What the scam contains

The “Queen’s Necklace” affair, the Ponzi scheme, and Madoff’s schemes were made possible by specific socio-economic structures. These fascinating stories of suckers have three components: the crook, his victims, and an audience.

The title of the book by Christian Chavagneux, columnist at Economic alternatives and heterodox economist, does not do justice to the originality and the scale of the research work accomplished. Indeed, his analysis goes completely beyond the anecdotal and the personalizing reduction to show the socio-economic structures that made these great scams possible. The author proposes to highlight the “scam equation”, namely the set of contextual factors that underlie these masterful manipulations and explain their success, some of which lasted several decades.

Each case, meticulously documented, is an opportunity to show the economic and social dynamics that were played by extraordinary characters, but whose individual characteristics are insufficient to understand their successful enterprises, which mobilized tens, even thousands of people – victims and accomplices.

The springs of human credulity

Chavagneux rightly points out that the social sciences have neglected the phenomenon of fraud, which is most often reduced to transgressive and spectacular anecdotal matters, scandals like so many others. For economists, the main question is to what extent these frauds disrupt the market or not. Criminologists wonder about the form of criminal personality embodied by the fraudsters, actors who are the opposite of their usual clientele, because they are “too well integrated socially”. Sociologists have focused mainly on the transgressions of “white collars”, a misleading image, because they were, in fact, interested in those of companies and their managers.

Chavagneux’s ambition is to understand the springs of human credulity, the consequences of which are as important in interpersonal relationships as in economics and politics. What are the individual and collective obstacles that often make it difficult to distinguish between appearances and reality, promises and results? Trust is a fundamental spring of human activities, particularly economic ones, but it is neither homogeneous nor stable.

There are always confidence games and the repertoire of “trickery techniques” is very extensive. Humans love to believe in stories, in rewarding tales that make them think that they will easily achieve their goals, get rich quickly and that they will thus demonstrate to others their power, made of know-how and luck.

More fundamentally, Chavagneux proposes a model combining three components: the swindler, his victims, and an audience. He wonders whether swindling is an activity dominated by supply (that of the swindlers) or by demand (that of the suckers). Their interactions are all the stronger because their exchanges take place in front of an audience in front of which both enjoy the exhibition of their talent and their success.

A matchmaker and financiers

The chapter that opens the book is exemplary of the author’s approach. Many believe they know the affair of the “queen’s necklace”, because the character of Marie-Antoinette is central in appearance and her vanity, her blindness, even her secret liaisons always monopolize the attention of historians and storytellers. But, as in The Meninas by Velazquez, the young princess in white who sits enthroned in the centre of the canvas is a decoy. It is not of her that the painter creates the portrait, but that of her sovereign parents whom we see only indirectly.

Similarly, beyond the escapades of a queen, the affair of the necklace is approached from the angle of the codes of court society analyzed by Norbert Elias in 1969. It is the economic and power strategies of the Rohan clan that are the driving force behind this series of events:

The social value of an aristocrat (…) depends not on his fundamental worth, his wealth, or even his prospects of wealth, but on what other nobles think he is worth. And their opinion of him depends in turn on what they think others think of Rohan. (p. 35)

Caught in this game of intersecting demands, Rohan has only one obsession: to obtain, for himself, his family and his network, the favors of the queen. He thus becomes the perfect target for the maneuvers of a young con artist. Cold, she totally lacks credibility, but in a situation she maneuvers very skillfully. To the point of managing to persuade Rohan that she has direct access to Marie-Antoinette and that she is the go-between he needs.

A second dimension of this file is generally totally neglected: the role of financiers (distinct from bankers) in the functioning of court society: “They belong to the microsociety of elites who mix with the privileged. (…) They participate in the race for rank and status in high society” (p. 52). Without their investments in the payment of remarkable stones and the work of renowned jewelers, nothing would have been possible. Court society lives on loans and debts.

Ponzi and co

The following chapters illustrate two major cases that are found in the perverse use of economic and social dynamics specific to each period. On the one hand, career crooks are presented who, alone or in small groups, exploit the speculative desires of the upper and lower middle classes.

Fifty years later, Gregor and Charles are running a scam similar to colonization, selling distant lands and honorary titles without any reality. Humbert seduces the greed of great fortunes by brilliantly maintaining the myth of a future American heritage for twenty years. Lemoine persuades diamond mine operators and the best jewelers that he is the inventor of a process for manufacturing synthetic diamonds. Ponzi attracts investors looking for high returns by paying his old clients with funds provided by new entrants, and this without any real activity. Finally, Sindona, a crook linked to the Sicilian mafia who became a banker, manages to capture the fortunes of Northern Italy, then that of the Vatican by ensuring an anonymous circulation of considerable funds via offshore places and speculation on currencies.

On the other hand, there are actors with real economic activity that serves as a cover for their illicit activities: Kruger, a Swedish industrialist, specializes in the production of matches. What could be more reassuring? He will own up to 250 factories worldwide. But, at the same time, he creates high-yield investment companies, becomes a “capital magnet” and borrows on the basis of his industrial credibility. He also grants loans to States, in exchange for monopoly agreements on wood, matches and other products. In twenty-five years, he thus captures 13 billion dollars, before going bankrupt.

Madoff is in the same category. Of course, there is a history of fraud in his family, but he managed to create an investment company at a fairly young age. In addition to this activity, he developed a Ponzi pyramid on a very large scale, targeting only very high incomes, recruited in particular from the Jewish community to which he belonged. His financial credibility is such that he becomes essential on the New York market, but also in Europe. His system of justifying false operations is so effective that a three-year audit conducted by the DRY detects nothing. After more than twenty years of trafficking, Madoff will finally be one of the victims of the 2008 crisis, with 19 billion in losses and thousands of victims.

And bitcoins…

Chavagneux’s book succeeds in the challenge of simultaneously producing a collection of exceptional adventure stories conducted at a breathtaking pace and a series of in-depth historical-socio-economic analyses. The whole is written in a lively style that gives the expression “popular science” all its nobility. The reader’s mind emerges from it decompartmentalized.

A recent book perfectly complements Chavagneux’s demonstration. It is I sold my soul for bitcoins (2020) by Jake Adelstein. The starting point is an investigation into a huge bitcoin scam. In 2014, Mark Karpelès, head of the company Mt. Gox, a Bitcoin exchange platform, disappears with 850,000 bitcoins (about $500 million), bankrupting his company. Pursued by many customers, he is finally found in Japan and convicted of fraud and falsification of accounts.

Beyond the thriller, the book precisely dismantles the world of bitcoins: the ingenuity of its inventors, the greed of its customers, the major attractiveness of confidentiality and the difficulties of public regulations. Once again, beyond the authors, it is the economic system itself that provided the resources for the first major scam of the XXIe century.