Fraud: An American History from Barnum to Madoff
Economic duplicity has bedeviled American markets from the founding of the Republic. Historian Edward Balleisen explores the enduring connections between capitalist innovation and fraud, as well as the vexed efforts to curb the worst business deceptions by private organizations and state agencies. Placing recent fraud scandals in long-term context, he shows that we rely solely on a policy of caveat emptor at our peril; and that a mixture of public education, sensible disclosure rules, and targeted enforcement campaigns can contain the problem of business fraud.
“Fraud is endemic to modern capitalism,” says Edward J. Balleisen, Vice Provost for Interdisciplinary Studies at Duke University and author of the new book Fraud: An American History from Barnum to Madoff (2017). In his talk at the Wilson Center, Professor Balleisen explored the history of American fraud, taking a broader historical perspective that is sometimes absent from other investigations. By doing so he provides a new understanding not only of how we have engaged with fraud in the past, but how we might better contain it in the future.
The history of fraud is replete with compelling microhistories -- stories about individual scandals or fraudsters, their methods, successes, and downfalls -- but, as Professor Balleisen presents, those stories show only part of the picture: a longer study captures the continuities and changes that have defined the national history of fraud. Some things have changed greatly; others, such as the structure, tactics, and even psychology of fraud, have remained remarkably constant.
Professor Balleisen breaks the history of fraud into four “regulatory ecologies,” periods in which certain attitudes and policies directed public response.
The early Republic was characterized by a strong belief in caveat emptor: if someone got fooled, it was their fault. P. T. Barnum, in his autobiography, said that “each party expected to be cheated.” According to Professor Balleisen, courts and juries were skeptical of any fraud charges, and rationalized this by saying that the best way to prevent fraud was to toughen people up and encourage a skeptical public. If courts were receptive to suits, then it would discourage due diligence and investigation on the parts of those who were potential targets.
A variety of factors contributed to an ad hoc but stiffening response to fraud in the later part of the 19th century and into the early 20th, from the chemical testing of guano to the protection of the post office’s reputation, which was under siege from fraudulent mail order operations. Professor Balleisen emphasized that this, like other changes, was a complicated and heterogeneous one: “We should be careful not to essentialize the business community.” This period culminated in the formation of the Federal Trade Commission and better business bureaus, but would be dwarfed in anti-fraud intensity by the period of the mid-20th century.
Beginning in the 1930s, there was a concerted move to clamp down on fraud. The Securities and Exchange Commission was formed in 1934, and both regulatory agencies and businesses worked to protect consumers. Did fraud disappear? Hardly. But it was reduced: the worst episodes of fraud were done by marginal or economically unimportant firms. Large scale fraud by major industries, of the kind that had characterized earlier periods and would characterize later ones, did not happen with near the same frequency or intensity. Direct efforts on the part of governments and businesses curbed the most visible and destructive expressions of fraud, suggests Professor Balleisen.
Even so, the big regulatory moves to combat fraud came under criticism in the 1970s. Critiques, particularly within the academy, focused on inefficiencies of the FTC, problems with anti-fraud laws, and a wider opposition to large, active government. These critiques were instrumental in ushering in a period of deregulation. “Deregulation was not an abolition of agencies,” stresses Professor Balleisen, but rather a reducing of budgets and shifting of priorities. Spurring growth and supporting innovation became the aims of the day. There was a harkening back to caveat emptor from the 19th century, and a belief that reputational incentives could effectively control fraud. Large-scale scandals, of the kind that were less common in the mid-20th century, once again rose.
And as for the future? “There are no magic bullets,” says Professor Balleisen. “Sole reliance on markets is quixotic” -- it is too easy to mimic authenticity, and, especially in a more global and technologically complex economy, the information asymmetries are too vast for the average person to overcome. Conversely, there may be limits to self-regulation by businesses, but we should not ignore its potential value. Stringent enforcement practice comes with its own risks, whether that is stifling innovation or risking due-process violations.
Professor Balleisen does not see the financial crisis in 2008 as effecting the same kind of anti-fraud change as previous events. There has been a contested response, and considering the inclinations of the present administration and congress, Professor Balleisen speculates that the chance of stronger anti-fraud measures in the future is low. The crisis in 2008 may not become the kind of “focusing event” that some would expect or hope. Ultimately, the best way to move forward is through prevention: we must establish and maintain good norms, in large part through education. That is a subject, Balleisen says, that we still have a lot of room to explore.
The Washington History Seminar is co-chaired by Eric Arnesen (George Washington University) and Christian Ostermann (Woodrow Wilson Center) and is sponsored jointly by the National History Center of the American Historical Association and the Wilson Center's History and Public Policy Program. It meets weekly during the academic year. The seminar thanks the Society for Historians of American Foreign Relations and the George Washington University History Department for their support.
History and Public Policy Program
The History and Public Policy Program strives to make public the primary source record of 20th and 21st century international history from repositories around the world, to facilitate scholarship based on those records, and to use these materials to provide context for classroom, public, and policy debates on global affairs. Read more