Fraud: An American History from Barnum to Madoff
Princeton University Press, 2017, 496 pp., $35
There is a long tradition of fraud in the history of the United States, and the history of antifraud efforts is only slightly shorter. Notwithstanding the title of his recent and impressive book, Duke University Professor Edward Balleisen’s principal concern is with these antifraud efforts rather than with the incidence of fraud itself. In his view, attempts to combat fraud illuminate the issue of business-state relations in American history, and act as a corrective to the widespread tendency to see the market and the state as antagonists when in truth they have always been interconnected. Although the book is open to question on several points, it is unquestionably a major scholarly achievement deserving of a wide readership among academic and general readers alike.
The bulk of Fraud consists of a chronological account of antifraud efforts, beginning with the consolidation of the United States after the War of 1812 and continuing to the present. Balleisin identifies four epochs during this period.
The first, lasting from 1815 until roughly the late 19th century, was defined by a legal and popular embrace of the principle of caveat emptor—“let the buyer beware.” Inhabiting a culture that prized self-reliance, lawyers, judges, and ordinary Americans alike agreed that victims of fraud were largely to blame for their own gullibility. Those who benefited from America’s rapid economic growth, moreover, feared that providing easy redress for fraud victims “would throw too much sand into the gears of commerce.”
Beginning in the late-19th century, however, mounting concern that America’s transition to full-fledged industrial capitalism increased the prevalence of fraud produced new antifraud efforts at both the state and, for the first time, the Federal level. The most significant of these initiatives was the attempt to combat mail fraud by businesses (including the innovative mail-order firm Sears, Roebuck) that relied on the mail to advertise their products. This effort, followed swiftly by others, drew on the resources of the emerging administrative state as well as self-appointed private watchdogs, the most important of which were the Better Business Bureaus. The latter were funded by subscriptions from large corporations whose managers worried that fraud threatened confidence in the capitalist system and hoped to stave off more statist solutions. Although this public-private antifraud partnership avoided full-fledged statism, the public side of it nevertheless drew charges of being an “American star chamber,” while both sides attracted criticism for violating principles of due process. In what would become a pattern, the resulting reforms by both Federal agencies and private actors strengthened procedural protections, but at the cost of reducing effectiveness.
A third epoch began when Congressional revelations of endemic fraud on Wall Street, which had contributed to the Great Depression, galvanized public support for a broad expansion of antifraud regulations, including the establishment of the Securities and Exchange Commission. Vigorous antifraud efforts received an additional boost from the spread of a consumerist ethos, especially after World War II, according to which one’s quality of life was measured by one’s possessions. Politicians from both parties rushed to cater to the sense of consumer “rights” among Americans by cracking down on fraud. The Better Business Bureaus—which, far from being victims of corporate capture, were led by men with a strong professional antifraud ethos—remained vigorous. So broad and deep was the antifraud consensus that many believed, and some worried, that the world of caveat emptor was giving way to a world of caveat venditor—“let the seller beware.”
But signs of fracture were evident. Around the 1970s, a wave of scholarship by social scientists, lawyers, and economists offered a far-ranging critique of the antifraud regulatory regime (as well as of regulation more broadly), which in many ways returned to the assumptions underlying the 19th-century world of caveat emptor. The bulk of this work came from the free-market right, which argued that antifraud regulation, by creating perverse incentives and imposing heavy compliance costs, stifled competition and innovation, thereby delivering the opposite of what it promised to consumers. Although important antifraud initiatives have occurred since the 1970s, the general trend has been deregulatory, in contrast to the previous epoch. For Balleisen, this trend has been no less perverse in its consequences than the regulatory trend seemed to free-market thinkers: Several of the worst business frauds in recent decades, including the Enron scandal and the subprime mortgage crisis, can be partially traced to specific deregulatory actions undertaken in the same period.
Although Balleisen has clearly considered the contemporary policy implications of his research, this is first and foremost a work of serious historical scholarship. In books of this sweep, it is always possible to point out oversights. But instead of finding it superficial, as big books too often are, I was continually impressed by Balleisen’s craft. Sixteen years elapsed between his first book, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America (2001), and this one, and he appears to have spent the time marinating in his subject matter. Fraud reflects extensive reading in a formidable number of discrete historical subfields—economic, business, legal, policy, and cultural—as well as in behavioral economics. Balleisen also made intelligent choices about where to supplement this reading in the secondary literature with in-depth original research. His broad scope pays dividends: dynamics that might have seemed isolated in narrower studies, such as demands for procedural fairness in antifraud enforcement, instead appear as part of enduring patterns in U.S. history.
Balleisen delivers on one of his central historical and theoretical claims, namely, to show that government regulations, far from common depictions of them as outside of or hostile to markets, in fact help to “constitute” markets. But I fear this claim may be unclear or unduly alarming to many readers. He is trying to compress nearly two hundred years of work since Karl Marx into a paragraph, likely in a commendable effort to keep the book to a reasonable length and to wear his theoretical sophistication lightly. I have some familiarity with the intellectual currents he is swimming in here, and I still felt I had to read a great deal into what he was saying; those who are unfamiliar may find themselves floundering. So let me try to explain what I think he means, why his evidence supports his claim, why the claim is not as radical as it may seem, and why it needs one significant qualification.
What Balleisen is trying to do here is to push back against a common popular view that markets create or sustain themselves solely because they are “natural” or self-evidently more “rational” or “efficient” than non-market alternatives. By contrast, in saying that law helps to “constitute” markets, Balleisen is arguing that markets are social constructions, created and sustained at least in part by the exercise of power on behalf of interests, and requiring cultural acceptance to function—they must be seen as a legitimate way of ordering human relations.
There is an edge to this argument: Since questions are less likely to be asked about the justice of a social order regarded as natural and consensual than about one seen as dependent on power, the claim that markets are socially constructed threatens the interests of those who benefit most from them. One can dial up the radicalism of this claim by moving to a rejection of markets as oppressive, but one can also dial down the radicalism by claiming that, while markets ultimately rest on relations of power, they provide more good to more people than any alternative. In other words, readers encountering Balleisen’s argument on this point need not alert the local Chamber of Commerce.
Most importantly, ideological implications aside, Balleisen provides evidence to support his claim concerning the social construction of markets. Regulatory laws appear in his work as social agreements about the legitimacy of market activities and are backed by the power of a sovereign state, which itself depends on a social agreement or compact.
But I would insert one qualification, with which Balleisen might or might not agree. Acknowledging that markets have a political, cultural, or legal character—a non-economic character—runs the risk of analytical elision. After all, markets also have an economic character. They unleash such powerful forces of “rational” cost-benefit analysis as to acquire a certain practical autonomy from the non-economic context in which they are ultimately embedded. Sometimes a response to a relative price movement is just a response to a relative price movement. Or, to put it more accurately, determining how the concept of “relative price movement” acquired its prevailing meaning would require an excursion so far afield from the topic at hand or a historical actor’s own awareness as to render the game not worth the candle.
By the same token, Balleisen’s claim as to the “indeterminacy of fraud” may also require more qualification than it gets. Balleisen is claiming here about fraud something similar to what he claimed about markets: that fraud has no determinate core meaning (economic, legal, cultural, or otherwise) that floats outside history only to parachute into different historical contexts, but rather is socially constructed depending on context. He marshals especially powerful evidence to support this argument in his bravura Chapter 6, which traces the emergence of mail fraud (and antifraud efforts) in the late 19th century on the basis of original research in Post Office archives. His cast of characters comes from all corners of American capitalism, including not only the expected giants like Sears, Roebuck, but also the Korean clothing entrepreneur Charles Young, the African-American beauty and hair impresario Madam C.J. Walker, and many others. In addition to enabling Balleisen to offer a thorough analysis of the factors contributing to mail fraud orders, the breadth of this cast underscores the sheer pervasiveness of innovative business practices in the U.S. economy. He argues convincingly that the existence of fraud was often indeterminate, depending on one’s perspective and with no objective point of reference. So, for instance, in railroad accounting, it was exceedingly difficult to determine what was an effort to defraud investors and what was an effort to handle new forms of depreciation and fixed costs.
Nevertheless, fraud is not always so indeterminate. As Balleisen himself notes in the introduction, “to call a person or a business a ‘fraud’ is, and has been for centuries, to make an accusation of ill-treatment or injustice, founded on deceit.” Is there anyone (besides a lawyer) who would regard Sears, Roebuck’s 1889 newspaper advertisement that “offered, for a limited time, a sofa and pair of chairs for only ninety-five cents,” acknowledging in tiny print that the furniture was “miniature” but not that it was for dolls, as anything but fraudulent? If not, then perhaps there can be a degree of determinacy to fraud.
I have only one clear-cut disagreement with Fraud, and some questions. The disagreement is with Balleisen’s his claim to have dented what a number of scholars refer to as the “myth” of the weak American state, which his evidence does not support. All of Balleisen’s examples of antifraud regulation before the Civil War were at the state, not Federal, level; Americans’ willingness to tolerate state and local governance has never been at issue. His first example of Federal antifraud regulation comes from the Civil War (the Quartermaster Corps’ battle against fraudulent defense contractors); the next, and more important, is the post-bellum Post Office. This timing supports the traditional view that the American state—meaning the Federal government—was weaker than its European counterparts at least until the Civil War, and perhaps even long after that. Indeed, Balleisen’s periodization hews fairly closely to conventional chronologies of business-state relations in U.S. history: little role for the Federal government until the Civil War, then a burst of administrative state-building in the Progressive Era, followed by another burst in the wake of the Great Depression, and then an anti-statist counter-attack building steam in the 1970s and continuing to the present. Insofar as that periodization is concerned, Balleisen’s originality consists of extending it into the important area of antifraud regulation.
My remaining comments are not criticisms, because in order to respond to them Balleisen might have had to cut valuable sections of Fraud or push it to unacceptable lengths. They ought instead to be regarded as questions.
The first concerns the effect that two related and mostly absent subjects—Congress and geographical divisions—might have had on his argument. The judiciary is well represented, but the infrequency of Congress’s appearances is striking in a book that deals so deeply with Federal legislation. The seeming irrelevance of sectional divisions, which have played so large a role in U.S. political economy (not just before the Civil War) and are apt to show up in the territorially organized Congress, is also notable.
A second question concerns the absence of discussion of how economic crises other than the Great Depression galvanized public discourse about fraud. Between 1815 and 1929, the United States experienced at least seven major panics and/or depressions (1819, 1837, 1857, 1873, 1893, 1907, and 1914). Many, if not all, of these events occasioned vociferous public denunciations of bankers and other economic elites as “corrupt.” Were they not also denounced as “fraudulent,” and if not, why not? If they were, then why did these denunciations not lead to a wave of antifraud regulation as they did after the Great Depression? Here I wondered particularly about Balleisen’s claim that antifraud efforts at the turn of the century were led by business elites rather than by grassroots activists. The historian Elizabeth Sanders has argued that many regulatory efforts that appear to have been initiated by business elites seeking to shore up confidence in corporate capitalism were actually initiated by anti-corporate grassroots agrarian activists, who forced business elites into defensive compromises. There was certainly no shortage of complaints about banks and railroads among those activists in the wake of the panics of 1873 and 1893. Is it possible that what Balleisen takes to be willing corporate efforts at capitalist stabilization were in fact grudging concessions to avert more radical alternatives?
Third, I question Balleisen’s weighing of the costs and benefits of antifraud regulation versus deregulation. He makes a strong case that, contrary to neoliberal arguments, markets do not police themselves. As he notes, reputational concerns as well as other market-based incentives and disincentives did not “ward off rampant manipulations and deceptions” in three unregulated markets: the New York City auction markets of the 1840s; the San Francisco stock market of the 1870s; and the Wall Street of the 1920s. Moreover, to his credit, he treats some of the costs of antifraud regulation as real problems, rather than dismissing them as the fevered imaginings of capitalist tycoons. Because, he argues, fraud tends to cluster in innovative sectors of the economy—indeed, innovations that deliver what they promise have sometimes been mistaken for frauds—the state cannot regulate fraud without imposing costs on innovation. One of the many strengths of his book is that he approaches policymaking as a choice between bad (some costs) and worse (heavier costs) alternatives, not as a choice between good (no costs) and bad (all costs) alternatives. He concludes, however, that the benefits of antifraud regulation have generally outweighed the costs. One may interrogate his evidence for that claim, but he has clearly given some thought to both sides of the regulatory coin.
The same is not true of the deregulatory coin, however. Here he considers only costs (a number of massive frauds that he traces in part to deregulatory actions), but not whether deregulation delivered any of its promised benefits: to promote innovation, competition, and growth. The result is an asymmetry in his analysis of the costs and benefits of antifraud regulation vs. deregulation.
Notwithstanding these criticisms and questions, I read Fraud with admiration. I did not find it an easy read—unlike most works of history, which embed analysis within story, Balleisen embeds story within analysis, with the result that the book lacks a propulsive narrative energy. But it is a good read: serious, intelligent, and rewarding. Although it has a sophistication that will satisfy specialists, it is also well written (the two do not always go together), which is to say that it will be accessible to educated non-specialists. Beach reading it is not, but anyone with an interest in business fraud, regulatory policy, business-state relations, or the seamier side of capitalism will find the time spent learning from Balleisen worth the effort invested.