Before Madoff and Ponzi: 19th-Century Business Frauds

Business frauds were popular kind of enrichment all over the world and through the centuries. Even nowadays we can find some issues to discuss, especially concerning online business and investments. Actually, such schemes are just bubbles, which can not exist for too long.

The history of business frauds started from the old centuries, but particularly in 19th century fraud schemes developed much, for people had little information about how to get their investments secured and a little hope for justice in courts.

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George Robb in his article “Before Madoff and Ponzi: 19th-Century Business Frauds” in a way of comparing history of frauds with reality, started to analyze some examples of business frauds, typical for 19th century, before the well-known frauds – Maddoff and Ponzi. “Ponzi schemes are a type of fraud in which investors make payments to a business that then distributes, returns to these investors from their own money paid by subsequent investors from only actual profits earned by the business.” But such systems work only when “new investors…pay off old ones.” (Robb 2012). Another fraud Bernard Madoff “was exposed in late 2008 as a $ 65 billion Ponzi scheme that had hoodwinked thousands of investors [to get] steady double-digit returns.” (Robb 2012). Unfortunately, such schemes have been working for centuries.

The 19th century was a time of Industrial Revolution, when people had many expectations about life and business in general. People expected to get money easily, without any necessity to work hard. Certainly, they had savings to invest in some projects. Frauds in this field promised extraordinary profits from investment money.

One of such projects was building the railways in Great Britain, and this required much capital. Some joint-stock companies and enterprises were created, run by criminals. “In 1845 more than 1,000 railway schemes were placed before an increasingly hysterical populace desperate to invest in the country's burgeoning railway system. In total, the schemes on offer that year sought to raise 600 million-three time the country's national income.” (Poynder 1996).

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The main thing that was widely used by frauds was that the majority of investors were just victims, never able to defend themselves. This opinion is supported by Geoge Robb as well: “Investors usually lacked the financial know how to protect themselves from fraud and received little assistance from the government.” (Robb 2012).

Another fraud, depicted by George Robb was George Hudson, so called “the Railway King”, whose company controlled at least ¼ of railway tracks, built in England. Some people really did not believe that railroads are really worth infesting, as they could hardly be so profitable, but the issue of psychological influence really did work.  

George Robb points out that in most cases common people were involved into frauds, they invested their savings to finally would get nothing – no profit and no money. In his research, Robb draws another example of fraud, like “Ladies’ Deposit Company” – a bank run “by women for women”. The head of it was just a woman without any proper education, who just needed little time to steal more than 250,000 USD, brought on deposits by about 800 women. In 1879, inBoston this bank promised to double money in a year, but really it was hard to believe. Only poor people, who owned not much savings, could believe this fraud to be real source of profit. And when later some media campaign was started against the bank and Sarah Howe, the organization declared that they are just a charity bank, and it is really able to double profits.

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The most poplar type of frauds, according to George Robb, is just sharing a company or instant bankruptcy, - such schemes are still can be repeated again. The frauds always have much business knowledge, unlike their victims, who just see advertisements or advise from some people to start their own business without any need to work out the ideas of profit. As a result, such schemes encourage people to invest money in just the soap bubbles, far from being the really profitable companies. In most cases, fraud schemes are led by well-known public figures, like politicians, religious leaders or other “top faces”, which people trust their savings without any hesitating. Then, when it turns out that such figures are just frauds, they easily disappear with money, and the victims are often have no time, finance and wish to seek for justice in courts. With the development of web in recent years, a number of such schemes duplicated, in comparison to the 19th century. Ponzi and Madoff schemes are still in use.

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