Boom and bust: It’s the American way

Earlier this month, my mother-in-law called from Pasadena, in dire need of consultation with my husband, who serves as the family’s unofficial Ben Bernanke. “Denny,” she said, “rumors are flying around here. Should I pull my money out of IndyMac?”

“Don’t worry about it, Mom,” came the answer. “A big bank like that -- it’ll never fail.”

But the rumors kept coming, until so many IndyMac customers had withdrawn their funds that the Federal Deposit Insurance Corp. took control of the bank’s affairs. By dawn Monday, lines of betrayed, angry and tearful depositors snaked around IndyMac branches across Southern California: a central-casting bank run in the heart of film country.

My husband -- like so many others who trusted IndyMac -- was wrong. Banks, even big banks, go under. And now, once again, the popular wisdom that banks cannot fail has been temporarily replaced by the knowledge that banks can fail. Share prices of bank stocks plunged to multiyear lows before staging a comeback last week.

This rapid oscillation between confidence and panic in the banking sector is nearly as old as the United States. Indeed, at the nation’s beginning, the financial landscape was far more complex, the hills steeper and the valleys deeper. Until the Civil War, every bank in the United States issued its own paper money, or notes, and the number of banks grew quickly. In 1790, the infant nation had four of them. During the next two decades, state legislatures incorporated more than 100 more, a surge one diarist labeled “bank mania.” Soon, he feared, “every company of boys which had a stock in marbles” would seek a banking charter. Whether their capital consisted of marbles or gold or silver, each of these banks printed notes that passed for money. Every bank bill was a promise; every transaction an arbitrage; every shopkeeper a currency broker.

Two centuries ago, worried investors turned to the newspapers, much as they do today. Many papers carried a column called the Banking Thermometer that helped them to reckon the value of the promises in their pockets. In the initial months of 1809, the Banking Thermometer tracked the “falling temperature” of notes issued by banks stretching from Massachusetts to the Michigan Territory. At first, the notes traded at something close to face value. Down the temperature went. Late January: 80 cents on the dollar. Then 70. 40. And finally, zero.

Amazed readers watched seemingly solid stuff -- their paychecks and the value of the homes they bought with the notes -- simply evaporate. Editorials paraphrased Prospero, the sorcerer-protagonist of Shakespeare’s “The Tempest,” reminding readers that paper money was an enchantment, its value the “baseless fabric” of a “vision.” Ordinary men and women woke with a start to find that the “airy stuff” they knew as money had “melted ... into thin air.”

Shakespeare’s Prospero was a cold, capricious enchanter. The financial wizard behind the banking collapse of 1809 was a more authentically American type: a striver, a gambler, one of the founding fathers of our speculation nation. Andrew Dexter Jr. was an ambitious man in an ambitious age. Like many born in the era of the American Revolution, he nursed a gravity-defying dream of rising without limits, a dream at once noble and venal, creative and destructive. On a small plot of land in downtown Boston, he would build the nation’s tallest building, a seven-story, 153-room colossus he called the Exchange Coffee House. His design, he explained to prospective investors in the winter of 1807, just before breaking ground on the project, was to take the city’s merchants out of the muddy streets where they conducted their trading and house them in a temple befitting the grandeur of commerce in the cradle of the late Revolution. He was the Donald Trump of early America. All he needed was some cash.

Dexter’s tower rose on a foundation of paper promises. Promises bought the land and the bricks and the timber. Promises paid the masons and the carpenters and the tinsmiths. Promises begat more promises. As expenses mounted, Dexter used the building as collateral to buy a controlling interest in a cluster of banks located far enough from Boston that New Englanders would have a hard time putting their promises to the test. Then he directed the banks’ boards to print money. When the notes began to depreciate, he printed millions more. While people trusted the alchemy behind them, the notes passed, from hand to hand to hand.

By the end of 1808, Dexter had papered much of the Eastern Seaboard with promises. Merchants who doubted the unfamiliar paper piling up in their cash drawers paid a battalion of runners to mass at bank counters from Michigan to New Hampshire and demand the gold and silver that Dexter’s bank notes said they were good for. Poker-faced, the cashiers delayed, slowly counting piles of copper coins or writing IOUs -- more paper promising still more paper later on. But they couldn’t stall forever.

In March 1809, the Farmers Exchange Bank of Gloucester, R.l. -- the weakest link in Dexter’s chain -- became the first bank in U.S. history to go under. Dexter had owned the bank for 11 months, during which the Farmers Exchange issued more than $600,000 in notes. When state investigators opened its vault, they discovered exactly $86.48 worth of gold and silver, a liabilities-to-assets ratio of more than 7,000 to 1.

All that summer, as the notes of the defunct Farmers Exchange Bank wreaked havoc on the accounts of everyone who held them, the wave of failures spread. Their coffers full of money-turned-wastepaper, each bank in Dexter’s web pulled against the others. People wondered why they had ever “confided” in bank bills. Paper phobia replaced paper mania. By August, a writer in the Pittsfield Sun said, it felt as if all New England was suffocating under an “immense floating mass of

Today, we struggle to clean up an entirely modern species of paper trash: the alphabet soup of CDOs, SIVs and other securities backed by subprime mortgages. The firms affected now aren’t small banking outposts in the American wilderness but giant multinational concerns. Britain’s Northern Rock, Wall Street’s Bear Stearns and now IndyMac have collapsed. Merrill Lynch and J.P. Morgan are wounded. And still the circle of mistrust widens, from mortgage lenders, to banks and brokerage firms, to the insurers whose contracts guaranteed the bogus mortgage securities, to credit markets around the globe.

As we grope our way through the wreckage, we’re better off than the first generation of over-leveraged Americans. We have a strong central bank to chart a course between recession and inflation, an FDIC to underwrite at least some of our mistaken confidence and bankruptcy laws that offer at least some protection for those who fail.

Andrew Dexter’s contemporaries knew none of these remedies. They had to settle for the smaller satisfaction of getting to the bottom of their mess. They found the man whom one of his fellow merchants called a “grand enchanter, whose touch converts every thing to paper.” Then they hounded him, in newspapers and through the streets, from state to state. He died in Montgomery, Ala., in 1837, alone and despised.

And broke, like the rest of his countrymen in a nation still addicted to paper credit, and once again suffering through a panic. Try as he might, Dexter never did make good. But he made a good villain, an icon of meaning amid the existential comedy of a boom-and-bust world.