One of the earliest financial scandals in the United States took place more than 200 years ago. The scandal developed around a pyramid scheme built on real estate speculation and questionable paper money, and led to the first bank collapse in the U.S. in 1809.
The Exchange Artist: A Tale of High-Flying Speculation and America’s First Banking Collapse, by Jane Kamensky, describes what happened
This is the story of Andrew Dexter, Jr., a speculator and financier in the early days of the United States. And while this was America’s first banking collapse, one of the lessons of the book is that we haven’t seen the last.
Much of the story involves Dexter’s attempt to build a large commercial building in central Boston, and how he paid for it with paper money.
Dexter financed the Exchange Coffee House, at the time the tallest building in Boston, with worthless paper money from regional out-of-town banks that he himself controlled.
The building was built, but the expected tenants and related business never materialized to the point where the project could have made money. In fact, even if everything had gone as expected it would have been difficult to pay all the bills. (The Exchange Coffee House later burned down in 1818.)
One of biggest problems was paper money. Banks issued paper “promises to pay” that often had little or no value. Artisans and workers received these paper notes for jobs performed and often weren’t really paid.
Bank notes were money, but they were not legal tender and no one had to accept them. One of Dexter’s banks issued $600,000 in paper money backed by only $84 in gold and silver. He also transformed promises into an illusion of success. These “promises to pay” were issued on small out-of-town banks in places that were at that time fairly remote, like Albany and Detroit.
After the scandal broke and no one would take the paper money, Dexter had to leave Boston. He traveled all the way to what is now Alabama, and had a role in founding the city of Montgomery. He was involved in real estate speculation here also, on what at the time was the edge of civilization.
One of the lessons of the book was that these kind of financial scandals often don’t begin with intent to commit fraud. But Dexter built a financial house of cards that could only be sustained by fraud. In the end even fraud couldn’t create enough fraudulent bank notes to pay all of the bills.
Another lesson is that there have been all kinds of collapses, reversals and scandals in the past 200 years. We have not seen the last financial scandal. In fact, it’s probably underway now. That’s something every person in business should keep in mind.
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