[PEN-L:33143] Charles Kindleberger on invariants

["Ian Murray" <seamus2001@xxxxxxxxx>]

"When commercial capital occupies a position of unquestioned ascendancy,
it everywhere constitutes a system of plunder." KM

[New York Times]
December 16, 2002
Corruption, Crime, Chicanery: Business Through the Ages
By CHARLES P. KINDLEBERGER


THE accounting scandals involving Enron, Arthur Andersen, WorldCom,
Qwest Communications, Tyco and other once highly regarded companies have
caused a crisis of confidence among many Americans. Some ask whether the
problems are so severe as to represent an irreparable fault in the
economic system.

>From a historical perspective, the answer is that economies are capable
of recovering and making progress, even after near devastation - not
only from war, as in the case of Germany and Japan after World War II,
but also from economic chicanery, which is scarcely new.

After bubbles collapse and interfere with economic growth, the resulting
loss of income stimulates efforts to maintain and increase income, both
honestly and in corrupt ways.

Starting in 1600 with the establishment of the British East India
Company, followed by its Dutch counterpart two years later, Europeans
learned how to extract great wealth from the Far East. Warren Hastings,
the first governor-general of India, and Robert Clive, a civil servant
with the East India Company who became known as "the conqueror of
India," were perhaps the earliest private malefactors of great wealth.
Hastings accumulated £200,000 in India and transferred it to England in
the 18th century; in the same period Clive transferred £280,000.

Edmund Burke, the 18th-century statesman, argued that Clive ought to be
removed. At the same time Lord North, who served as Britain's prime
minister from 1770 to 1782, contended that Hastings's £200,000 was not
excessive.

A few hundred lesser employees of the company also did well. On nominal
salaries, clerks (known then as writers), cadets, assistant surgeons,
ship captains and ship husbands, who handled charters, all found
opportunities to acquire wealth.

Human nature has not changed. Andrew S. Fastow - who, while serving as
Enron's chief financial officer, was also running partnerships,
particularly LJM2, set up by Enron to keep debt off the books - has been
indicted on 78 counts of fraud, money laundering, conspiracy and
obstruction of justice. The East India employees smuggled goods to
Europe and dealt in opium with China. The role of ship commander was
bought and sold, typically for £2,000 to £5,000, but sometimes for up to
£10,000 and once for double that.

So egregious were their activities that British historians were not the
only ones to single out Hastings and Clive. A German economic historian,
Jacob van Klaveren, writing in the 1950's on the origins of corruption
between the state and private business, asserted that corruption in
business had begun with the East India Companies.

By the 19th century, business corruption was so much a fact of life that
it became a prominent theme for European novelists. Among them were
Honoré de Balzac in "The Human Comedy"; Charles Dickens, "Little
Dorrit"; William Makepeace Thackeray, "The Newcomes"; Anthony Trollope,
"The Way We Live Now"; Gustav Freytag, "Soll und Haben"; Alexandre
Dumas, "Black Tulip"; and Emile Zola, "L'Argent."

And like many European fashions, swindling found its place in America by
the 19th century, where Mark Twain and Theodore Dreiser included it in
the plots of their books, while Boston produced Charles Ponzi, a
swindler so prominent that his name became synonymous with one type of
chicanery. He borrowed money for 45 days at 50 percent interest and paid
early investors with cash from later suckers whose money he kept.

The writers had abundant examples to inspire them, including Eugene
Bontoux, founder and director of Union Générale, a French bank that
collapsed in 1882, and in the United States, Daniel Drew, James Fisk Jr.
and Jay Gould, who manipulated the stock of the Erie Railroad.

Financial scandals abounded on both sides of the Atlantic in the 20th
century, as well. Among the perpetrators were the cabinet members
involved in the Teapot Dome scandal during the administration of
President Warren G. Harding; Ivar Kreuger, the Swedish Match King, who
put together an empire of companies and became a private lender to
governments before the empire collapsed, fraudulent accounting was
exposed and he committed suicide in Paris in 1932; Robert L. Vesco, who
looted Investors Overseas Services, the Swiss-based mutual fund empire
founded by Bernard Cornfeld; Michele Sindona, the financier behind the
Franklin National Bank in New York and Banca Ambrosia in Milan; and
Nicholas Leeson, the rogue trader who brought down Barings Bank.

Two famous 18th-century swindlers - Sir John Blunt, chairman of the
South Sea Trading Company, and John Law, a Scot, who persuaded the
French government in 1716 to let him open a bank that could issue paper
currency in Louisiana, which France owned - might be said to have a
modern counterpart. Sir John's stock manipulation led to what became
known as the South Sea bubble and produced the crash of the London stock
exchange. Law's issuance of paper money, which was used to drive up
shares that then plunged, became known as the Mississippi bubble.

Before the bubbles burst, each took vast earnings and invested in real
estate. Sir John had six contracts to buy estates when the South Sea
bubble burst in 1720; Law owned one-sixth of the Place Vendôme in Paris,
plus a dozen estates in the French countryside, when the Banque Royale
and the Compagnie d'Occident failed that same year.

Some figures in current scandals have also shown an eye for real estate.
One of them is Kenneth L. Lay, the former chief executive of Enron. He
acquired a multimillion-dollar penthouse in Houston, his home city, plus
three large houses in Aspen, Colo., worth more than $5 million each,
along with a building site valued at more than $1 million.

Investors have good reason to worry that next year may produce new
disclosures of illegal insider trading, overstated profits and other
dubious accounting practices. But the year could also bring new rules
for corporate accounting, as the Securities and Exchange Commission, the
new Public Accounting Oversight Board, federal and state governments,
the courts and securities exchanges take up the issues raised by the
scandals. Although it is too early to say whether they will succeed in
overhauling the rules and restoring public confidence, it is fair to say
that after disclosure of history's past swindles, public outrage led
eventually to reform.