Understanding fraud at work: Role-model for economic fraudsters

AN overview of the history from the 16th century to date shows that the art and craft of fraud are deficient in inventiveness: they repeat the same script of their craft time and again, of course, with seemingly new trappings. Its plagiaristic repetitiveness goes most often unnoticed because human memory is proverbially short. This point was forcefully driven home to us by John Kenneth Galbraith in The Age of Uncertainty (1977) where he said:

“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

It is well said. Shakespeare borrowed all his plots in his plays, but he turned them into things of beauty ever new, hence never stale. In this leaf I intend to tell you something about the structure and strategy of fraud as explored and portrayed by Charles Mackay in his Extraordinary Popular Delusions and Madness (1841). Never is a name more connotative and suggestive than this book’s. This book, especially its first three chapters [‘Money Mania.—The Mississippi Scheme’; ‘The South-Sea Bubble’; and ‘The Tulip mania’] deserve to be read by all who want to understand the technique of mega frauds illustrated in certain financial/money manias, now brought to perfection under the Pax Mercatus (the rule of market) established under the architecture of the present-day Economic Globalization. Michael Lewis considered Mackay an economist as high in stature as Adam Smith, Ricardo, and Keynes. The bubbles evidencing greedy financial manias pertain to the South Sea Company bubble of 1711–1720, the Mississippi Company bubble of 1719–1720, and the Dutch tulip mania of the seventeenth century. These show how the murk of greed helped produce a breed of financial fraudsters who succeeded in ingratiating the power-wielders and suborning even the watchers of public interest to turn them into a band of suppliant helpers and cheer-leaders of the greedy maniacs.

In this leaf it is not possible to provide even a synoptic view of the aforementioned three chapters. What I would attempt is a short summary of the common features only those points which must not go unnoticed by us if we really believe in the often repeated idea, as Edmund Burke put it, ‘ Eternal vigilance is the price of liberty’. But before I set out to draw such features I would quote Defoe who described the craft of greed with an amazing succinctness:

Some in clandestine companies combine;
Erect new stocks to trade beyond the line;
With air and empty names beguile the town,
And raise new credits first, then cry ’em down;
Divide the empty nothing into shares,
And set the crowd together by the ears

How graphic are the words in the concluding two lines in the context of the computer generated money under the present-day rogue financial system. How accurate is the portrait of the creatures pullulating on the stock markets gathering roses which do not exist, and harvesting money no more than evanescent digital flickers through figures which yield unjust enrichment to some, befool many entrapped in the quest of a rainbow, and leave the society by and large morally depraved to suffer inequity and injustice.

On this short leaf I cannot even provide you a synopsis comprehensive enough motivate you to go through Mackay’s book for light and delight. Here I would provide you some foretaste of what is the best in Mackay’s.

In the ‘Mississippi Scheme’, Charles Mackay draws an account of a powerful financial bubble which emerged from the collective pursuits of the bankers, speculators, economic adventurers and crooks. The artificial creation of credit, and the fecundity in the proliferation in paper currency, and a systematic maneuverings through monetary policy worked hand and glove with the wielders of political power in the degenerate ancient regime in France marching headlong to the Revolution (1789). The circulation of more money and the emergence of the extractive and exploitative gladiators created certain oasis of wealth in the aggrieved French society fostered the flame till the ancient regime turned into ashes. Consider the following brief extracts from Mackay’s book which, it is hoped, would provide us a good perspective to understand the goings-on of our days:

(a) The French society had become philistine, corrupt, and callous to common people. It was a society where some were born to great delight whilst all others were born to gruesome night.

“The looms of the country worked with unusual activity, to supply rich laces, silks, broad-cloth, and velvets, which being paid for in abundant paper, increased in price four-fold. Provisions shared the general advance. Bread, meat, and vegetables were sold at prices greater than had ever before been known; while the wages of labour rose in exactly the same proportion. The artisan who formerly gained fifteen sous per diem now gained sixty. New houses were built in every direction; an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching….. It was remarked at this time that Paris had never before been so full of objects of elegance and luxury. Statues, pictures, and tapestries were imported in great quantities from foreign countries, and found a ready market. All those pretty trifles in the way of furniture and ornament which the French excel in manufacturing were no longer the exclusive play-things of the aristocracy, but were to be found in abundance in the houses of traders and the middle classes in general. Jewellery of the most costly description.”

(b) The stock-market induced madness.

“The story goes that a hunchbacked man who stood in the street gained considerable sums by lending his hump as a writing-desk to the eager speculators! The great concourse of persons who assembled to do business brought a still greater concourse of spectators. These again drew all the thieves and immoral characters of Paris to the spot, and constant riots and disturbances took place.”

(c) Emergence of paper money: the hiatus inter se appearance and reality.

“The warnings of the parliament, that too great a creation of paper money would, sooner or later, bring the country to bankruptcy, were disregarded. The regent, who knew nothing whatever of the philosophy of finance, thought that a system which had produced such good effects could never be carried to excess.”

(d) Autocratic monarchy of the ancient regime worked as participis criminis in contradiction to constitutional monarchy of England where public outcry and vigilance led the government to forge effective steps against the swindlers whether they were in the government of the day or outside.

“In a constitutional monarchy some surer means would have been found for the restoration of public credit. In England, at a subsequent period, when a similar delusion had brought on similar distress, how different were the measures taken to repair the evil; but in France, unfortunately, the remedy was left to the authors of the mischief.”

The South-Sea Company was incorporated under the Act of the British Parliament with a view to restoring public credit, which was in a bad plight. Reports and rumours were assiduously manufactured so that the masses could be turned into herds to be easily driven to the traps so dexterously made with an active assistance of many ministers, members of Parliament, high dignitaries and many others shaping public policies including the Chancellor of the Exchequer. The king’s worry, expressed at the opening of the session of 1717, at the state of public credit was sought to be dealt with by setting up two great monetary corporations, the South-Sea Company and the Bank of England. The French bubble was treated as a model, but ‘wise in their own conceit’ some modifications were effected to escape the follies which pricked them flat. But the prime mover was the same in both the countries. Mackay puts it thus: “Visions of boundless wealth floated before the fascinated eyes of the people in the two most celebrated countries of Europe.” Some of the gnawing features were thus captured by Mackay:

“Walpole warned against “the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth.” “It seemed at that time as if the whole nation had turned stock-jobbers.” “Every fool aspired to be a knave.”

“The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose.” In a prophetic spirit he added, that if the plan succeeded, the directors would become masters of the government, form a new and absolute aristocracy in the kingdom, and control the resolutions of the legislature. If it failed, which he was convinced it would, the result would bring general discontent and ruin upon the country.”

(iii) Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market. The projectors took the first opportunity of a rise to sell out, and next morning the scheme was at an end. The shares of this company were rapidly subscribed for. But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”

(iv) “But it did not follow that all these people believed in the feasibility of the schemes to which they subscribed; it was enough for their purpose that their shares would, by stock-jobbing arts, be soon raised to a premium, when they got rid of them with all expedition to the really credulous.” “It would be needless and uninteresting to detail the various arts employed by the directors to keep up the price of stock. It will be sufficient to state that it finally rose to one thousand per cent. It was quoted at this price in the commencement of August. The bubble was then full-blown, and began to quiver and shake, preparatory to its bursting.”

(v) “Is there no warmth in the despair of a plundered people?—no life and animation in the picture which might be drawn of the woes of hundreds of impoverished and ruined families? of the wealthy of yesterday become the beggars of to-day? of the powerful and influential changed into exiles and outcasts, and the voice of self-reproach and imprecation resounding from every corner of the land? Is it a dull or uninstructive picture to see a whole people shaking suddenly off the trammels of reason, and running wild after a golden vision, refusing obstinately to believe that it is not real, till, like a deluded hind running after an ignis fatuus, they are plunged into a quagmire?”

In the ‘Tulipomania’ Desire for tulips were created and made wide spread by adopting a strategy analogous to the strategy of the present-day commercial world bent to beget consumerism by creating and manipulating demands and desires. They procured intellectual hirelings to prove their points and to sell their wares. This mania overtook Western Europe in no time ‘Unmerited encomia lavished upon these fragile blossoms.’ ‘In 1634, the rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.’ Prices went up and down, and the speculative profits were reaped. The ‘tulipomania’ got transmuted through some magic wand into ‘finmania’ (financial mania)! Falsehood and propaganda grew in crescendo, and public vigilance faded out. ‘The tulip-jobbers speculated in the rise and fall of the tulip stocks, and made large profits by buying when prices fell, and selling out when they rose.’ And all this led to:

“The prices of the necessaries of life rose again by degrees: houses and lands, horses and carriages, and luxuries of every sort, rose in value with them, and for some months Holland seemed the very antechamber of Plutus.”

All this not only swindled common people, it ruined even the crème de la crème who dug their grave to sleep insouciance. Mackay describes their plight thus: ‘Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.” The story of greed ended as it always ends: in disaster. Even the government of the day found itself helpless.

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