Essentially, it sought to provide low-interest loans to poor tradesmen, shielding them from predatory pawnbrokers who charged as much as 30% interest. The corporation made loans available at the rate of 5% in return for a pledge of property for security.

The Charitable Corporation was modelled on Monti di Pietà, a charitable institution of credit established in Catholic countries during the Renaissance era to combat usury, or high rates of interest.

Unlike the Monti di Pietà, however, the British version – despite its name – wasn’t a non-profit. Instead, it was a business venture. The enterprise was funded by offering shares to investors who, in return, would make money while doing good. Under its original mission, it was like an 18th century version of today’s socially responsible investing, or “sustainable investment funds.”

Raiding the fund

In 1725, the Charitable Corporation diverted from its original mission when a new board of directors took over.

These men turned the corporation into their own piggy bank, taking money from it to buy shares and prop up their other companies. At the same time, the company’s employees began to engage in fraud: Safety checks ceased, books were kept irregularly and pledges went unrecorded.

Investigators would ultimately find that £400,000 or more in capital was missing – roughly $108 million in today’s U.S. dollars.

In the autumn of 1731, rumours began to circulate about the solvency of the Charitable Corporation. The warehouse keeper at the time, John Thomson, who was in charge of all loans and pledges but also in league with the five fraudulent directors, hid the company’s books and fled the country.

At the shareholders’ quarterly meeting, they found that money, pledges and accounts had all gone missing. At this point, the proprietors of the Charitable Corporation stock appealed to the British Parliament for redress. One-third of those who petitioned were women, a proportion that equalled the percentage of women who held shares in the Charitable Corporation.

Many women were drawn to the corporation because of its public mission in providing small loans to working people. It’s also possible that they had been intentionally targeted for fraud.

The parliamentary investigation led to various charges being levelled against both managers and employees of the Charitable Corporation. Many of them were forced to appear before Parliament and were arrested if they did not. The managers and employees deemed most responsible for the 1732 fraud, such as William Burroughs, had their assets seized and inventoried in order to help pay back the shareholder losses.

Bankruptcy proceedings were started against the banker and broker, George Robinson, and the warehouse keeper, Thomson. Both Sir Robert Sutton and Sir Archibald Grant were expelled as members of the House of Commons, with Grant being prevented from leaving the country and Sutton ultimately prosecuted in several courts.

In the end, the shareholders received a partial government bailout – Parliament authorized a lottery that reimbursed only 40% of what the corporation’s creditors had lost.

The risks of concentrated power

There are several key characteristics that stand out in the collapse of the Charitable Corporation . The company was offering something new or venturing into a new sector. In this case, it was what are today termed microloans.

Meanwhile, the management was centralised in the hands of just a few people. The Charitable Corporation got into trouble when it reduced its directors from 12 to five and when it consolidated most of its loan business in the hands of one employee – namely, Thomson.

The key fraud was using the assets of one company to prop up another company managed by the same people. For example, in 1732, the corporation’s directors bought stock in the York Buildings Company, in which many of them were also involved. They hoped to juice stock prices. When that didn’t happen, they realised they couldn’t cover what they had taken out of the Charitable Corporation’s funds.

News of the fraud came as a surprise, with little advance warning. Part of this is due to the ways in which managers were well respected and well-connected to both politicians and the financial world. Few public figures mistrusted them, and this proved to be a useful screen for deceit.

I would also argue that the company’s connection to philanthropy lent it another level of cover. The Charitable Corporation’s very name announced its altruism. And even after the scandal subsided, commentators pointed out that the original business of microlending was useful.

After the Charitable Corporation’s collapse in 1732, Parliament didn’t institute any regulation that would prevent such a fraud from happening again.

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Amy M. Froide is Professor of History and Director of the Dresher Center for the Humanities at UMBC. Her research includes early modern British, women's and financial history from 1500 to 1750, with a focus on economic, social, and financial history. She is the author of Never Married: Single women in early modern Britain (Oxford University Press, 2005) and Silent Partners: Women as Public Investors during Britain’s Financial Revolution, 1690-1750 (Oxford University Press, 2016), the founding director of UMBC's Entrepreneurship & Innovation minor and the former Chairman of the History Department.

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The original of this article was published at https://theconversation.com/ftxs-collapse-mirrors-an-infamous-18th-cent… - The Conversation - on 21 December, 2022. This version is edited by World Money Laundering Report.