The Victorian banking system was plagued by regular bank failures due to fraud or mismanagement exacerbated by grossly misleading information. In the opinion of informed contemporaries, many banks that did not fail were weakened by fraud. I look at data on the frequency and magnitude of fraud, and show that while it was a minor part of a healthy financial system it was substantially more than fraud in the UK or US in the 20th century; excepting the period after 1878 (the last 23 years of Queen Victoria's 63 year reign), there was the equivalent of Madoff-scale scandal or greater every decade. I develop a simple model that explains why rational agents might, under limited monitoring, engage in fraud to cover short-term losses in a bank.Download the paper from SSRN at the link.
February 1, 2012
Geoffrey Williams, Rutgers, The State University of New Jersey, has published Trust But Verify: Fraud in Victorian Banking and Its Diminishment. Here is the abstract.