Trust is like gold: it’s at the heart of capitalism, and it’s a commodity that can be either invested or squandered. As Ian Klaus tells it, the history of modern finance is a story of the constant interplay between trust and risk, and between gentlemen and rogues.
His new book Forging Capitalism: Rogues, Swindlers, Frauds, and the Rise of Modern Finance (Yale Press, 296 pages, $30) begins with an episode in 1814, during the Napoleonic Wars, when “a slippery confidence man” wearing a fake military uniform arrived in a British town and announced that Napoleon had been killed in battle, and that the war was over. Until they were corrected, his lies wreaked havoc on the London Stock Exchange—which had been the fraudster’s goal all along.
Klaus talked to The Baffler this week about the swindlers that have always wreaked havoc on our financial systems, and how foolish we would be to idealize the past.
In your introduction, you write, “Fraud is the tax for creative capitalism.” What do you mean by that?
I was getting at the ways in which new assets or markets were created through history. There was a sort of creativity that was evident in nineteenth century capitalism—along with many problems, of course—where people saw market needs, and invented ways to fill those gaps. Insurance is the easiest model here: if you think about the wide variety of new forms of insurance that were created to deal with the new risks that were emerging in the nineteenth century, people said, “let’s do bicycle insurance, let’s do luggage insurance, and travel insurance.” I think there’s something creative in that act.
But at the same time, consumers didn’t have any familiarity with the types of insurance that were being deployed, and I think history shows that fraudsters—opportunistic creative capitalists of their own sort—recognize that, in any spaces where people aren’t very familiar with the market, they themselves can prosper, by taking advantage of that lack of information.
Fraudsters are very good at filling in the gap. When you look at the longer history of capitalism, you rarely see these new creative forms of assets without also seeing the fraudsters that accompany them.
You have a lot of stories in this book about wacky schemes and fraudsters; do you have a favorite character?
I actually find the historical figures who aren’t the most outlandish to be the most unsettling. So inevitably I’m drawn to figures like Beaumont Smith, who’s just a senior clerk in a ministry, who essentially watches paper come in and out, but has the opportunity to take advantage of that position. He doesn’t really exist very widely in the historical record—he’s a clerk, so he’s not out there like someone like Sir Gregor MacGregor, making outlandish claims. He’s someone who probably got in too deep (although we can’t exactly get that from the record), and found himself either forced, or needing, to pursue fraud. He was really just a cog in the machine, but who was crucial to making that machine work. I think those stories tell us something about how important trust is in processes of capitalism, and the ways in which fraudsters can do so from the most basic of positions.
Sorry, should I have said something more spectacular? I just find these un-famous people somewhat appealing, and I must say, a little more sympathetic.
No, I totally agree, and it makes you think about the quiet cogs of the machine that we don’t ever hear about at all.
Right, if Beaumont Smith hadn’t perpetrated this gigantic fraud, it’s very unlikely that he ever would have appeared in a book about the history of capitalism.
So let’s talk about when people get caught. Did you learn anything surprising about how fraud has historically been anticipated, and then punished?
In certain instances, there is sensitivity to fraud as a threat, as a form of human risk. So there’s political risk, there’s risk at sea (which is a sort of natural risk), and then of course there is the risk that’s tied to greed and misbehavior—that is a very particular human risk.
The people who participated in capitalism in the nineteenth century were in no way naïve about how serious that threat was. I think that is something that sometimes gets lost in history, in the way people think about the way that the market might have worked, at some time. Nineteenth-century capitalism is not the story of a time when you could just depend on people’s honesty, and everyone was forthright, and that somehow that’s been lost.
Can you talk about the role of information exchange, and changes in technology, in this story? Rumors and gossip have clearly always been important tools for fraudsters, to spread hoaxes, but then of course as the financial press developed it could also, ideally, be an important check against falsehoods.
That’s how I understand the history of financial reporting, yes, that it was simultaneously offering to fix asymmetries of information, in what was an incredibly complicated, globalized market, and yet was also in the business of having its own angle and its own stocks to puff, so to speak. And so reporters offered expertise, and offered access to new information, and even promised higher returns if you listened. But just like so many other market developments, in the space that people were creating new ways to supply information and expertise, people quickly took advantage of those platforms.
On the technology question, the telegraph was among the most exciting developments when it came to transmitting information that the world had ever seen; it changed both newspapers and financial markets, dramatically. How to take advantage of all that new information, and what sort of platforms could be found to be trustworthy, and could earn the trust of people who wanted to listen to them? That’s certainly something that has other historical parallels.
What can people learn from your history about how to perpetrate fraud and get away with it?
[Laughs.] Um, that’s a very creative question. Well, what seems to be clear from the relationship between fraud and capitalism is that, just as in the case of bubbles—at periods of optimism, and periods infused perhaps with ambition for wealth—frauds seem to be easier to perpetrate. Just as you find enterprising, honest, creative individuals there, you’re likely to find enterprising, dishonest, creative individuals too, I suspect.
When I was doing this research, I had to put myself, to a certain degree, on the ground, to try to understand—because some of these frauds are complicated—exactly what the processes were by which fraudsters could pursue them. If you look at the great fraudsters of the nineteenth century, as I said, some of them are these gigantic figures who turn themselves into heroes, and some of them are just clerks. They tend to be individuals who know how trust works, in the simplest sense. Some of the frauds involved serious self-aggrandizement, and some of them involved keeping one’s head down.