WHAT FRAUD COSTS.
QEVERAL national types of commercial fraud have been brought before the public this week. Germany, America, and England have each exhibited samples of what it can do in swindling ; and it is rather instructive to look at their charac- teristics. We suppose that we may fairly speak of the failure of the Pomeranian Bank as more or less a piece of swindling, because it is already known that the ruin of the concern was not wholly due to misjudgment or misfortune. There was, we fear, a smack of quiet rascality in some of the transactions of the Pomeranian Ritterschaftliche Privat Bank. But then, on what grand aristocratic principles the Bank was conducted ! You did not, perhaps, get your money ; but you had the satisfaction of knowing that it was taken by gentlemen who were not neugebackene, but had pedigrees stretching into the mists of antiquity. The bills which it loosely discounted for its feudal customers were often not financially worth much ; but you might console yourself with the thought that there was appended to those documents the name of some grand Freiherr, some ' scion of the fine old Pomeranian nobility. We do not assume that German commercial morality is of an altogether higher caste than the code ruling among merchants here ; but let us admit in fair- ness that there is an aroma of feudal pride, which is scarcely swagger, with a dash of primitive simplicity, about the very frauds practised in the Fatherland, and the con- sciousness, if not quite the reality, of Arcadian innocence and " blameless brotherhood." The soap sold may not do to wash with—it may be cheesy or pulpy—but the cakes are sure to be encompassed with some generous sentiment and moral lather about Deutsche treue, excellent for internal application ; the needles you buy may be partially eyeless and wholly point- less, but the packet will be sure to have an sesthetic label with patriotic words engraved thereon which would do any pur- chaser's heart good. And we may be sure that if the descendant of some Crusader or Teutonic Knight makes a good thing out of a " knightly bank," he will feel as he contemplates his gains that, as Hans Breitmann pensively observes in looking at the products of his raids, "Providence blessed him with deabotts and sheens." In short, if the reality of innocence be gone, there is always the proud satisfaction of knowing that the consciousness of it remains in the bosoms of the Herrechaften who do you the honour of taking your money and, in a fit of abstraction, do not return it.
Contrast these sort of operations with an ordinary swindle, such as America has been known to produce. We have not to seek far for an instance. It has just come to light that the President of the Market Street Railway, known to every one who knows Philadelphia, the Secretary, and Treasurer, have been carrying on for seven years a manufactory of forged share certificates, on which as " collateral " they raised money for personal and public purposes. If they wanted funds for a private speculation, or to pay wages, bills for horse-feed, or dividends, they forged so many more certificates, and deposited them with their bank as " collateral." Eight directors, with the proverbial astuteness of directors, allowed this to go on with- out their knowledge for seven years. A mere accident—the fact that Mr. Morton, the President, erroneously entered a bond as due on September 25th instead of the 15th—led to the dis- covery of the fact that about £60,000 belonging to the railway had been abstracted, and that the amount of shares had been surreptitiously increased by 140 per cent. Here we see a fine perception of practical. require- ment. Mr. Morton and his coadjutors go straight to their mark. There is nothing crooked in their frauds. They operate as a bold General does, striking right at the centre of the enemy. No hypocrisy clings to what they do. Their fraud is of a genial, cheerful character; some of the fine solid qualities of the Pilgrim Fathers are still unobtrusively present in the men who boldly manufacture or water wholesale stocks. They are better than their works, and it is possible for the most honest of us to understand the general feeling of the American swindler that the world is all before him when once he is found out. There is, indeed, sure to be a sad lack of sentiment and romance about the doings of the American commercial rogue. It is sadly plain that he has no Gendith or Emplindsanikeit, never read " Werther," or hummed songs of the Fatherland, as he " cooked" a dividend. Stealing in his ease looks very much like stealing, and he cannot execute a coup in that abstract way which some- times marks a German banking swindle, and which induces you to think that the man who has emptied your pockets has been searching for the philosopher's stone in the wrong
place. As to our own country, we are sorry to say that the commercial frauds with which we Englishmen are most familiar possess, as a rule, few or no redeeming or attractive qualities. They are stupid but dangerous frauds, such as those of which a jury have just found the managers of a Building Company guilty. Ninety-nine out of a hundred of the criminals who come before the Central Criminal Court on charges of fraud have exhibited no inventiveness or boldness, and have been engaged in some petty, sordid trick. The trial at the Old Bailey this week, which ended in the con- viction of two officials of the Artisans' Dwellings Company and an estate agent, is a case in point ; all three merely combined to palm off on the Company sham bargains. Mr. Herbert Spencer, who is almost as acute an observer of social facts as he is a subtle thinker, believes that in this re- spect we are declining, and that " while the great and direct frauds have been diminishing, the small and indirect frauds have been increasing alike in variety and number." He thinks that, while the English merchant no longer keeps by him a bag of debased coin wherewith to give change, as according to Defoe's "Complete English Tradesman " he once did, there is a decided increase in complex forms of crime, It is immaterial to our main purpose whether the standard of commercial morals all the world over is rising or fall- ing. What we desire to point out is, that there is a certain tax a fraud-tax, we may call it — paid by the honest people, that the amount of this tax varies in each country, and that in some departments of in- dustry this tax is so high as to be practically prohibitive of enterprise. We do not use the term " tax " altogether loosely ; the analogy is close ; the existence and recurrence of certain frauds have precisely the same effect as if a tax of enormous and varying weight were imposed on commercial enterprise,—
the worse tax of all, one of capital, and one which, if it were estimated, would appal people by reason of its vastness, and would be seen to transcend all other im- posts. No one can actually calculate its amount, but we do not think it altogether impossible to indicate according to what circumstances this tax will vary. Mr. Babbage long ago called attention to the large element in price of the cost of verifying the quality of articles and work done. In his day he had no lack of examples in point ; but the prin- ciple which he then explained for the first time is now far more strikingly true than it then was.. All work done by joint-stock enterprise—requiring, as it does, so much dele- gation—pre-eminently stands in need of verification : accounts must be audited ; there must be boards of directors to look after managers, and committees to look after boards, and accountants to look after them all. To prevent actual fraud, or what is often the same thing, gross mismanagement, a large company—or, in fact, any large undertaking—must either run large risks, or must submit to the burthen of a large expendi- ture in respect of verification or detection, and the consequence is that in certain branches of industry joint-stock enterprise has been almost drawn out of the field by an actual increase in the cost of production as effectually as if a tax had been imposed upon the earnings of Companies. An eminent English lawyer stated the other day at the Social Science Congress, with the concurrence of Lord Gifford, a Scotch Judge, that the whole law of frauds must be altered if Companies were to be protected. But this is only a portion of the evil. Mr. Giffen has shown, in his able essay on Stock-Exchange Securi- ties, the seriously injurious effect on the prices of sound, excellent securities, which is produced by the detection of 'bogus' com- panies. "A shrinkage of values " all round occurs when the public become aware of the nature of such enterprisesas the Lisbon Tram- way Companies. The effect is exactly the same as if the Chancellor of the Exchequer were to levy a tax of ten or fifteen per cent. on the capital of all Companies whose shares are quoted. Now all this is only another way of saying that the people who suffer most from this fraud-tax are those who have largely developed joint-stock companies, and who have organised industry on a large scale,—in other words, such coun- tries as England and America. It is only another way of stating the fact that ouchoccurrences as the scandal connected with the Pomeranian Bank must have the effect of imposing this tax on German industry. Hitherto, according to German law and custom, the manager of joint- stock concerns has been practically supreme ; he has been subject to few of the checks in the shape of board or general meetings in use here ; but the experience acquired with refer- ence to the Pomeranian Bank will probably necessitate the employment of a more effective but costly system of inspection or verification throughout Germany.
All this points strongly to the fact that the fraud-tax is on the increase ; but we should fail to describe the exact extent of its incidence if we did not add, that it has completely and necessarily extinguished one form of investment. Roughly speaking, we may say that none of the fourth-rate States of the world can borrow except on terms which are virtually prohibi- tive. The disclosures brought to light before the Foreign Loans Committee, and the sharp experience with respect to Spain and Turkey, not to mention many other States which have prac- tised "the confidence trick," have destroyed the power of the smaller States to borrow. In other words, the fraud-tax is too much for all but strong, powerful States. On the whole, our conclusion is that honest people and needy Governments are the chief sufferers from this fraud-tax.
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