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, and so on.  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 otherwise 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 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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