Sleight of the Invisible Hand

Stock market fraud is as old as the stock market.

Chris Lehmann December 8, 2014

View of the port in Gregor MacGregor’s mythical Central American colony of Poyais. (Library of Congress via

In the panoply of myths most cher­ished by apos­tles of cap­i­tal­ism from Adam Smith to Mil­ton Fried­man to Tyler Cowen, sec­ond only to the ratio­nal mar­ket is the moral mar­ket. Under this cat­e­chism of the mar­ket faith, the act of bring­ing com­merce to new ports of call serves to lift all par­ties into a more civ­i­lized mind­set — more tol­er­ant, more lib­er­ty-con­scious, more mind­ful of our shared human­i­ty, and more averse to busi­ness-quash­ing geopo­lit­i­cal conflicts.

Every phase of our market society’s expansion was shaped by deceit, fraud and mountebankery.

But the his­to­ry of West­ern cap­i­tal­ism has trend­ed in a dif­fer­ent direc­tion. As much as the Enlight­en­ment sages and their neolib­er­al suc­ces­sors have insist­ed oth­er­wise, the spread of mar­ket val­ues has been a breed­ing ground of fraud and chi­canery. Indeed, the smoothest path to paper wealth has proved, in moral terms, to be the crookedest.

As Ian Klaus explains in his engag­ing new book, Forg­ing Cap­i­tal­ism: Rogues, Swindlers, Frauds, and the Rise of Mod­ern Finance, every phase of our mar­ket society’s expan­sion was shaped by deceit, fraud and moun­te­bankery. Focus­ing on the British invest­ment scene of the 19th cen­tu­ry — the van­guard of cap­i­tal con­sol­i­da­tion that would serve as the mod­el for the lat­er, far larg­er com­mer­cial rev­o­lu­tion in Amer­i­ca — Klaus assem­bles a gallery of rogues who con­sis­tent­ly defied the pur­port­ed civ­i­liz­ing mer­its of sober glob­al investment.

In Feb­ru­ary 1814, for exam­ple, 13 years after the Lon­don Stock Exchange was found­ed, the mar­ket was sent into fran­tic con­vul­sions by a rov­ing imposter in Ger­man mil­i­tary garb who walked into a pub in Dover to announce the death of Napoleon Bona­parte. Eng­land was then at war with the Emper­or of France, and a report of his death could be count­ed on to dra­mat­i­cal­ly move mar­kets — much as, say, the specter of an Ebo­la out­break does in today’s finan­cial world. It quick­ly became clear that the lit­tle tyrant was still very much alive and the pho­ny mes­sen­ger was in cahoots with an esteemed British naval hero, Lord Thomas Cochrane, who man­aged, amid the chaos of the day’s trad­ing, to fend off a dis­as­trous £10,000 loss loom­ing over his own portfolio.

But, the moral reck­on­ings of the mar­ket being what they are, Cochrane’s dis­grace was short-lived. He led sev­er­al suc­cess­ful naval attacks in Latin Amer­i­ca and, in the 1830s, he acced­ed to his father’s earl­dom; by 1847, Queen Vic­to­ria had rein­stat­ed the con­vict­ed fraudster’s knighthood.

Clear­ly things were not going accord­ing to the Adam Smith script. Each new out­break of fraud would call down new bureau­crat­ic mea­sures designed to cur­tail risk and ver­i­fy the authen­tic­i­ty of traders — until these sys­tems, too, fell vic­tim to inge­nious fraud­sters. Still, the lords of finance were deter­mined to ensure that self-reg­u­la­tion would remain the order of the day, and a series of inquiries by Par­lia­ment came to naught.

And so con­tin­ued a series of British stock scan­dals. There was Gre­gor Mac­Gre­gor, a Scot who tout­ed invest­ments in nonex­is­tent mines in the myth­i­cal Cen­tral Amer­i­can colony of Poy­ais. There was the pio­neer of insur­ance fraud, Wal­ter Watts — a mod­est insur­ance clerk by day, and a sybarit­ic (and much loved) impre­sario of the Lon­don the­ater scene by night. There was Har­ry Marks, the trans­plant­ed Yank edi­tor of the Finan­cial News, who used the paper to pro­mote anoth­er fraud­u­lent min­ing invest­ment, this time in South Africa.

But by the time of Marks’s tri­al in 1889, the spec­u­la­tive puff­ing and col­laps­ing of asset bub­bles that had scan­dal­ized British busi­ness inter­ests dur­ing the Cochrane affair had become the sta­tus quo. It was, in Klaus’s words, an age of opaque, cav­a­lier finan­cial cap­i­tal­ism.” And sure enough, Marks weath­ered his dis­grace with min­i­mal dam­age, and his paper con­tin­ued to serve as an author­i­ta­tive invest­ment bible.

Klaus doesn’t draw par­al­lels between these stud­ies in British fraud and the grotes­queries that stoked the 2008 finan­cial melt­down. But for every Thomas Cochrane, Wal­ter Watts or Gre­gor Mac­Gre­gor, we have a Bernie Mad­off, Ange­lo Mozilio or Sandy Weil. Then there’s that shame­less huck­ster Alan Greenspan, who mas­quer­ad­ed as a com­pe­tent cen­tral banker and insist­ed, much like Har­ry Marks, that fraud, strict­ly speak­ing, was sim­ply unthink­able in his unruf­fled vision of pure investor trans­paren­cy. We’re still wait­ing for the mar­ket to bring him to jus­tice, too.

Chris Lehmann, is edi­tor-in-chief at The Baf­fler and a for­mer man­ag­ing edi­tor of In These Times. He is the author of The Mon­ey Cult: Cap­i­tal­ism, Chris­tian­i­ty, and the Unmak­ing of the Amer­i­can Dream (Melville House, 2016).
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