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Things are not always as they appear

Reports of company meetings are usually a bit dull – those from a hundred years ago even more so. So why I bothered to read this one I don’t know. It concerns Farrow’s Bank, a small bank that despite there being a war on seems to be doing just fine.

“So”, I wondered, “what happened to it?” My assumption was that it got swallowed up in one of the gazillion or so mergers that have taken place in the banking sector in the last century or so.

Well, not quite. Actually, in 1920 it went bust. Spectacularly.

It turned out that at no point in its 13 or so years in existence as a publicly-listed company had it made a profit. By the very time this company meeting was taking place losses were routinely being covered up by inflating asset values.

So, were there any tell-tale signs that all was not as it appeared? Obviously with accounts that were largely fictional it would have been difficult to tell from the numbers. But were there other clues?

It is difficult to tell from this distance but a few things stick out. The first is that, the chairman and founder, Thomas Farrow, prior to founding the bank wrote a book entitled The Moneylender Unmasked in which he criticized the methods of moneylenders. Was he, perhaps, a gamekeeper turned poacher? – someone who had worked out all the tricks of the dishonest and then applied them for his own benefit. I doubt it. More likely, I suspect, that his ideas were nonsense in the first place and the acid test of their commercial implementation simply proved it.

The second is that one of the depositors described the Chairman’s speeches as “sanctimonious” and “treacly”. Does this, perhaps, suggest a lack of attention to the business of making money?

The third, was his fullsome praise for the then Minister of Munitions, David Lloyd George. Businessmen don’t usually praise the government, far less individual government ministers. I could say a lot more about that particular minister but I’ll save that for another time.

The Times 5 August 1915 p2

The Times 5 August 1915 p2

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6 comments to Things are not always as they appear

  • Damnation! Too late to short the shares

  • Paul Marks

    Actually businessmen often praise governments (even specific politicians) – partly out of fear (they might hit us if we do not praise them), partly out of the hope of government contracts.

    But also because business people are human beings – they “internalise” the same ideology that other people do (at school and university and so on).

    If a politician presents himself as “helping the poor” (or whatever) the natural response is to praise the politician.

    Especially for a businessman who is very busy running a business – so busy that he (or she) actually has very little idea what is actually going on in the wider world.

    Yes business people (even successful ones) are often surprisingly uniformed outside their field.

    And why not?

    After all they concentrate on what they can directly effect (not general matters).

    That is how they became rich in the first place.

  • Paul Marks

    On this specific bank – I suspect that Patrick is correct.

    Businessmen who claim to be trading for the common good (not their own profit) are normally either conmen or hopelessly misguided.

    A point Adam Smith made.

    As for bankers.

    The Gotch bank in my home town of Kettering went bankrupt largely because they kept lending to a single person.

    No corruption was involved on the part of the bank – just hopelessly innocent faith in the wild schemes that the person said he was investing the money in (he was actually spending it).

    Never trust written (or internet) accounts – go and physically examine the factory (or whatever) yourself (and do not announce you are coming).

    No bailout for the Gotch bank.

    (Or for the hundreds of little banks that have gone under in the United States – but not the big five in New York City…..).

    Which was a good thing – as one Gotch became a painter and another an architect.

    They spent their lives in a much better way that they would have done had the family bank been bailed out and they had become administrators in in it.

  • Mr Ed

    That linked article is fascinating, it shows many things to me:

    1. That journalists knew how to convey the facts in a clear manner without sensation and, albeit at length, in a clear manner. It is well worth reading the report in full.

    2. The scam was, with hindsight, obvious, with all the signs of a well-planned fraud, the targeting of decent folk, the ‘do-gooder’ in charge, this quote caught my eye:

    The explanation of this unusual method of accountancy was that when trading losses occurred, the assets were written up to cover the deficiency, first insuring that the value was there; then from the profits of those assets an inner reserve could probably be formed.

    Farrow admitted that money utilised in paying the staff salaries and wages and the shareholders’ dividends had come from the deposits of the unfortunate depositors, but in extenuation he declared that he did not know at the time that this was being done.

    Pretty much the mortgage book of every British bank and building society might be in the same situation, albeit due to fractional reserve asset price inflation.

    3. The similarity to the last bank crash that we have had (albeit different circumstances), the absurd optimism, like those who put their deposits in Icelandic banks (despite the long history of inflation in that country).

    It would be wholly unwarranted to say that this reminds me of the Kids Company collapse, after all that was a charity. I have even read that a former secretary to a Labour MP sold her house to give the proceeds to this charity, and has not even had a receipt of any account of how the money was spent. How devastating, how terrible, ‘ow’s about zat zen?

    But I do wonder if the price of weed is falling the the vicinity of Borough Market now that the cash handouts on Fridays presumably have stopped.

  • Paul Marks

    By the way – the propaganda against “war profiteers” was strong even then.

    The propaganda (spread by Marxists – and by some stupid “libertarians” who are manipulated by the left) that wars are caused by the influence of “corporate capitalist big business” and benefit this “big business”.

    In Britain this led to retrospective taxation in the 1920s – supposedly companies had made “obscene profits” during the war and the “hard faced men who had done well out of the war” must now pay – retrospectively.

    The British aircraft industry (and other industries) were badly undermined by these insane antics.

    As for David Lloyd George.

    The man was a windbag.

    Government (at least sensible ones) do not “organise production” during war – they offer money for stuff (shells and so on) and if the governments offer enough money the shells (and so on) will appear.

    Even Franklin Roosevelt had enough sense left to call off (call off – not intensify) his war on American industry when war was declared (the Second World War).

    Ford (and so on) suddenly found that the government was not hitting them any more – and they could produce stuff for the war without constant government (or union – unions in the 1930s being actively backed by the Roosevelt regime) interference.

    See “The Wild Wheel” and other works by G.G.

    Or see how Admiral Nimitz (and his advisers) “organised production” (or rather did not) in relation to the Pacific.

    In the case of the First World War…..

    Ludwig Von Mises showed (in “Nation, State and Economy”) that the economic approach of the French in the First World War (offer money for war supplies) was superior to the “War Socialism” of Ludendorff and co.

    So “the Welsh wizard” had nothing to boast about on the economic side.

    As for military matters.

    Without going into the old debate about Douglas Haig (upon which Patrick and myself are fundamentally opposed) the line “back him on sack him” springs to mind.

    David Lloyd George just “bitched” for years – both during the war and after it (to protect himself over attacks over the million dead British Empire soldiers and the millions of wounded).

    I would have sacked Haig – actually in 1914 – when his performance is incompetent (even before his utter mess at the Battle of Loos in 1915), but had not sacked him I would have backed him.

    The political elite (especially David Lloyd George) just bitches.

    “It is all his fault” (subtext “do not blame ME”) without following words by actions.

    After all actions are hard – personally selecting a new commander would tie you to him.

    What if he happened to be no better than Haig (and there were Generals WORSE than Haig – see the clowns who were sent to command at Sulva Bay, who could not have been any worse had they been deliberately trying to help the Central Powers) – what happens then?

    If one’s personally selected General fails – then one falls with him, and windbag David was not prepared to go back Liverpool (or Wales) and actually earn a living.

    Better to stick to Haig (and bitch about him) than actually personally select someone else – and run the risk of making a mistake. And being tied to that mistake.

    In short David Lloyd George did not care about the ordinary soldiers (no more than Haig did – for all his faults Sir John French actually did care about the ordinary soldiers, as did some other British army generals) – what David cared about was covering his own backside.

    David Lloyd George was a windbag when he entered politics – back in 1890 when he takes the seat in Wales with a dishonest campaign against a local landowner. And he remained a windbag – right to the 1940s.

    When the wretched “wizard” supported doing a deal with Mr Hitler even after the war had started.

  • Paul Marks

    Caring about your soldiers carries risks.

    Wellington could have been killed – often, because he insisted on seeing things with his own eyes.

    Douglas Mac was the same – he often risked his life (and got away with it). He acted this way because he was very critical of First World War generals (such as his own boss Pershing) for hanging too far back.

    But it can go other way.

    For example old General Broadwood (the man who actually did the stuff that Haig took credit for in the Boar War) was I-must-see-this-with-my-own-eyes type.

    And he was killed in the First World War – as many of the better Generals (better men – rather than men who were pretending to be what they really were not) were.

    It is a sort of natural selection in reverse.

    The least “fit” are the most likely (not least likely) to survive – because they are careful to survive.

    Minimising the risks they personally take – at the expense of their soldiers.

    A brave general who insists on seeing what is actually going on, runs a high risk of being killed.

    We remember the men who take these risks and get away with it.

    We should also remember the Generals who take the risk – and do not get away with it.