot become the main mechanism of relations between capitalists. A culture of trust is necessary. Adam Smith, in his Theory of Moral Sentiments (1790) was concerned that the 'hidden hand' of the market be regulated and underpinned by strong moral sentiments. But these sentiments have to be learned and acquired by the bourgeoisie every bit as much as the working class needed -- for capitalism to function -- to turn up to work on time and develop a certain level of respect for authority and effort. The virtues that Victorian reformers spent so much time drumming into the minds of the working class, had also to be drummed, with very similar measures of success and failure, into the minds of the bourgeoisie itself.

The importance of this can be understood if we consider the nature of the bourgeoisie (or the capitalists or entrepreneurs or whatever you want to call them) as a social class. Unlike the feudal aristocracy the membership of the bourgeoisie is not based on blood or lineage. The possession of money capital is the only criteria for membership. And the bourgeoisie is every bit as internally fractious as class as was the aristocracy. Just as the latter was characterised by internal feuding and warfare, so for the bourgeoisie the underlying unity of economic interest is moderated by aggressive competition between companies as well as conflicts between various types of capital—finance and manufacturing, agricultural and industrial, small and large and of course between capitalists as such and the working class upon whose labour capitalism depends. Every capitalist wants to buy as cheaply as possible and sell as dearly as possible. The idea that aggression and deception, even violence, will not feature as a significant aspect of behaviour, not only towards the working class, but between members of the bourgeoisie as well, is absurd. In many ways the early bourgeoisie has a better claim to the title of the dangerous class than any section of the poor. Constraints on criminality and violence come from a variety of sources and, as with the stabilisation and habituation of the working class. there is a combination of the effects of capitalist development itself and the specific efforts and achievement of reformers.

The South Sea Bubble

By the early 19th century these new habits of restraint and trust were still emerging and not yet formed, while business operated under conditions in which there was little in the way of effective surveillance of company activities. Shares were traditionally traded in Coffee houses in the City of London. (The London Stock Exchange was founded in 1801) The only source of opinion on the viability or trustworthiness of a particular venture and whether or not it was worth investing in was by word of mouth. There was no auditing, annual reports, clear accounting practices, sources of reliable information about a company - who had formed it, what was the capital etc. Hence rumour and speculation were rife. An early example of fraudulent market manipulation occurred during the Napoleonic wars, in 1814, a full year before the battle of Waterloo, when a speculator Charles de Berenger distributed leaflets from his coach saying that Napoleon was dead and French defeated. The price of British government bonds rose dramatically, and he was able to sell bonds at an inflated price. There were various other speculations based on rumour during the eighteenth and early nineteenth centuries but the most famous was undoubtedly the case of the South Sea Company. The company was founded in 1711 by merchants with the aim of taking over -- purchasing -- government debt in return for interest payments and for trade in goods with Spanish Colonies in South America. The South American business tailed off so the company concentrated on servicing national debt and in 1720 offered to take over entire British national debt. Members of parliament and government were bribed to back the plan and to use state funds to buy up shares in the company. The result was that South Sea company - share prices rose. The phenomenon gave rise to a mass of imitator companies, many of whose shares were bought on credit. The 'bubble' burst’ when it was discovered that the directors had already sold their own shares at a profit as the price rose. They fled abroad. The imitator companies collapsed and there was general panic.

But gradually the moralisation of the bourgeoisie became centred on notions of respectability and family life, of the bourgeois gentleman as provider and protector of his wife and children from which calm oasis of an almost feudal patriarchy he ventured out into the public world of commerce and competition. (Zaretsky 1976) Meanwhile pressures for constraints on the freedom of capital came both from enlightened sections of the bourgeoisie, concerned about the health of the labour force as a whole and the state of the working class family, and the increasingly organised working class itself. The result was the wide spectrum of state intervention covering areas of housing, public health and the regulation of working conditions. A legal framework for the governance of the company gradually developed. Factory legislation regulated working conditions while the principle of limited liability aimed to protect a widening circle of middle class investors. Meanwhile the development of auditing and accountancy, the growth of the financial press and the legalisation of trade union organisation would lay the institutional foundation for key sources of information and their communication between investors, customers and workers and would thus establish at least some of the preconditions for the development of social relations of crime control in this area.

The growth of Limited Liability

Until 1844 there were no standard clear ideas on how to run and found a company. The situation was rife for speculators. Forms of control and surveillance only emerged gradually. Limited liability began in 1844. The main legislation was the Limited Liability Act of 1856. The idea behind limited liability was simple: if the company collapsed with unpaid debts the investors would only be liable for the sums they had invested in the enterprise. Their personal assets could not be seized to meet company debts. This was regarded as necessary to encourage savings and investment and thus the accumulation of capital. Some economists were dubious and argued that limited liability contracted the ethic of individualism: –you take the risk and bear the consequences. The economist McCullock argued: “"carelessness will be immeasurabley increased if [companies] may limit their liabilities and speculate and gamble without any fear of the consequences.”" Limited liability was, in his opinion, an encouragement to financial fraud. But Fraud was only one of the forms of commercial or white collar crimes that emerged to prominence during the nineteenth century.

Major forms of white collar crime: against the working class

Much has been written (and we have discussed it in previous lectures) about crime by the working class during the 18th and early 19th centuries as a form of resistance to capitalism. While much of working class crime was a form of resistance, capitalists were taking advantage of the new social relations of urban industrial and commercial life and the lack of any legal regulation to commit a variety of crimes against the working class. We have already mentioned the rape and sexual harassment of female workers in the early textile mills. Many of these intolerable conditions which included dangerous machinery and working conditions were not of course crimes, they only became so later on with the emergence of Health and Safety legislation.

Meanwhile the working class were also exploited as consumers by the adulteration of food and other commodities. The adulteration of food, no longer grown or locally supplied to the new urban working classes, was especially rife in the early part of the century. Engels, writing The Condition of the Working Class in England in Manchester in 1844 quotes the local newspapers on cases describing all the fiddles of the period  - sugar adulterated with pounded rice, even refuse from soap making sold as sugar! Cocoa adulterated with brown earth and mutton fat, recycled tea leaves, flour adulterated with gypsum and chalk etc. Not only food but cloth, pottery etc., were all subject to adulteration of various types. Meanwhile the ailments and illnesses resulting from the twelve hour working day and the virtual collapse of family life were treated with a variety of fictitious medicines of little actual value. Engels wrote:

"Fraud is practised in the sale of articles of every sort... But the lion's share of the evil results of these frauds falls to the workers. The rich are less deceived, because they can pay the high prices of the large shops which have a reputation to lose... while.... They (the workers) must deal with the small retailers, must perhaps buy on credit, and these small retail dealers who cannot sell even the same quality of goods so cheaply as the largest retailers, because of their small capital and the large proportional expenses of their business, must knowingly or unknowingly buy adulterated goods in order to sell at the lower prices required, and to meet the competition of the others."

Engels here is, it should be noted, not taking a moral stand against the small shopkeeper but against the whole capitalist system which ends up with the small shopkeeper having to make a choice between selling adulterated produce or going out of business.

Against other capitalists and investors

banking fraud

The lack of proper regulation by the Bank of England combined with economic fluctuations during the earlier part of the century made for a high attrition rate among private banks. For example of 291 banks formed between 1844 and 1868 only 49 (16%) remained in operation in 1868. There were several banking crises during the 1820s and widespread fraud was uncovered: George Howarth, manager of the Rochdale Savings Bank into which many poor people put their savings, was discovered on his death in 1849 to have embezzled £72,000 through false accounting. Many of the problems of private banks stemmed from a lack of a body of experience regarding the correct relationship between deposits and loans with the result that many banks collapsed through over-lending and the inability to pay depositors. It was also difficult to determine the creditworthiness of borrowers.

When companies gained limited liability in in 1856 many banks remained unlimited liability enterprises claiming that their credibility rested on unlimited liability for deposits. The most famous remaining unlimited liability enterprise to survive into modern times was the insurance market of Lloyds of London. Bank failures continued well into the nineteenth century and one of the largest, in which false accounting was deployed, was the 1878 City of Glasgow Bank failure. The bank was one of the largest banks at the time with 133 branches and deposits of over £8m. It collapsed with debts of over £8.5m It transpired that the directors had lent millions of pounds to friends and family without any collateral security and had then concealed the insolvency by fiddling the accounts so as to understate its loans by £3m. The directors got 18 months imprisonment while thousands of small savers lost their money. It was this crash which was major impulse to developing tighter controls such as the independent auditing and monitoring of company accounts.

fictitious companies

It was the railway building boom of the mid 1840s which gave a major boost to the development of limited liability. In the mid 1840s railway building was something like 7 percent of national income. Masses of companies appeared with all sorts of proposals. Lots of individuals made fortunes. Railway magnates like Henry Hudson were among the first generation of big industrial entrepreneurs (as opposed to financiers and Merchants) to enter 'respectable society'. Needless to say railway construction was a big area for fraud. Companies would appear and offer high returns and take investors money and then vanish into thin air. The phrase 'railway morals' became a term of abuse after an article by Herbert Spencer (the great Victorian social Darwinist philosopher) in the Edinburgh Review in 1854.

Proposals for new railway companies had to get a Private Members Bill through the House of Commons. This was itself partly a measure of control against fraud and non-viable schemes but it didn’'t stop fraudsters walking off with investors money before the Bill came up in the House. In 1846 The Railway Gazette exposed several of these schemes: The West End and Southern Counties Railway spent all shareholders deposits before its Bill came up and was rejected in Parliament, likewise the Bristol and Liverpool line, the Northampton Bedford and Cambridge Line. (all the details here are from Robb - see below) If an investor suspected fraud then of course it was up to them to sue the company in the bankruptcy court. Despite new periodicals like the Railway Gazette, financial journalism was in its infancy and the only way of knowing whether the proposed company was viable was if it was backed by big names’ particularly among Members of Parliament.  This was the origin of the term 'guinea pig'. MPs were paid in guineas as front men to back the proposal even though they often had no idea about the viability of the project they lent their names to. Journalists were bribed to puff up the company prospects in the fledgling and with limited liability, if they personally put in only a nominal sum of investment in the company then they wouldn'’t be liable when it failed or vanished!

Henry Hudson the 'railway king' as he was known, became a millionaire. He kept no proper accounts and was forced on one occasion to pay back £72,000 to a company he had fleeced. The practice of what is now a criminal offence of 'insider trading' was widespread. Hudson escaped prosecution due no doubt to his being friends with the Duke of Wellington and various important Members of Parliament. Less fortunate was a certain Leopard Redpath. Over a 10 year period as registrar of the Great Northern Railway he stole £24,000 to support a lavish lifestyle. He was found guilty of embezzlement and transported to Australia.

These an other scandals prompted legislation in areas such as the tightening up of company accounting practices. Auditors were required to make a clear distinction between revenue and capital. The Regulation of Railways Act 1868 followed the exposures of railway finance in the commercial crisis two years before. The Act established uniform standards for published accounts, even though complaints about railway accounting practices continued and there was still a lack of consistency between companies in the way capital and revenue expenditure were defined.

Meanwhile general business illegality remained rife during the nineteenth century. During the period 1866-83 17 percent of all new companies formed in the United Kingdom failed. The economist Henry Shannon, attempting to calculate the levels of fraudulent company formation, reckoned that about one sixth of all new promotions during that period were fraudulent. (Robb 1992: 142) The amount of reported white collar crime—mainly fraud, embezzlement and false pretence—increased during the second half of the nineteenth century in contrast to a general fall in crime1

The 1890’s saw some big time confidence tricksters. Ernest Hooley became known as the Napoleon of Finance’. His speciality was buying up companies on the verge of collapse and then repackaging them’ making out they had been re-capitalised and reorganised when this was not the case. He published exaggerated prospectus, bribed MP’s and financial journalists. Between 1895 and 1897 he promoted 26 companies. But by 1898 he was bankrupt but was never prosecuted because he had only promoted companies rather than actually stealing from them. His friend was Horatio Bottomley was not so lucky. He promoted publishing and mining companies on the stock exchange. He founded the Financial Times which he used as a bribery mechanism on the threat of scandalous stories which could ruin a business. Every time one of his companies went bankrupt he was able to persuade shareholders to finance a new one to buy up the debts of his previous one. Finally, at the end of the First World War he founded the Victory Bond Club to enable to poor to subscribe to government Victory Bonds. He salted away about £150,000 from this scheme. He was exposed and sentenced to seven years hard labour. –

The Control of White Collar Crime

Business crime had something in common with family violence in the sense that both the commercial company and the family were institutions in which the criminal justice system intervened reluctantly. We have seen in a previous lecture how the transformation of the relation between husband and wife into that of offender and victim clashed with the core values of the family as the bedrock of authority and socialisation in Victorian society. We noted that the courts were often reluctant to break up families and tried instead to act as 'marriage menders'. Something similar occurred in the case of business crime. The status of the businessman as entrepreneur, as risk taker, wealth creator and respectable pillar of society, were sufficient to impede the application of the criminal label where it would be normally applicable.  Like the family, business was an institution whose integrity had to be protected at all costs and for whom internal processes of self regulation were considered to be in many respects more appropriate than the criminal justice system.

the criminal justice system

So how the criminal justice response was decidedly weak. The idea of the police marching into the Boardroom just as they marched into the working class communities and rookeries of Victorian cities is fanciful. For most of the 19th century the City of London Police, which for obvious reasons has much contact with financial fraud assigned just two officers to be available to investigate irregularities in the London Stock Exchange. There are of course some particular obstacles to the detection and prosecution of business crime. The business offender does not stand out as does the household burglar leaving his fingerprints and other tell-tale signs in a place where his very presence—someone else’s house—signifies his criminality, but is rather, in Michael Clarke’s (1990) phrase, ‘legitimately present’ at the scene of the crime; working away at his desk, behaving apparently normally as he falsifies the accounts. The crime may be discovered only later when the accounts are audited. This is not dissimilar to the hidden nature of much family violence. The growth in size and complexity of business operations meant that business offenders were growing in power and their activities becoming increasingly inaccessible to both criminal justice detection methods and public surveillance. Company audits only became compulsory in the United Kingdom in 1900. This trend to complexity contrasts with that of street crime where offenders were becoming, with the break-up of the old rookeries and the penetration of poor inner city areas by the police, progressively weaker as the nineteenth century wore on. Furthermore, the victims of white collar crime themselves, particularly if they are institutions such as banks or other deposit takers, have understandable motives for reluctance to report crime to the authorities. No bank wants to discourage deposits by it becoming known that it has been a victim of successful fraud. In this there is some similarity with family violence. A wife may blame herself for her husbands violence and be reluctant to report it for reasons of shame.

As with the family, the social standing of the business enterprise and the community of entrepreneurs was from early on, despite the humble origin of many of its members, a problem for the judiciary. In the 1840s Engels cynically contrasted the experience of rich and poor in the courts. 

".... enmity to the proletariat is so emphatically the basis of the law that the judges, and especially the Justices of the Peace, who are bourgeois themselves, and with whom the proletariat comes most in contact, find this meaning in the laws without further consideration. If a rich man is brought up, or rather summoned, to appear before the court, the judge regrets that he is obliged to impose so much trouble, treats the matter as favourably as possible, and, if he is forced to condemn the accused, does so with extreme regret, etc.., etc.., and at the end of it all is a miserable fine which the bourgeois throws upon the table with contempt and then departs. But if a poor devil gets into such a position as involves appearing before the Justice of the Peace -- he has almost always spent the night in the station-house with a crowd of his peers -- he is regarded from the beginning as guilty..... The partisanship of the Justices of the Peace, especially in the country, surpasses all description.... And the conduct of the police corresponds to that of the Justices of the Peace. The bourgeois may do what he will and the police remain ever polite, adhering strictly to the law. but the proletarian is roughly, brutally treated; his poverty both casts the suspicion of every sort of crime upon him and cuts him off from legal redress against any caprice of the administrators of the law..." [Engels 1844: 568]

George Robb (1992) in what is by far the most systematic discussion of nineteenth century business crime to date notes the reluctance of the legal and criminal justice systems to intervene.

"From the mid-nineteenth century through the early decades of the twentieth, the law put few obstacles in the paths of white collar criminals, trusting instead that the free market would regulate itself and that good business would drive out bad. The liberal outlook was taken up by the law courts which neglected business frauds and treated white collar criminals with comparative leniency. Throughout much of this period, cultural perceptions of 'criminality' remained focused on the 'dangerous classes' while elite misconduct was seen as a relatively minor social ill." (1992: 147)

He notes that the harshest sentences for white collar offences were reserved for embezzling clerks rather than leading businessmen (Robb 1992: 164). He adds another factor, directly associated with the high status of the business community.

"Another reason frequently given for the lenient sentencing of most white-collar criminals was that the shame and social disgrace attendant on criminal conviction were punishment enough for middle-class persons. Exclusion from polite society was viewed as a more serious penalty than imprisonment..... For white collar criminals prison was seen as ancillary to their personal sense of shame and loss of social status." (Robb 1992: 165)

This illustrates again the similarity with matters concerning the family. The shame of the violent husband who had lost his temper was often regarded as punishment enough.

But just as there was a reluctance by the criminal justice system to interfere in the workings of the family, there was a reluctance to intervene in business for fear of undermining the market mechanism and the process of competition. While police surveillance in no way obstructs—indeed it might be seen to encourage—the productivity of workers, the activities of capitalists were understood to require shielding from the obstructions of too much external surveillance and legal regulation which might stifle enterprise and weaken the company in the face of competitors. The state consequently feared to move effectively in such areas. The overwhelming legitimacy of capital accumulation shifted the blame for crime onto the victim: those who invest in fraudulent enterprise have only themselves to blame. Even in clearly established cases of fraud and deception the victims whose investments had been plundered were held ultimately responsible for their misfortunes and “…chastised for failing to exercise proper judgement or for being blinded by their own greed. Legislation, it was argued, could not protect a fool from his folly.” (Robb 1992: 148) Robb quotes The Times in 1856 inveighing against regulation of business because "... a multitude of regulations serves merely to confuse the general public and to gave adroit schemes increased opening for evasion, while at the same time it begets a false sense of confidence and extinguishes the habit of private vigilance."

Robb concludes by noting how 

self regulation

Thus the regulation of business criminality was to a considerable extent a matter of 'crime prevention', the vigilance of the potential investor, buyer or lender in checking on the credit status of his client or deposit taker. This gives a particular importance to the development of sources of information which would enable this checking to take place. Such an emphasis on vigilance on the part of the private citizen is not so out of step with other tendencies in nineteenth century criminal justice which we have already dealt with such as the responsibility of the victim to initiate criminal prosecution, the proliferation of Associations for the Prosecution of Felons etc. The 1880s was the period when, with the foundation of the Financial Times, compulsory auditing (1900) the sources of information began, quite late in the day, to enable the potential investor to make something like an informed guess about the status and reliability of those who were offering to take his or her money. But the idea that this did much to stem the idea of business criminality, any more than the existence of the police officer or the CCTV camera effectively deters street crime, is or course wishful thinking. Crime was then, and remains today, endemic to the system.

references

George Robb (1992) White Collar Crime in Modern England: Financial Fraud and Business Morality 1845-1929. Cambridge: Cambridge University Press