суббота, 30 июня 2012 г.

RICHARD CANTILLON AND THE FRAUDULENT VIOLATION OF THE IRREGULAR-DEPOSIT CONTRACT

It is a remarkable fact that three of the most noted monetary theorists of the eighteenth and early nineteenth centuries were bankers: John Law, Richard Cantillon, and Henry Thornton. Their banks all failed. Cantillon alone escaped
relatively unscathed, not only because he stopped his risky speculation in time, but also (and most importantly) because of the large profits he fraudulently obtained by violating the obligation to safeguard his customers’ assets.

Indeed, Cantillon clearly violated the contract of irregular deposit, however in this case the deposit was not of money, but shares of stock in the Mississippi Trading Company, founded by John Law. Cantillon’s fraudulent scheme was as
follows: he loaned large amounts of money to his customers to allow them to buy shares in the company, on the condition that the stocks act as collateral and remain at Cantillon’s bank as an irregular deposit, in this case of fungible and indistinguishable shares. Later Cantillon, unbeknownst to his clients,
misappropriated the deposited securities, selling them when he thought their market price was high and keeping the money from the sale. Once the shares had lost practically all of their value, Cantillon bought them back for a fraction of their old price and restored deposits, securing a hefty profit.

Finally, he demanded repayment of the loans he had initially made to his clients, who were unable to return the money, since the collateral they had at the bank was worth close to nothing. These fraudulent operations led to multiple criminal
charges and civil suits against Cantillon, who, upon being arrested and briefly incarcerated, was forced to leave France in a hurry and flee to England.
Cantillon, in defense, put forward the same argument so often used throughout the Middle Ages by writers determined to confuse the irregular deposit with the loan. In fact, Cantillon tried to defend himself by claiming that the stocks
deposited with him as unnumbered fungible goods had not actually constituted a true deposit, but a loan implying the full transference of ownership and availability to the banker.
Thus, Cantillon considered his operations perfectly “legitimate.” Nevertheless, we know his legal argument was unsound and even though the deposit of securities was considered an irregular deposit of fungible goods, the obligation
to safeguard the shares and maintain continual possession of all of them remained. Therefore, when Cantillon sold the shares to the detriment of his customers he clearly committed the criminal act of misappropriation. F.A. Hayek explains Cantillon’s attempt to justify his fraudulent actions:
His point of view was, as he later explained, that the shares given to him, since their numbers had not been registered, were not a genuine deposit, but rather—as one would say today—a block deposit so that none of his customers had claim to specific securities. The firm actually made an extraordinary profit in this way, since it could buy back at reduced prices the shares sold at high prices, and meanwhile the capital, for which they were charging high interest, lost nothing at all but rather was saved and invested in pounds. When Cantillon, who had partially made these advances in his own name, asked for repayments of the loans from the speculators, who had suffered great losses, and finally took them to court, the latter demanded that the profits obtained by Cantillon and the firm from their shares be credited against these advances. They in turn took Cantillon to court in London and Paris, charging fraud and usury.
By presenting to the courts correspondence between Cantillon and the firm, they averred that the entire transaction was carried out under Cantillon’s immediate direction and that he therefore bore personal responsibility.
A perfect example in the twentieth century was the failure of the Bank of Barcelona and of other Catalonian banks that systematically accepted the irregular deposit of securities without keeping full custody of them. Instead, to attain a profit, they used them in all sorts of speculative operations to the detri-
ment of their true owners, just as Cantillon had done two hundred years earlier. Richard Cantillon was brutally murdered at his London home in 1734, after twelve years of litigation, two arrests, and the constant threat of imprisonment. Although the official version was that he was murdered and his body burned beyond recognition by an ex-cook who killed him to rob him, it is also plausible that one of his many creditors instigated the murder, or even, as suggested by A.E. Murphy, his most recent biographer, that Cantillon staged his own death to escape and to avoid more years of lawsuits and legal action against him.

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