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Yale Series in Economic and Financial History
Forging Capitalism: Rogues, Swindlers, Frauds, and the Rise of Modern Finance
Vice is endemic to Western capitalism, according to this fascinating, wildly entertaining, often startling history of modern finance. Ian Klaus’s Forging Capitalism demonstrates how international financial affairs in the nineteenth century were conducted not only by gentlemen as a noble pursuit but also by connivers, thieves, swindlers, and frauds who believed that no risk was too great and no scheme too outrageous if the monetary reward was substantial enough. Taken together, the grand deceptions of the ambitious schemers and the determined efforts to guard against them have been instrumental in creating the financial establishments of today. In a story teeming with playboys and scoundrels and rich in colorful and amazing events, Klaus chronicles the evolution of trust through three distinct the age of values, the age of networks and reputations, and, ultimately, in a world of increased technology and wealth, the age of skepticism and verification. In today’s world, where the questionable dealings of large international financial institutions are continually in the spotlight, this extraordinary history has great relevance, offering essential lessons in both the importance and the limitations of trust.
296 pages, Kindle Edition
First published October 14, 2014
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Displaying 1 - 4 of 4 reviews
July 22, 2019
This is a historical study of financial fraud from the birth of modern capitalism during the Napoleonic Wars until WWI. The beginning of this book was theoretical and very compelling. It included ideas from thinkers like Adam Smith and Hume on both why a free market would make people more virtuous and prosperous and why if it didn't it would be problematic. The book then goes historical. Back to Napoleon, we've all heard of how Rothschild, being very rich, was able to get the news of Napoleon's defeat to the London market quicker than the government and thus to make a lot of money. In this book, we learn of some frauds who saw the economic potential in such an action and faked Napoleon's defeat just a bit too early and made a lot of money in the bond market. This is followed by a few other classic frauds, which brought of the question of who should assume risk for these transfers of wealth. The old British courts set the precedent for modern financial law which is limited liability (aka the reason a Trump-like charlatan character can be a total financial failure and still be rich... the state saying, "hey man, you made a stupid choice, but someone else will assume the risk). Anyways, the examples got more boring (thus the 2 star rating) but the book ends on the same theoretical footing it started on. This time it's Mises and Hayek (post-WWI) warning about immoral capitalists. We don't have to go back this far for examples of Madoff-frauds, but this shows that it's nothing new. I guess you can't force someone to have virtue. Frauds have taken advantage of the system in which the check was gentlemanly virtue, followed by reputation, and now data (background checks, etc). But Adam Smith was probably right that if there is no virtue involved, the system will fail.
July 12, 2018
As a person who wants to know the western financial history, this may no be the right book for me. But still, I knew from this book that the financial history is full of frauds. It will continue into the modern world. No surprise there are so many finance frauds in my countries. As her finance is at the 19th century stage of the modern finance, even with very advanced technology. Maybe one should always remember that every new thing is a tool for cheat.
January 25, 2015
By Edward Hadas
Financial fraud can be fascinating. There is something compelling about the way confidence men, from Thomas Cochrane to Bernard Madoff, take advantage of both the human willingness to believe and the weakness of greed. Madoff’s scam was exposed as markets crashed in 2007. For Cochrane, who made a fortune on a false rumour of Napoleon’s death in April 1814 in London, Ian Klaus’ new book - “Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance” - provides not only the facts but the economic context of that early example of market manipulation.
Klaus, now working for the U.S. State Department, chooses Cochrane as an emblematic figure of financial skullduggery in the early days of modern financial markets. In that era, social status was enough to gain trust in the still-small circle of capital markets. Cochrane, a flamboyant war hero from a good family, was readily believed. On the other side, the still relatively new stock exchange was anxious to prove that it was, as Klaus puts it, “an arena of sociability and character… not a haven for roguish, credit-manipulating speculators.”
The Cochrane affair ended inconclusively. He went to prison but always protested his innocence. The details as presented by Klaus are not simply entertaining, they provide valuable lessons for today. The first is that “fraud is the tax for creative capitalism.” In other words, the rapid shifts in the financial world continually undermined the networks of trust which restrain evil and desperate operators in more static financial arrangements. It was, Klaus argues, a tax worth paying, as enduring capitalism could not have been forged without some trickery.
The second point is that Adam Smith was wrong to believe that markets could be kept honest through a combination of sociability, virtuous moral sentiments and self-interest. “Instead, trust was built through a series of deliberative approaches created or enhanced over a century,” Klaus writes. Those approaches can be summarised by the slogan, “trust but verify.” Honesty can win out, but not without careful procedures, objective standards and constant checks.
Klaus makes his case through stories. The tales get more technical as time goes on because the scale of financial dealings widened, as did the complexity of deceit. By the middle of the 19th century, there was too much information and scepticism about for simple lies to gain credence. However, with a little work, dishonest prospectuses and forged bills and insurance policies could divert money to the wrong places. In response, the guardians of financial markets had to become more vigilant. They relied less on personal testimonies and developed the now-familiar techniques of detailed verification.
Klaus is both persuasive and a good narrator. It is hard to resist figures like Walter Watts, an insurance clerk who embezzled enough money in the late 1840s to buy a few theatres and live a jolly life for a few years. Readers might be less enthralled with some of the arcane details, but frauds, then as now, often turn on the ability to find a weakness in procedures which were meant to keep them away.
Klaus limits his discussion to the ability of financial markets to become trustworthy, but that is only one part of a much bigger story. One of the great triumphs of modern industry is that consumers trust products made by thousands of people they cannot possibly know. Indeed, despite all the checks and procedures in finance, the industry remains a problem child in developed economies.
Madoff chose the right business. There would be far too many inspections and concrete tests for him to keep funds flowing in for an imaginary gold mine or a fraudulent airline. As a financier, though, he could rely on his customers’ greedy desire for outsized returns and their gullibility in a plausible-sounding man with good connections. Thomas Cochrane would have understood.
Financial fraud can be fascinating. There is something compelling about the way confidence men, from Thomas Cochrane to Bernard Madoff, take advantage of both the human willingness to believe and the weakness of greed. Madoff’s scam was exposed as markets crashed in 2007. For Cochrane, who made a fortune on a false rumour of Napoleon’s death in April 1814 in London, Ian Klaus’ new book - “Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance” - provides not only the facts but the economic context of that early example of market manipulation.
Klaus, now working for the U.S. State Department, chooses Cochrane as an emblematic figure of financial skullduggery in the early days of modern financial markets. In that era, social status was enough to gain trust in the still-small circle of capital markets. Cochrane, a flamboyant war hero from a good family, was readily believed. On the other side, the still relatively new stock exchange was anxious to prove that it was, as Klaus puts it, “an arena of sociability and character… not a haven for roguish, credit-manipulating speculators.”
The Cochrane affair ended inconclusively. He went to prison but always protested his innocence. The details as presented by Klaus are not simply entertaining, they provide valuable lessons for today. The first is that “fraud is the tax for creative capitalism.” In other words, the rapid shifts in the financial world continually undermined the networks of trust which restrain evil and desperate operators in more static financial arrangements. It was, Klaus argues, a tax worth paying, as enduring capitalism could not have been forged without some trickery.
The second point is that Adam Smith was wrong to believe that markets could be kept honest through a combination of sociability, virtuous moral sentiments and self-interest. “Instead, trust was built through a series of deliberative approaches created or enhanced over a century,” Klaus writes. Those approaches can be summarised by the slogan, “trust but verify.” Honesty can win out, but not without careful procedures, objective standards and constant checks.
Klaus makes his case through stories. The tales get more technical as time goes on because the scale of financial dealings widened, as did the complexity of deceit. By the middle of the 19th century, there was too much information and scepticism about for simple lies to gain credence. However, with a little work, dishonest prospectuses and forged bills and insurance policies could divert money to the wrong places. In response, the guardians of financial markets had to become more vigilant. They relied less on personal testimonies and developed the now-familiar techniques of detailed verification.
Klaus is both persuasive and a good narrator. It is hard to resist figures like Walter Watts, an insurance clerk who embezzled enough money in the late 1840s to buy a few theatres and live a jolly life for a few years. Readers might be less enthralled with some of the arcane details, but frauds, then as now, often turn on the ability to find a weakness in procedures which were meant to keep them away.
Klaus limits his discussion to the ability of financial markets to become trustworthy, but that is only one part of a much bigger story. One of the great triumphs of modern industry is that consumers trust products made by thousands of people they cannot possibly know. Indeed, despite all the checks and procedures in finance, the industry remains a problem child in developed economies.
Madoff chose the right business. There would be far too many inspections and concrete tests for him to keep funds flowing in for an imaginary gold mine or a fraudulent airline. As a financier, though, he could rely on his customers’ greedy desire for outsized returns and their gullibility in a plausible-sounding man with good connections. Thomas Cochrane would have understood.
December 27, 2016
In April 1910, brokers and bankers in Liverpool, London, Le Havre, Bremen, and New York realized over a two-day span that they had purchased and resold upward of $5 million worth of forged bills of lading from the Alabam firm Knight, Yancey, and Company. The perpetrators appeared to be John W. Knight and W.J. Yancey, two well-connected good-time boys from the American South who for years had been in the business of trading cotton and other goods on future markets and through bills of exchange and lading -- which is to say, they were in the business of trading representations of cotton rather than the real thing. The losers, bankers and insurers all around the Atlantic, were out of the equivalent of more than $2 billion in today's terms, and news of the fraud rippled across the Atlantic. Anglo-American relationships were decidedly important at century's end. The United States was a testy, difficult, upstart ally, but by the late nineteenth century the former colonies had become Britain's biggest economic partner. If Asia and Africa accounted for around 30 percent of British overseas investment, white settler colonies such as Australia and the United States attracted around 45 percent.
Evidence of this special economic relationship abounds in British and American fiction. Caspar Goodwood, one of Isabel Archer's spurned suitors in Henry James's The Portrait of a Lady, is an heir to a New England cotton mill. Though Archer suggests there was nothing "cottony" about him, he did have American manners despite his Harvard training. American ways -- straightforward, honest, fair-dealing but controlling -- also appear in Wilde's The Picture of Dorian Gray: "The Americans are an extremely interesting people," one character observes. "They are absolutely reasonable. I think that is their distinguishing characteristic." Liverpool and London cotton merchants and bankers knew better, as did the Americans themselves. One of the most famous American stories of deception is Herman Melville's The Confidence-Man: His Masquerade. Written shortly before the outbreak of the Civil War, Melville's novel takes place on a steamship traveling south on the Mississippi River toward New Orleans. As one might expect from the title, little is as it seems, as a shape-shifting stowaway moves among the steamer's passengers, playing with their trust. "He looks honest, don't he?" asks one character, only to be quickly reminded, "Looks are one thing, and facts are another." It is a steamer of strangers. An inscription on a pasteboard sign hangs from a nail near the boat's barbershops: "NO TRUST."
Evidence of this special economic relationship abounds in British and American fiction. Caspar Goodwood, one of Isabel Archer's spurned suitors in Henry James's The Portrait of a Lady, is an heir to a New England cotton mill. Though Archer suggests there was nothing "cottony" about him, he did have American manners despite his Harvard training. American ways -- straightforward, honest, fair-dealing but controlling -- also appear in Wilde's The Picture of Dorian Gray: "The Americans are an extremely interesting people," one character observes. "They are absolutely reasonable. I think that is their distinguishing characteristic." Liverpool and London cotton merchants and bankers knew better, as did the Americans themselves. One of the most famous American stories of deception is Herman Melville's The Confidence-Man: His Masquerade. Written shortly before the outbreak of the Civil War, Melville's novel takes place on a steamship traveling south on the Mississippi River toward New Orleans. As one might expect from the title, little is as it seems, as a shape-shifting stowaway moves among the steamer's passengers, playing with their trust. "He looks honest, don't he?" asks one character, only to be quickly reminded, "Looks are one thing, and facts are another." It is a steamer of strangers. An inscription on a pasteboard sign hangs from a nail near the boat's barbershops: "NO TRUST."
Displaying 1 - 4 of 4 reviews