LOCH KATRINE is an unlikely birthplace for a master criminal. The slice of pristine water stretches through the heart of Scotland’s Loch Lomond national park, around 30 miles north of Glasgow. At its head is a small house which takes its name from the loch’s main tributary, Glen Gyle. It is a peaceful setting. Glengyle house was built in the early 17th century by the clan MacGregor, a family made famous by Rob Roy, born there in 1671. Rob’s debt-dodging antics have made him very popular in Scotland (his creditors were rich landowners). He features in two Hollywood films, an operetta and a cocktail. Gregor MacGregor, born at Glengyle in 1786, is less well known. He deserves more attention: he pulled off the greatest confidence trick of all time. MacGregor’s biggest swindle raised £200,000. Over his lifetime, his bond-market frauds ran to £1.3m (as a share of Britain’s economy, around £3.6 billion today). It is true that more recent scams have raised more. Bernie Madoff, a New York-based fraudster caught out in 2008 ran a scheme 20 times bigger, at $65 billion. In cash terms alone Mr Madoff trumps MacGregor. But fraud is about creating false confidence, and making people believe in something that does not exist. For some, like Mr Madoff, it is the belief in the trickster’s shamanic stock-picking skills. For others, like Charles Ponzi, it is a fail-safe mathematical scheme. MacGregor was far more ambitious: he invented an entire country. He was, he claimed, the “Cazique” or Prince of this land—Poyais—located near the Black River, in modern-day Honduras (see map).

MacGregor claimed that Poyais covered 8m acres (an area larger than Wales). It was rich in natural resources but in need of development. That would require both cash and manpower. Through an elaborate publicity campaign, he succeeded in persuading people not only to invest their savings in the bonds of a non-existent government, but also to emigrate to a fictional country. How on earth did he manage it? The blind capital of the country The financial climate of the early 1820s was ideal for a con man. Napoleon had been defeated and the British economy was expanding steadily, driven on by manufacturing. The cost of living was falling, with industrial workers’ wages rising. Interest rates drifted down, with the government borrowing more and more cheaply. The country was in upbeat mood. The downside to all this was that investing in government debt, a staple place to park spare funds, had become boring. The market rate on the most popular British government bond (the “consol”) fell steadily between 1800 and 1825. The government made the most of this, swapping its existing debt for new bonds that paid rates as low as 3%.

All this gave British investors the incentive and the confidence to look for more exciting opportunities. One option was to lend money to governments that paid higher interest rates. Russia, Prussia and Denmark had good credit records, but offered a 5% return. These countries raised large chunks of cash in London in the early 1820s.

Another was to invest in mining companies, which could yield massive gains if investors got in at the right time: shares in the Anglo-American company rose by over 300% in the space of one month at the end of 1824. Looking back at the boom in 1859 David Evans, a financial journalist, noted that investors started to make “sanguine anticipations of inordinate gain”.

Other Latin American investments became fashionable too. The collapse of the Spanish empire meant there was suddenly a list of new countries to invest in. London experienced its first emerging-market boom, with debt raised on behalf of the newly formed governments of Brazil, Colombia, Mexico and Guatemala. The loans were attractive: Mexican bonds paid 6%, double the rate on the British consol.

All this should have been a warning sign. Investors were hunting for returns, as they would later do in the run up to the Great Depression and to the subprime crisis. Financiers tend to do silly things when searching for yield. Looking back at the boom 30 years later The Economist reported that loans were being made for “mining companies to explore lands which contained no metal”.

MacGregor rode this wave of Latin American optimism. In October 1822 he offered a £200,000 Poyais bond at 6%, a similar rate to that paid by the governments of Peru, Chile and Colombia. Unlike these countries, Poyais had no record of collecting taxes or system for doing so. But MacGregor argued that Poyais was so abundant in natural resources that export-tax revenue would easily cover the interest payments on the debt. And doubting investors only had to look at the Poyais settlement scheme for evidence that the plan was going ahead. It worked, and the bond was successfully floated. MacGregor’s funding was in place.

A new life in a distant land

MacGregor’s search for settlers was successful for different reasons. One was his aggressive sales pitch, described in “The Land that Never Was” (2004), by David Sinclair. It included interviews in the national papers, a book (supposedly written by Thomas Strangeways, but actually by MacGregor himself), and promises of friendly natives, a mild climate and fertile soil. Poyais’s forests were filled with valuable timber. It was strategically well placed near the Isthmus of Panama, with plans for a canal being mooted even in the early 1800s.

Paradise for the credulous: Poyais, as depicted in MacGregor’s publicity material MacGregor’s prospectus would have found a natural audience in a public keen to start afresh abroad. Moving to the United States was as popular as buying stocks there. In the 1820s emigration to America, which had been held back by war, started to pick up again. MacGregor needed to persuade settlers that Poyais, a brand-new country, had more to offer than America did. But some of the promises sounded very iffy. The natives were not only friendly, but loved the British. The soil was not just fertile, but capable of sustaining three maize harvests per year (elsewhere, two would be good going). The water supply was not just clean, clear and abundant, but in the streams of Poyais there were chunks of gold. How did the settlers, a group that included a banker, doctors and experienced military men, fall for this nonsense? New research by Tamar Frankel of Boston University suggests some answers. Ms Frankel studied hundreds of financial cons, looking for recurring patterns. One set that pops up time and time again describes the traits of the victims. They tend to be excessively trusting, have a high risk tolerance, and—especially the more educated victims—have a need to feel exclusive, or part of a special group. Other research shows that victims tend to harbour dissatisfaction with their current economic status, and a desire not to be left behind. Some feel envious of their economic neighbours, which can lead to greedy, risky investing. There are reasons to suspect that MacGregor’s settlers would have had many of these traits. He targeted those with a natural tendency to trust him. While he raised cash in London, he looked for settlers in Scotland claiming that hardy and adventurous Highlanders had the skills and character to develop the new land. In fact, he was playing on the unquestioning trust people grant those from their own religious or ethnic group. The Poyais settlement scheme was an “affinity crime”: MacGregor was one of them.

Historical evidence also suggests the Scottish families would have been particularly well placed to raise the cash that settlers had to pay MacGregor to buy tracts of Poyasian land. Scotland had three large lenders that were at the cutting edge of finance at the time. Unlike in England, it was possible to invest in bank equity as well as hold deposits, and the major banks had branch networks. The Scots were used to finance, and could access it. Evans observed that “money or credit could be obtained for every enterprise, and the natural consequence of universal confidence was a general tendency to over trading and speculation.”

Some of the settlers would have felt envy, too, because Scotland, unlike England, had no colonies. There had been attempts to correct this, and the country had a record in Central American adventures. The Darien scheme of 1698 had aimed to put Scottish colonies each side of the Panama isthmus. If it had worked it would have saved an arduous and dangerous journey across America, and been a precursor to the Panama Canal. But it did not: the English helped scupper it, and Scotland lost a lot of lives and money. To his more educated settlers, MacGregor suggested that they were making good on the Darien disaster.

Death of a dream

MacGregor’s offer was thus a glorious treasure hunt. Settlers were not merely being asked to invest (which anyone could do) but had been specially selected to display skill and bravery in making their own fortune while righting a national wrong. Whether it was optimism, greed or both the settlers did not obtain any independent verification that Poyais actually existed.

MacGregor was able to fill seven ships. Two set out ahead of the others. The Honduras Packet departed from London in September 1822, the Kennersley Castle from Leith on January 22nd 1823. They carried around 250 settlers.

Things went bad very quickly for MacGregor’s investors. Two developments spread fear through the minds of bond-market investors. First, worries emerged over the legitimacy of debt raised for new Latin American governments, many of which were not officially recognised by Britain. Concerns about Colombian loans in particular spread to Peruvian debt, and on to Poyais. Second, France announced plans to depose the Spanish government, and the expectation that Spain would default caused further contagion. Latin American bonds fell sharply with the price of Poyais bonds down by 16% in December 1822 alone (see chart). Things took longer to turn sour for the Poyais settlers. Their journey took just under two months. On arrival, they found that circumstances were not quite as they had been described. There was no port, no town and no roads. The local tribes were not aggressive but were not particularly helpful either. At first, they thought they must be in the wrong place. The hardy Scots decided to stay where they were while the mistake was clarified. They had little choice: their tickets on the Honduras Packet and Kennersley Castle had been one-way. To start with, the outlook did not look too bleak. They had tools to clear the forest and build a camp. There were two doctors in the party, and a full medicine cabinet. There was plenty of food: 12 months’ basic provisions, trees laden with fruit, quail and wild pigs roaming in the forest and a river full of fish. In the first few days the main problem was a lack of rum. Things soon got much worse for the Poyers (MacGregor preferred this to “Poyasians”). The officer class—the banker and clerks—refused to help set up camp. Hunting and fishing trips were badly organised, and the settlers went hungry. Lacking leadership, they began to fight over rations. As the wet season set in they became despondent, with some men refusing to make their own huts watertight. Children began to die. Recognising they were in trouble, one brave settler built a canoe. Shortly after setting out to get help he drowned. An Edinburgh cobbler—a man promised the title of Official Shoemaker in Poyais—shot himself.

In May a passing ship came to the rescue, and began to ferry the settlers to Belize. But malaria, yellow fever and malnutrition had already ravaged the Poyers and two-thirds of them—including many that made it to Belize—died. Word of all this reached London and the British Navy sent out ships to catch and turn back the five more boats that had already set sail.

The Inca of New Granada

Although MacGregor was responsible for these deaths it is not clear that he needed to be. History had handed him the bond-market boom. His sales of bonds and land rights made huge amounts of money. Raising the settlers’ hopes was unnecessary, since he floated the bond before the settlers left. Why did MacGregor do it?

There is some evidence that he started off with a genuine dream about the colonisation of Poyais. He believed that one of his ancestors had been involved in the Darien disaster and was convinced that the Scots should try again in Central America. He had been there many times, and was a genuine war veteran. The young MacGregor had joined the British army aged 16, fought in the Venezuelan republican army too, and been promoted by Simón Bolívar to the rank of Major-General. In 1817 he had raised a small army of American republican fighters and captured Amelia Island, off the coast of Spanish-controlled Florida.

These exploits, and his spinning of the results, made him a popular figure in the press. He was seen as a swashbuckling adventurer. This acted as free advertising. Some were more critical: Michael Rafter’s highly critical contemporary account paints him as a louche character, “addicted to the pleasures of the table, and … frequently intemperate to excess.” He was certainly as committed to parties as he was military manoeuvres. He used a smart walking cane and smoked a lot of cigars. He sounds quite fun.

But MacGregor had some very dangerous personality traits. He was a dreamer, convinced that he was descended from an Inca Princess. This made his plan to lead a country feel quite normal, even a birthright. Often, MacGregor was acting out his dreams. According to Ms Frankel, when fraudsters do this it makes their behaviour seem natural and credible. At some level MacGregor probably believed his own story.

He also had narcissistic tendencies. Consider the titles he gave himself. He was not just the Cazique of Poyais, but the Inca of New Granada too. He was obsessed with the badges, pins and stripes that came with formal military regalia. Rafter’s portrait of MacGregor claims his “master passion [was] an extreme affection of dress and fashion”. He created a flag and a complex honours system for Poyais, bestowing titles on the most senior settlers, and the highest ones on himself. This side of his self-obsession seems harmless, and might have helped comfort the settlers. Who would design an honours system for a country that did not exist?

The dark side of self-obsessed fraudsters is that they see other people as objects, Ms Frankel says. It is not that they consciously ignore others’ feelings, as selfish people do; rather, others do not figure at all. This is what makes narcissists such as MacGregor really dangerous. He showed no concern for his settlers. They were merely an extra source of funds, and a way of persuading bond-market investors that the Poyais plan was actually going ahead.

By the autumn of 1823 the grim realities of life at Poyais had reached London. MacGregor quickly moved to France, where he simply repeated the same trick, looking for fresh investors and more settlers. Initially he was successful, persuading 60 would-be Poyers to up sticks. But Parisian authorities were less credulous than those in London: when the French settlers applied for passports to travel to a country that no one could prove existed, an official investigation was triggered. MacGregor was imprisoned.

He got out, but things start to unravel. In order to pay off previous investors he had to increase the scale of fictitious Poyais bonds, attempting an £800,000 flotation in 1826. But by now his reputation was tarnished and the taste for Latin America had faded. The bond flopped. MacGregor returned to Edinburgh but was tracked down by Poyais investors and chose to emigrate. He died in Caracas in December 1845.

Today the area that MacGregor called Poyais remains an undeveloped strip of land. So does Darien, which is the only break in the 30,000 mile Pan-American Highway. Back at Loch Katrine, visitors can rent holiday cottages beside the water. Those who visit the small graveyard can read the inscriptions on memorial stones celebrating the famous clan. There is no mention of Gregor MacGregor, or of Poyais.