------ EH.NET BOOK REVIEW ------
Title: The Exchange Artist: A Tale of High-Flying Speculation and America’s
First Banking Collapse

Published by EH.NET (September 2010)

Jane Kamensky, /The Exchange Artist: A Tale of High-Flying Speculation and
America’s First Banking Collapse. / New York: Penguin, 2009.  xv + 442
pp. $17 (paperback), ISBN: 978-0-14-311490-1

Reviewed for EH.Net by Eric Hilt, Department of Economics, Wellesley College.

The first banks in the United States were founded by elite merchants, and
often enjoyed a quasi-official role in public finance.  Located in major
cities, these institutions were large, conservatively managed, and generally
quite successful.  But as the American economy developed its banking system
quickly expanded and large numbers of new banks were created.  The
proliferation of banks was accompanied by innovations in banking practice,
and some of these new institutions departed from the traditional approach of
the establishment banks in ways that made them quite fragile.  Others
crossed the line into fraud.

Jane Kamensky’s /The Exchange Artist/ tells the story of Andrew Dexter, the
man behind the first bank failure in the United States.  This was the
Farmer’s Exchange Bank in remote Gloucester, Rhode Island, which Dexter
acquired in 1808, and which failed in spectacular fashion in 1809.  Dexter
was an early pioneer of aggressive and unscrupulous approaches to bank
management, and developed techniques that would later contribute to
innumerable bank failures over the nineteenth century.  Relying on an
enormous amount of archival research, Kamensky’s book carefully documents
Dexter’s banking career, and the business venture his banks were used to
finance, the Exchange Coffee House in Boston.  It is a fascinating story.

In Dexter’s era, banks issued paper liabilities called bank notes that were
used as money, but were not legal tender -- businesses were not obligated to
honor them at face value.  Instead, they were valuable because they
represented a promise by the issuing bank to redeem them in specie at par on
demand.  Bank notes were accepted as payment at a discount that reflected
the cost of returning the note to its issuing bank, and the perceived value
of the bank’s promise to redeem the note.  Most of America’s early banks
were relatively conservative in their note issuance, and maintained a healthy
level of specie reserves relative to their circulation.  The threat of note
dealers buying up large amounts of discounted notes and redeeming them also
kept note issuance in check.

Andrew Dexter’s great contribution to the history of American banking was
that he and his allies pioneered techniques to evade this threat of note
redemption.  His innovation was to gain control (or at least substantial
influence) at several banks located in far-flung places, and use each to
circulate notes from his other banks.  Dexter first gained control of a bank
in Boston, and then additional institutions in the Berkshires, in Maine, in
rural Rhode Island, and even in Detroit, in the Michigan Territory, all
around 1806-08.  Bank customers in Boston received notes from Detroit, those
in the Berkshires received notes from Rhode Island, etc.  The difficulty and
expense of travel among these distant locations made note redemption less
likely, as did the fact that his “wildcat” banking strategy was mostly
unknown to Americans at the time.  He was thus able to inflate his
circulation well beyond what would have ordinarily been sustainable.  The
note issuance was used mainly to finance loans to Dexter himself, which in
turn were used to build the Exchange Coffee House.

Completed in 1809, this lavishly appointed structure was seven stories high,
far taller than any other in the United States, and cost a tremendous sum to
build.  Inspired by similar institutions in other cities, but conceived as
something much grander, the Exchange Coffee House was a combination reading
room, stock exchange floor, coffee house, hotel, restaurant and general
emporium of commerce.  Institutions like it had succeeded elsewhere, but
Dexter’s Exchange was built on a scale that was totally out of proportion
to the needs of Boston’s merchants, and moreover Boston’s stock traders
preferred to remain at their outdoor location.  The building was never a
success, and was later destroyed in a fire that could not be effectively
fought:  the building was so tall fire engines could not pump water high
enough to reach the flames.

The high costs and mounting debts from the Exchange Coffee House forced
Dexter to borrow heavily from his banks, particularly from the one the one
bank where he exerted total control, the Farmer’s Exchange Bank in
Gloucester, RI.  Before long he was borrowing $20,000 per day from that
institution, arranging to have its notes shipped by courier to Boston.
Eventually, coalitions of merchants who had become aware of the bank’s
practices organized to force the institution to close by presenting large
amounts of its notes for redemption, and also persuaded the Rhode Island
legislature to investigate its books.  When the bank finally closed its
doors, Dexter owed the bank more than a half million dollars, and fled with
his family to Canada.

Kamensky, who teaches in the History Department at Brandeis University,
writes in lively prose that is enriched with fascinating historical
details.  She has researched every element of her tale exhaustively,
enabling her to tell not only Dexter’s life story, but also the life story
of the Exchange Coffee House, from the work of the carpenters and masons who
built it, to the fire companies that unsuccessfully attempted to save it.
Using computer-generated imagery of architectural interiors, the book enables
the reader quite literally to see into the halls of the building as it
appeared in 1809.  It is an impressive work of history.

My only criticism of this otherwise fine book concerns its analysis of money
and banking.  Kamensky’s narrative encompasses some of the most important
developments in the history of banking in New England, but her
interpretations of some of these developments falter.  The reader is told,
for example, that the emergence of note brokers “made paper’s value
shakier” (p. 53), presumably because they would buy the notes of
out-of-town banks at a significant discount.  But note brokers almost
certainly made bank notes more reliable, both because they created a liquid
market in which prices could be quickly obtained, and because they helped
monitor and discipline issuing banks.  Likewise Kamensky’s discussions of
the intended function of the “Exchange Office,” a Boston bank that could
have helped discipline country banks, and of the efforts of Boston’s
establishment banks to redeem the notes of country banks, offer the
perspectives of contemporary opponents without critically evaluating them.
As a work of history, this book is quite successful, but as a work of
financial history, it is less so.

Dexter eventually returned to the United States and moved to the Alabama
Territory, where he founded the town that became Montgomery.  The last part
of Kamensky’s narrative follows Dexter to the South, and details his
business ventures there, all ultimately unsuccessful.  Over his lifetime,
Dexter was able to seize the opportunities that became available during
lending booms, but he was only able to achieve modest, short-lived successes,
which were all followed by failure.  The great reversals of fortune in his
life offer fascinating insights into the business world of nineteenth-century
America.

Eric Hilt is Associate Professor of Economics at Wellesley College, and
Research Associate of the National Bureau of Economic Research.  Email:
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Geographic Location: North America
Subject: Financial Markets, Financial Institutions, and Monetary History
Time: 19th Century