Britain’s ‘Financial Revolution’ is usually best known for its fiscal and market effects. However, it also coincided with changing opinions towards consumer credit. By the early 18th century, borrowing and lending was accepted as a fact of life that was best tolerated rather than regulated out of existence. One attempt at improving the terms upon which the poor borrowed was the creation of the Charitable Corporation, a lender intended to be more compassionate. Despite the noble intentions, the company attracted rather ignoble employees and eventually failed after substantial financial improprieties resulted in the loss of hundreds of thousands of pounds.
Founding
A new form of financial institution was introduced with the establishing of the Charitable Corporation. The company was chartered in December 1707 as “The Charitable Corporation for Relief of Industrious Poor, by Assisting them with Small Sums upon Pledges at Legal Interest”. It was established in London by founder William Higgs who sought to create a credit institution for the poor that was less predatory than other lenders. Many were in search of an alternative to pawnbrokers since those lenders had also acquired a negative reputation for encouraging crime, in part by allegedly receiving stolen merchandise as the basis for a loan.
The Charitable Corporation was to raise investor capital which it would then use to make small loans to the poor at just 6% interest per year. These loans would be made against collateral kept with the company. In essence, the Charitable Corporation operated like a pawnbroker but would charge lower interest rates; most pawnbrokers charged at least 30% interest. Charitable alternatives to pawnbrokers had been established elsewhere, such as with the monti di pietà in Italy. However, unlike the monti, the Charitable Corporation was founded as a for-profit entity, rather than as a strictly charitable endeavor.
Growth
In its early years, the Charitable Corporation struggled to launch; little capital was raised and lending activity was scarce. The company’s charter initially limited it to a capital of £20,000 to £30,000 and a maximum loan amount of just £25. The upper limit on loans was raised to £1,000 in 1718 though and this was the earliest sign the company was beginning to wander from its initial mission. Borrowers with collateral to secure such a large loan could hardly be considered poor. This was an era when a laborer could expect to make nine to twelve shillings a week or roughly £30 a year even at the high end of that range.
Still other changes were underway. In 1725, a new committee was appointed to lead the company. This coincided with a rise in the level of capital raised by the company with government approval. The limits on its capitalization had already been lifted from £30,000 to £100,000 in 1722 but this amount of capital was not raised until 1728. Thereafter, future increases came quickly. The limit rose to £300,000 in 1728 and to £600,000 in 1730. Widows and orphans were among the new shareholders. Those relying on the bequests and estates left to them were drawn by the company’s returns, which were higher than those offered on safer investments.
Business was picking up as the Charitable Corporation also acquired new customers. Contrary to provisions in its charter, the company began to issue notes to borrowers in lieu of cash so they could take on new business even when reserves were low. The leadership change helped bring legitimacy to the enterprise. Sir Robert Sutton, a former diplomat and now a Member of Parliament was appointed a director, along with fellow Member of Parliament, Sir Archibald Grant. Despite the high-profile leadership, new problems began to afflict the company. Internal recordkeeping deteriorated and loans were made with no collateral pledges being recorded, if any collateral was pledged at all.
John Thompson
There was other trouble brewing at the Charitable Corporation and at its center was John Thompson. A Scot now in London, Thompson had been working at the Charitable Corporation as its warehouse keeper since at least 1726. His was a position of great responsibility as he held one of the keys to the company’s Fenchurch Street warehouse where borrower collateral was stored. A surveyor was previously employed to conduct an audit of the collateral each evening but this post was abolished later in 1726.
Without any close supervision, Thompson would bring the company to ruin. In time, he would be accused of acting without the approval of his superiors and of committing various frauds. These included making loans against fictitious collateral, making new loans on the same collateral without first repaying the existing loan so that the value of the loans could exceed by many multiples the value of the collateral, and making loans to himself against collateral it was his job to value and in some cases against fictitious collateral.
Even where there were ‘real’ customers, their identities were obscured since Thompson’s assistants Thomas Warren and Richard Woolley would act as brokers on the borrowers’ behalf, entering their own names into the records. They also borrowed from the company for their own benefit; Warren and Woolley used their borrowings to enter the clothing business. As for Thompson, he escaped Britain for the continent after his misconduct became known to a company accountant who then notified Sir Robert Sutton. Though Thompson later accepted some responsibility, he blamed his assistants for beginning the fraud while they in turn blamed him.
Failure
News of improprieties at the company began to leak to the press in 1731 and Thompson was arrested in Rome of all places in 1732. He was noticed by an Italian banker, John Angelo Belloni, who happened to count the pretender to the British throne, James Francis Edward Stuart, among his clients. Therefore, at least somewhat knowledgeable of British affairs, Belloni arranged to have Thompson arrested and notified authorities in London.
Estimates of the total amounts lost at the Charitable Corporation were between £500,000 and £600,000. The company had £385,000 in loans outstanding against just £35,000 in real collateral, suggesting a massive amount of fraud relative to the total activities of the company. If the £350,000 deficit is interpreted as a loss, then that would obviously greatly imperil the holders of £192,000 in company debt outstanding, adding to the losses. In this sorry state, the Charitable Corporation failed.
Thompson may have been the villain but blame was also placed with the directors of the company. The scandalous meltdown of the firm was regularly likened to the South Sea Bubble which crashed twelve years earlier, though in that case the firm at its center survived. Here, shareholders stood to lose everything. So, various officers, including Thompson, were summoned to testify before Parliament. Both Sir Robert Sutton and Sir Archibald Grant were expelled from the House of Commons, though, as it happens, Sutton would be reelected a member in 1734. Shareholders of the company asked Parliament to provide some sort of relief. In the end, the proceeds of a state lottery were allocated to the company’s shareholders but many likely lost most of their investment nonetheless.
Lawsuit
Looking to be made whole, the company sued some of its former directors, committeemen, and officers. The latter were accused of breaches of trust, such as failing to ensure loans met the criteria set out in the company’s charter and bylaws, allowing multiple loans to be made on the same collateral, allowing Thompson to make loans to himself, removing certain checks on Thompson, and putting more power in the hands of him and his assistants. They were also accused of neglect for not attending to the requirements of their post, such as balancing the books and inspecting the company warehouse.
The committeemen argued that they should not be bound by strict rules because the post they held was one for which they received no salary. They further argued that they should not be held equally liable as the company’s leadership, but that each should be judged based on their own actions. The judge, Lord Hardwicke, ruled in 1742 that all of the directors, committeemen, and assistants were liable to make investors whole, even if to varying degrees, and that the fact they collected no salary was no excuse for their conduct. The less guilty among the defendants would still have to make up any shortfall in amounts unable to be recovered from those more responsible.
Lesson
In the early 18th century, Britain was afflicted by numerous financial crises and setbacks, from the South Sea Bubble to the failure of the Charitable Corporation. While the latter was smaller in size than the former, they were still regularly grouped together as a rather new kind of scandal. It was surprising that such events would occur when the country’s financial development was still in its infancy. Nonetheless, a good case could be made that these scandals occurred because of, and not despite, the recency of the debut of a more entrepreneurial and frenzied financial world.
More from the Tontine Coffee-House
Read about how the poor used the services of pawnbrokers in 18th century Britain and learn about a more long-lasting form of charitable lender, the monti di pietà. Also, consider subscribing to this blog’s newsletter here.
Further Reading
1. Brealey, Peter. “The Charitable Corporation for the Relief of Industrious Poor: Philanthropy, Profit and Sleaze in London, 1707-1733.” History; The Journal of The Historical Association, vol. 98, no. 333, 2013, pp. 708–729.
2. Froide, Amy M. “The Long Shadow of the South Sea Bubble: Memory, Financial Crisis, and the Charitable Corporation Scandal of 1732.” Boom, Bust, and Beyond, 2019, pp. 179–198.
3. Yorke, Philip (1st Earl of Hardwicke). Court of Chancery. The Charitable Corporation against Sir Robert Sutton and about Fifty Others. 13 Aug. 1742.
4. Simpson, Ian J. “Sir Archibald Grant and the Charitable Corporation.” The Scottish Historical Review, vol. 44, no. 137, Apr. 1965, pp. 52–62.
