Madoff: apt description by J K Galbraith

Madoff, Galbraith and the [em]bezzle

Andy Smith

Independent 16 December 2008

I have just rediscovered this beautifully written passge from pages 152 to 155 of 'The Great Crash 1929' by J.K. Galbraith, which explains precisely why the Bernard Madoff scandal has hit us now, in the midst of a banking crisis, why something of that sort was inevitable, and why we can expect more of the same:

"To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years elapse between the commission of the crime and its discovery. (This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.)

At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's businesses and banks. This inventory - it should perhaps be called the bezzle - amounts at any moment to many millions of dollars. It also varies in size with the business cycle.

"In good times people are relaxed, trusting, and money is plentiful, But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.

In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks".

One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: "Every great crisis reveals the excessive speculations of many houses which no one before suspected."

There is only one word that is out of date. It is the word 'millions'. Substitute 'billions' and the passage is timeless.