Thomas Farrow was born in Catton, near Norwich, in 1862. He left school at the age of 13 to take up an apprenticeship to a solicitor. Although he passed all the necessary exams, he decided in 1881 to go to London to work as personal secretary to W.H. Smith, the leader of the House of Commons. He later took a similar position with Robert Yerburgh, the president of the Agricultural Banks Association. After writing a book in 1895 that criticised bankers for offering poor value, he set up the Mutual Credit and Deposit Bank in 1901, followed by Farrow’s Bank in 1904.
What was the scam?
Farrow’s Bank deliberately focused on the smaller savers and borrowers supposedly neglected by the large institutions. It offered higher interest rates on small deposits and more generous terms on small loans than its competitors. As a result, its deposits increased from £166,304 in 1908 (£17.4m today) to £4m (£161m) by 1920, while still reporting large profits. However, in reality this profitability was a mirage generated by Farrow falsifying the balance sheet by writing up the value of the bank’s assets (such as agricultural land), to hide the fact that the bank was in fact losing large sums of money.
What happened next?
Desperate for more money to pay depositors, Farrow agreed in 1920 to sell a controlling interest in his bank to the American investment bank Norton, Read & Company. However, when the prospective buyers examined Farrow’s books, they discovered the bank was not only unprofitable, but also insolvent, leading to its immediate collapse. Farrow claimed that all the deception was intended to save the bank’s future, rather than for his personal enrichment, but he was convicted of fraud in 1921, along with the bank’s deputy chairman and chief accountant, and was sentenced to four years in prison. He died in 1934.
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Lessons for Investors
Farrow’s emphasis on small depositors would spur the main banks to pay much more attention to this segment of the market. However, this was small comfort for Farrow’s shareholders, who were wiped out, and the depositors, who received just over a quarter of their money back. One of the red flags was that the bank was registered as a “credit bank” rather than a “clearing bank”, which reduced the level of regulation. For example, the accounts were never checked by an external auditor and were overseen only by the chief accountant and later by his unqualified son.
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