Clever Geek Handbook
2 April 2025

Investment Titans

Recommendation

Jonathan Burton relays the advice of nine top investors - Harry Markowitz, Paul Samuelson, Jeremy Siegel, John C. Bogle, Joseph Lakonishok, Richard Thaler, Gary Brinston, Peter Bernstein and William Sharpe. The author focuses on different aspects of investing - stock-market risk and reward, indexing, value versus growth investing, investor psychology, international investor strategies and risk tolerance. Burton concludes Investment Titans with observations about common themes - diversifying, investing now and staying invested. This solid book avoids repetition by focusing on different investment issues for different investors.

Take-Aways

  • To decide how to invest, realistically and honestly assess how well you tolerate risk.
  • The amount of risk you take is one of the few aspects of investing you can control.
  • Diversify, because the future is unpredictable.
  • Harry Markowitz based his "Modern Portfolio Theory" on creating a portfolio of unrelated stocks.
  • Paul Samuelson’s "Time Diversification Theory" emphasizes long-term investing.
  • Jeremy Siegel urges investing in stocks since stocks have easily beaten inflation.
  • John C. Bogle recommends low-cost index funds.
  • Joseph Lakonishok advises you to be a value investor, seeking value in out-of-favor stocks that will make good recoveries.
  • Richard Thaler believes that investor psychology dominates markets.
  • Gary Brinson says you should invest globally by looking for leaders in an industry. Location doesn’t matter, since borders and trade barriers are obsolete.

Summary

Nine Investment Titans

Nine investment titans offer their advice on how to make the best investments while weighing risk and reward. In these extensive interviews, they agree that all investors must assess, realistically and honestly, how well they tolerate risk. Unlike your portfolio’s return, the amount of risk you take is one of the few aspects of investing that you can control.

The investment titans fall into two camps: "efficient market disciples" who believe the investment landscape is "cut and dried," and those who believe you can predict stock price movements and exploit markets through diligent research. The former group believes that how you allocate your assets to stock and bonds - rather than the particular stocks you select - is the most important factor in meeting your financial goals.

Titan One: Assess Your Portfolio as a Whole

Harry Markowitz emphasizes diversification, since the future is unpredictable. If you diversify, you can balance out your portfolio, because when one group of stocks is declining, another will be appreciating. He developed the "Modern Portfolio Theory," which says that if you create a portfolio of unrelated stocks, each security contributes its own strength.

“Risk doesn’t have to control you; the goal is to control risk. When approaching an investment decision, be realistic about what the market can give you in exchange for the risk you take.”

He advises balancing your risk tolerance against the returns you expect. Others’ success in the market may tempt you to take more risk than you ordinarily would. Instead, trust your "rational gut feeling" about how much risk you really feel comfortable taking. You will get more return as you risk more, and get less as your risk declines. Find a place that feels right.

“Investment perspective and risk tolerance are unique with everyone. In truth, no one knows when any bull market will end or begin. In that sense, the risk of being out of the market is actually greater than the risk of being invested.” [Paul Samuelson]

Markowitz published a road map to help investors assess the risk of their entire portfolio in the 1950s. He led the way in this field, receiving a Nobel Prize in 1990.

Titan Two: Diversify Within Time

Paul Samuelson does not believe that you can’t lose money if you simply hold stocks long enough (say, 10 to 50 years). While long-term stocks will do better than other assets, don’t invest on that assumption. Risk always exists, even over the long term. You cannot avoid "systematic risk" of simply being in the market.

Samuelson emphasizes investing for the long term with his "Time Diversification Theory." Step into the market and stay for a lifetime. Make long-term investments, but diversify. Keep a properly allocated portfolio, in which you spread your assets across many securities based on your risk tolerance. But recognize that the market is very uncertain. Don’t try to seek precise market timing. Don’t jump from one industry to another and from cash to stocks and back again. While it’s fine to speculate in stocks with a small amount of money, it’s risky to think you can be in the right place at the right time.

“Insider buying can be a good indicator. If you can’t be a corporate executive, invest like one. Insiders are among the earliest to spot value within a company and to act on it. These internal factors will be reflected in the stock price long before investors read about them in the quarterly report.” [Richard Thaler]

Samuelson, professor emeritus of economics at the Massachusetts Institute of Technology, also received a Nobel Prize.

Titan Three: Look for the Equity Premium

Jeremy Siegel believes that a stock portfolio which you hold for more than 20 years is less risky than a portfolio of bonds, because inflation undermines the value of fixed-income returns. By contrast, stocks easily have beaten inflation. You risk more by not being in the investment game than by playing. By staying in for the long run, you can enjoy growth and income your entire lifetime.

“To Gary Brinson, the chairman of influential Chicago-based investment manager UBS Asset Management, stocks should be chosen according to business sectors, not borders. Where a company is based doesn’t much matter, as long as it is a leader.”

However, you won’t get the kind of returns that have occurred since the big bull market started in 1982. Stock returns are lower now because investors have a greater demand for stocks. This is the basis for the equity premium, which increases when few people want to own stocks. But as more and more people have observed the benefits of investing over recent decades, they have become stock buyers. Therefore, they bid the prices up, and their potential return on investment comes down. To be a better investor, maintain a diversified portfolio and avoid short-term market timing. Buy stocks for the long term.

"The key points that Jeremy Siegel suggests can help people to become better investors: Maintain a diversified portfolio. Avoid short-term market timing. Don’t underestimate your true holding period. Even in the darkest moments, stocks are to have and to hold."

Siegel, professor of finance at the Wharton School of Business at the University of Pennsylvania, wrote the bestseller, Stocks for the Long Run.

Titan Four: The Outperforming Average

John C. Bogle emphasizes minimizing expenses. He disparages market strategies, theories and cost-benefit analyses. Instead, he stresses simple, low-cost approaches, based on low management fees and superior investment returns.

“One of the easiest investment rules for people to follow is John Bogle’s all-consuming passion, minimizing expenses.”

Low-cost index funds provide a good value. Rather than trying to beat the market by buying and selling the latest hot stocks, buy a representative sampling of the stocks in the index. While such funds may outperform the index occasionally, they only will do so by a very small amount. However, they capture nearly all of the benchmarks they are tied to, and do so efficiently and inexpensively. This approach also cuts down on management costs.

“Investors need to make a realistic and honest assessment of their risk tolerance, for portfolio risk is one of the few factors within their control. Portfolio return, unfortunately, is not.”

The index you use is the key factor in your return. Instead of using the Standard and Poor’s 500 Index, use the Wilshire 5000, which indexes the total stock market.

Bogle is the founder of the Vanguard Group of mutual funds.

Titan Five: Seek Uncommon Value

Joseph Lakonishok is a strong supporter of value investors who understand that "what goes down must come up." Value investors look for stocks the value of which other investors have assessed incorrectly. Rather than paying premium prices for popular growth stocks, they look for "Wall Street’s dogs."

Out-of-favor stocks usually will be cheaper than growth rivals. Typically, these stocks are low because the companies have made big mistakes. But, sometimes, their executives take good, solid chances and they recover. The value investor can profit handsomely from this. But be patient. You can’t expect your investments to pay off quickly. You need "emotional contrarianism," so you can live with any bad news about the company in which you have invested. Growth stocks typically reward past success. Look toward the possibility of future success. It’s a good sign when a company does a lot of research and development relative to sales, since that indicates that the company’s insiders hope for a more positive future.

“Asset allocation - how much you confer on stocks and bonds - not stock selection, is most important to meeting financial goals.”

Lakonishok is a finance professor at the University of Illinois and a well-known institutional money manager.

Titan Six: Investor Psychology

Richard Thaler’s strategy of behavioral finance discounts efficient market models on the grounds that investors are not rational at all times; their emotions drive them. He believes that psychology and behavior are dominant influences on stock price movements. However, if you stay calm and cool when others overreact, you can do much better in the market.

“Josef Lakonishok, a finance professor at the University of Illinois and a respected institutional money manager, is a staunch supporter of value investing.”

Avoid the systematic errors of judgment or "heuristic biases" that undermine investors’ choices. Don’t be overly confident or optimistic; don’t confuse chance with skill. Get over your aversion to loss. Don’t regret your decisions or ignore the big picture. Do not think about what others are doing: People bid Internet stock prices to unrealistically high levels.

Try to buy like an insider. When corporate insiders buy shares in the open market, they may have some insights about the company that they announce to the public - but which the public ignores. Conversely, when insiders sell at a very high level, that’s not a good sign.

Thaler, a professor of behavior sciences at the University of Chicago, focuses on investor psychology and behavior.

Titan Seven: Invest Globally

Gary Brinson believes in selecting stocks based on business sectors, not on borders. Globalization has made borders and trade barriers obsolete. Today, people trade stocks around the clock on all major exchanges, so a company’s location does not matter. Look for leaders in a business sector and invest in them. Think about worldwide opportunities and international investing in a global environment.

“Globalization will make borders and trade barriers obsolete. Stocks will trade around the clock on every major exchange.”

The key rule for investing is how well you allocate your money across stocks, bonds and cash, rather than the specific stocks you pick or your market timing. Overall, your asset mix accounts for about 94% of how well your investments do. Thus, decide on your basic allocation, and once you decide what portion you will invest in stocks, look at non-U.S. companies. International investing offers "potentially high returns, portfolio diversification and participation in the rapidly evolving global economy."

“William Sharpe developed the Sharpe Ratio, which is now a standard measure of whether fund managers are good at their jobs. The better the ratio, the better the fund’s risk-adjusted return.”

Brinson is chairman of the UBS Asset Management.

Titan Eight: The Good Investor

Peter Bernstein, a master of "the art of holding hands," works with new investors who need counseling, especially those who never have experienced a true bear market. Bernstein believes that a good investor is realistic and accepts uncertainty. The future is unpredictable, even though many investment counselors argue that equity increases in the long term. Extrapolations provide a road map that suggests when deviations from the past might show up. But a total break from the past also might occur.

Approach investing with the recognition that "we don’t know exactly how to measure risk. And we sure don’t know how to measure the market." Diversify. It may cost you more in the short run, but it’s the only way you can survive the really hard times.

Bernstein is a best-selling author and investment counselor.

Titan Nine: Expanding Investment Opportunities

William Sharpe, an expert on asset allocation and simplifying the method for measuring and controlling portfolio risk, developed a number of helpful investment tools, including the "Capital Asset Pricing Model" (CAPM), which indicates how much risk a mutual fund manager is taking with your money. He developed the "Sharpe Ratio," which measures how well fund managers are doing their jobs. And now he has developed an investment-planning tool called "Financial Engines," to help everyone do investment planning.

Use these tools and concentrate on using, not beating, the market. Focus on your optimal asset allocation. Diversify over time. If you seek higher returns, accept the greater risk that you will take when times are bad.

Sharpe is a retired economist from Stanford University. He shared the 1990 Nobel Prize for his work in asset allocation and simplified risk-measurement methods.

About the Author

Jonathan Burton  is a prolific and well-known financial journalist. Investment Titans grew from his "Leaders in Finance" series, which he wrote for Asset Management. He co-authored the best-selling Electronic Day Traders’ Secrets and has contributed to to The New York Times, Bloomberg Personal Finance, The Economis and The Christian Science Monitor.

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Investment Titans

Book Investment Titans

Investment Insights from the Minds that Move Wall Street

McGraw-Hill,
 


2 April 2025

The China Price

Recommendation

Shoppers know that the ubiquitous “Made in China” labels on everything from basic food and clothing to high-end electronics usually mean low prices. But most consumers don’t realize the full extent of the repercussions that the “China price” extracts from the Chinese and the rest of world. Journalist Alexandra Harney undertakes an in-depth investigation into what Chinese workers must endure to save the average American family $500 a year: low wages, crushingly long work days and brutal – sometimes deadly – working conditions. But she also reveals the hidden costs the world pays for the China price, including climate change, air pollution, unemployment and unsafe products. Harney gained unprecedented access to secret factories, workers’ homes and government offices to hear the personal, often chilling stories of what China’s economic boom has meant for millions of people. Although Harney’s argument ignores some mitigating factors, such as China’s right to industrialize and the good that growth in China has achieved, BooksInShort strongly recommends reading this book before your next shopping trip: Reflect on what that “$3 T-shirt or $30 DVD” player really costs the world.

Take-Aways

  • China’s massive, low-wage workforce made “the China price” possible.
  • Multinational companies demand ever-lower prices, which lead to labor abuses.
  • Migrants from China’s interior to its coastal manufacturing centers encounter low pay, long work shifts, substandard housing and little access to health care.
  • To combat exploitation, multinational corporations maintain “codes of conduct” for their suppliers, but they can’t effectively govern suppliers’ compliance.
  • China’s economy runs on coal, but the resultant pollution affects the entire planet.
  • China’s one-child policy will reduce labor availability, which will lead to higher wages.
  • The government discourages most labor activism, but recognizes the risk of social upheaval from aggrieved workers.
  • An entire industry has emerged to aid companies in falsifying compliance with ethical labor standards. This helps Chinese factories stay competitive.
  • Many firms consider their supplier codes of conduct little more than public relations mechanisms for managing their legal and reputational risks with Western consumers.
  • The China price is climbing; China now faces competition from even cheaper countries.

Summary

At What Cost?

China now is the world’s third-largest manufacturer of all types of products, from low-end consumer goods to high-end electronic equipment, and it is poised to usurp the United States for the top spot by 2020. What China makes, it sells abroad: Its exports rocketed from $26 billion in 1984 to $1,218 billion in 2007. Walmart “buys at least $18 billion worth of goods from China every year.” Samsung, IBM, General Motors and numerous other multinationals buy extensively from China. The tremendous low cost of Chinese-produced merchandise – “the China price” – has catapulted the country to new economic heights.

“‘The China price,’ screamed a BusinessWeek headline in 2004, has become ‘the scariest three words in US industry’.”

The China price derives largely from the country’s huge, low-cost working population. Some 104 million laborers work in China’s manufacturing and assembling industries – the equivalent of all the manufacturing employees in the US, the UK, Canada, Japan, France, Germany and Italy combined, times two. Most of China’s laborers are migrants from the poor rural interior, who relocate to manufacturing centers for work, often living in crowded, squalid dormitories. Their average pay – $0.57 per hour in 2002 – is lower than the average wage that an Industrial Revolution-era worker earned in the UK in the 1800s. China’s cheap labor is why 2.3 million work opportunities vanished from the US between 2001 and 2007.

“Over the last several years, the China price has redrawn the global manufacturing map and laid the foundation for the next economic superpower.”

The China price translates into an average annual savings of $500 for the typical American family. But these savings extract a significant cost not only from exploited Chinese laborers and unemployed US workers but also from the rest of the world. In 2007, tainted Chinese pet food killed not only cats and dogs, but also poultry and hogs, which posed a risk of contaminating the US food chain. Later that year, 100 people died when Chinese manufacturers mislabeled a deadly chemical that ended up in cough syrup in Panama. In separate incidents, the US recalled Chinese-made toys containing lead paint and warned against potentially unsafe Chinese automobile tires. The environment suffers, too: Air pollution from China travels as far as Oregon and Washington State and affects weather patterns along North America’s west coast.

“China has become legendary for its ability to undercut prices for everything from consumer goods to industrial machinery. The only way for manufacturers elsewhere to compete was to move to China themselves.”

As the Chinese juggernaut rolls over other nations’ industries, China stands accused of dumping, of keeping its currency undervalued and of contributing to global climate change. But China’s advantages – low-wage workers, cheap land, government inducements, political stability, and solid transportation and communications infrastructures – continue to draw global business.

The Economic Cost

“China emerged from three decades of relative isolation in 1978.” Since then, the government has relaxed restrictions on farming, currency and industry, propelling China economically. “Clusters” of specialized businesses have grouped together within cities, which have “emerged as leading manufacturers of specific products.” More than 1,000 of these industrial clusters exist along China’s “coastal export region.” For example, one 40,000-worker factory in the town of Shunde makes almost 50% of the world’s microwave ovens; 1,000 specialized companies located in Shengzhou produce 40% of the world’s neckties; and the city of Dongguan assembles so many computers that “if there is a traffic jam between Dongguan and Hong Kong, 70% of the world’s computer market will be affected.”

“The high costs the country pays to achieve the China price make sustaining it a high-wire act.”

These specialized centers make manufacturing faster and more efficient, allowing these industries to compete ferociously for Western customers, who are corporate giants that demand razor-sharp pricing for their bargain-hunting consumers. This strenuous competition means employees commonly put in 12- to 18-hour shifts, seven days a week. Wages are poor and often withheld, and children work alongside adults. Chinese law prohibits these abuses, but enforcement is minimal, so factory managers who do obey the regulations lose out on a comparative advantage.

“Coal, more than any other product, lies at the heart of the China price.”

When these abuses first came to light in the Western media, companies like Walmart established a “code of conduct” for their suppliers and dispatched auditors to conduct site visits to ensure compliance. The terms of these codes and audits vary among corporations, which charge the Chinese factories fees for their inspections. To avoid having to institute differing, expensive and burdensome rules, Chinese business owners create “shadow,” or unregistered, factories in other locations that mirror the “five-star” factories their Western suppliers audit. The shadow factories run longer shifts and pay lower wages, but desperate migrants from the countryside snap up jobs in these places. The shadow factories allow Chinese business owners to meet their corporate customers’ stringent demands for high production at low costs.

The Health Cost

China’s booming economy also has consequences that harm people’s health: “More than 200 million Chinese workers in 16 million companies are exposed to dangerous working conditions.” Some towns and provinces that specialize in industries like mining are known as “cancer villages” or “widow towns” because of the high incidence of deaths from lung diseases such as silicosis, a preventable illness caused by poor ventilation and inadequate safety equipment. Migrant workers don’t have health insurance, and their deplorable living conditions spread disease. In these towns, babies often are born with deformities.

“In a world where so many are cheating to keep costs down, telling the truth becomes a handicap.”

While China has tough laws on worker safety, it lacks trained inspectors. Recently, litigation and court judgments in workers’ favor have prompted more people to address their grievances through formal processes. The Beijing government recognizes that aroused masses could threaten the country’s political and social stability, so it is mandating greater access to health insurance for workers. Still, one Chinese health official sums up a popular sentiment: “The multinationals...brought dangerous work and pollution and left with the profits.”

The Environmental Cost

Coal supplies more than 60% of China’s energy, and the country produces and consumes more coal than any other country in the world. China’s economy runs on coal, which presents massive pollution problems. Due to its dependence on cheap coal, China spews more carbon dioxide and sulfur dioxide into the atmosphere than any other nation, thus contributing to global climate change. Other side effects of China’s reliance on coal include acid rain, smog and mercury poisoning. Air pollution in some cities affects children as badly as would smoking “two packs of cigarettes a day.” In 1998, a United Nations agency said the city of Taiyuan in coal-producing Shanxi province had the dirtiest air in the world. Moreover, only 20% of China’s 27 biggest cities meet minimum government standards for drinking water.

“The pressure on price can pit a company’s compliance department against its buying department.”

But more industrialization calls for more coal. One-third of the nation’s coal comes from China’s 16,000 coal mines, 90% of which are perilous, small, privately owned enterprises. Many poor people eke out a subsistence living extracting coal by hand without safety equipment or proper ventilation. Some private coal mine owners do well enough that they comprise a third of China’s millionaires, but most others, attracted to the rising prices for coal to meet growing demand, operate small, illegal mines. Alternative energy sources – even the celebrated Three Gorges Dam – can supply only a fraction of current energy needs. That means pollution will continue for the time being. Future clean-up operations will cost the coal industry money, raising the price of energy, adversely affecting China’s competitiveness and raising the China price.

The Social Cost

The inequities brought on by China’s economic miracle are making Chinese workers politically and socially aware. Today’s migrants benefit from the factory experiences of their older family members and friends. This “second wave of post-reform migrant workers” is less tolerant of poor working conditions and is more likely to take legal action against abuse. This faction of the workforce is the product of China’s one-child policy, which augurs a dwindling supply of labor in the near future. Greater dissemination of information also means that migrants, who largely are undocumented and uninsured in the cities where they work, are beginning to agitate for greater rights. No longer content with earning just enough money to support themselves or their families back home, they aspire to long-term, productive careers and social acceptance. They are less likely to return home and, thus, they present greater burdens on the resources of larger cities.

“You’ve got the absolutely perverse system where everyone is incentivized to cover up the problems.”

Informed workers and lawyers are establishing nongovernmental organizations to present unified fronts against bureaucrats and corporate management. They are winning court cases for labor compensation and speaking up against injustice. With support from foreign labor organizations, independent unions are challenging the ubiquitous but largely ineffectual All-China Federation of Trade Unions (ACFTU), which is the only union that the Chinese Communist Party permits. While the government restricts most protests, it gingerly is testing some worker freedoms within the controlled confines of the ACFTU. Many younger people are looking for ways to safeguard their rights within the system, rather than seeking to foment revolution. But the China price depends on low wages and cost savings from inadequate employee protections and damaging energy use. These practices are under threat from shifting demographics that promise fewer – but higher-paid – workers to fuel the Chinese economic engine and to underwrite the China price.

The Corporate Cost

Multinational corporations that use China as their manufacturing and assembling center are responsible in many ways for the conditions they encounter. Their clout in negotiating with comparatively smaller manufacturers means they usually dictate terms, often contrary to their own policies. For instance, one Chinese factory owner turned down business from Timberland when the shoe company’s deadlines would have forced the Chinese laborers to work longer than the maximum 60-hour weeks restriction that Timberland’s own code of conduct put in place.

“A decade of monitoring by multinationals has not led to substantial improvement in working conditions in Chinese factories.”

While some firms’ core values promote social responsibility – like Levi Strauss, which was the first company to propose a supplier code of conduct – most firms consider their codes of conduct as mere public relations mechanisms to manage their legal and reputational risks with Western consumers. Disney, Target, Kohl’s and Home Depot provide little useful public information on their suppliers, while Walmart, Reebok, Adidas, Nike and Gap are much more forthcoming. Yet even the largest multinationals can’t patrol all their suppliers all the time, and even if they could, their own demands for the lowest possible prices and the fastest delivery times preclude most of their codes. For example, only 5.4% of Walmart’s global suppliers pass its compliance tests. Any factory manager that could meet all Walmart’s ethical standards would have to raise his prices to do so and probably would lose Walmart’s business in the process.

“Our appetite for the $30 DVD player and the $3 T-shirt helps keep jewelry factories filled with dust, illegal mines open and 16-year-olds working past midnight. We all pay the China price.”

In response, a new occupation has taken root in China: “Falsification engineers” consult with companies on how to doctor documents and conceal illegal overtime or faulty working conditions to meet client codes of conduct. Observers estimate that about 80% of Chinese factories flout compensation rules, and 95% ignore working-hour limits. So in essence, big corporations have taught their suppliers how to game the system, and multinationals know less now about the conditions within their suppliers’ operations than they ever did, which raises the question: “What else are Chinese factories hiding?”

The Future Cost

Some Chinese firms and Western corporations are receptive to change. They’re working to create “model” factories that provide adequate pay, benefits and working conditions. Yet “rising wages and material costs, greater demand for unionization, a higher risk of litigation” and “a dwindling supply of cheap workers” jeopardize China’s competitive advantage. The China price is climbing: since 2004, export prices have risen 2% per year. Already lower-wage Vietnam, Bangladesh and India are luring multinationals to consider a “China-plus-one strategy,” where firms conduct operations in China as well as another low-cost Asian base to stave off political and other risks.

“China makes you sharp or it kills you.” (Eslie Sykes, manager of a Flextronics plant, Guadalajara, Mexico)

China cannot afford to continue competing in world markets based on price alone. It must move up the economic value chain, educate its citizens and assure good jobs for hundreds of millions of restless workers in order to achieve its own ideal: a “harmonious society.”

About the Author

Alexandra Harney is a journalist who has covered Asia for The Financial Times.

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The China Price

Book The China Price

The True Cost of Chinese Competitive Advantage

Penguin,
 


2 April 2025

The Exchange Artist

Recommendation

Andrew Dexter Jr. is the villain of historian Jane Kamensky’s book on America’s first bank failure, which occurred in the early 1800s. He used worthless banknotes to finance construction of Boston’s Exchange Coffee House, at seven stories the U.S.’s tallest building at the time. In the process, he financially ruined hundreds of laborers who worked on the project. By the time they learned that his banknotes were bogus, Dexter was long gone. Kamensky deftly tells his tale with fascinating detail and little-known facts. In brilliant writing, she traces the rise of “speculative capitalism.” She offers the bittersweet saga of a man with little conscience and big dreams he never fulfilled. BooksInShort finds that her book compellingly depicts America’s early financial history – and, perhaps, one facet of its emerging fiscal personality – through the tale of this colorful charlatan.

Take-Aways

  • Andrew Dexter Jr. was a “paper man” par excellence – an entrepreneur, speculator and risk taker.
  • He was as entrepreneurial and risk-taking as America’s revered founders, George Washington, Thomas Jefferson and Benjamin Franklin. Only, he was a criminal.
  • Dexter believed deeply in the American dream. He searched for it, but never achieved it.
  • He learned about enterprise and bold vision from his uncle, Samuel Dexter, a U.S. Treasury Secretary.
  • Andrew Dexter built Boston’s Exchange Coffee House, then America’s tallest building, a brick-and-mortar metaphor for the U.S. as the land of opportunity.
  • Fire destroyed the building in 1818 and put an end to an ill-fated, unprofitable, illegally funded endeavor.
  • Dexter paid for the construction of the magnificent building with bogus money.
  • Government authorities caught on to his scheme and shut his Rhode Island bank, which issued unfunded banknotes. It was America’s first such bank closure.
  • Dexter fled from Boston in disgrace to Nova Scotia, then later to Alabama.
  • In 1837, he died alone, a bitter, broken man and a pauper.

Summary

The Speculator’s Dream

In Boston, in the early 19th century, the Exchange Coffee House was a perfect metaphor for the nascent American Republic and its “gospel of ascent” and open opportunity. Andrew Dexter Jr., who conceptualized, created and , some might say, conjured the building, was a bold speculator, just like George Washington, Benjamin Franklin, Thomas Jefferson and many other early U.S. founders; only unlike them, he was a con artist. In Dexter’s America, popular myth said you could become anything you wanted. Born shortly after the Revolution, he bought this noble vision wholeheartedly. It was true for many and it almost came true for the daring Dexter, dreamer and fraudster. For a time he achieved wealth and prominence by painstaking chicanery, but he died an angry pauper. His personal tale and the story behind his remarkable building were hugely improbable.

Young Man on the Make

Dexter was born in 1779 in rural Massachusetts, grew up in Providence, Rhode Island, and completed Rhode Island College in 1798. In his graduation address, he proudly embraced the American “gospel of aspiration,” proclaiming that the “hatchet of industry, wielded by the strong arm of freedom, shall resound from the shores of the Atlantic to the banks of the Mississippi.” Dexter then moved to Boston to study law and began wielding his own hatchet in an inglorious yet unforgettable swath by working for his uncle, famous local lawyer Samuel Dexter. Some Bostonians said Samuel was a “tongue-for-hire” with no principles. They called him “Ambi-Dexter.” But he must have had some credibility, because the state legislature appointed him to the U.S. Senate and President John Adams named him Secretary of the Treasury. Dexter learned much from his uncle. Primarily, he discovered how to become a financial speculator and risk taker, skills at which the wily Samuel excelled.

Banknotes and “Specie”

In the early 1800s, America had no national paper currency. The federal mint used precious metals to make coins called “specie.” Banks produced the paper money, which was called “banknotes.” Supposedly, consumers could redeem banknotes for specie any time at the issuing bank. However, such paper currency often was tied loosely to what Adam Smith, author of The Wealth of Nations, described as “the solid ground of gold and silver.” If all banknote holders claimed their specie at the same time, most banks could not have met their demands. Each note included the signatures – real autographs, not printed facsimiles – of the bank’s president and cashier. These signatures sent an unambiguous signal to banknote holders: You can redeem these notes for coins of the realm.

“Rags make paper/ Paper makes money/ Money makes banks/ Banks make loans/ Loans make poverty/ Poverty makes rags.” [ – Anonymous]

Banknotes facilitated trade and commerce, but they were not legal tender. No government entity endorsed them. Previously, the American government had been in the paper money business. The Continental Congress issued more than $226 million in paper notes called “Continentals.” Individual states issued their own notes, worth another $100 million. However, such paper money became grossly inflated and nearly worthless. By 1779, a Continental “traded against specie at a rate of 42-to-1.” One knowledgeable observer called the notes, “no better than the wampum of the savages.” When the U.S. government stopped printing money, banks quickly took over this potentially lucrative business. After all, what could be more profitable than printing money?

“Dexter’s downfall astonished not because it was monstrously singular, but rather because it laid bare the rules of the game.”

The problem was that no one had to accept banks’ notes. Their often fluctuating value depended on numerous factors: the issuing bank’s reputation, the standing of its directors, the bank’s supposed holdings of specie and so on. With hundreds of banks in operation across America and with all their different banknotes floating around, no one could know precisely from day to day what a particular banknote might be worth. Speculators – “paper men” – loved the banknote business. Thriving on chaos and confusion, they focused on buying paper low and selling it high. Such individuals were bold betters, ready to pay pennies on the dollar for “clever” investments.

The Yazoo Men

Andrew Dexter’s Uncle Samuel was a noted paper man. Always alert for the “main chance” to make money, he and his cohorts preferred “fickle fortune to steady competence.” Samuel and his investment group purchased 11 million acres of the “Yazoo tract” in Georgia’s western reserves, now Mississippi and Alabama, buying a “land mass half again as large as...Rhode Island.” Was this bold move an honorable, above-board purchase? Perez Morton, one of Samuel’s partners, believed so: “Whatever is not forbidden by law is permitted,” he testified to Congress, “and whatever is permitted is lawful.”

“The early American banknote was a frozen gesture: a handshake caught mid-grip, a speech act committed to paper and stretched over time and space.”

Young Andrew absorbed this happy creed, understood the magic of paper money and rapidly put it to work. In Boston, he became a trustee of the Exchange Office, called the “Changery,” a new banking and investment firm. It agreed to deal in any paper currency, even from the most remote, highly suspect banks. This was the opposite of other banks’ standard practice. Most Boston banks discounted banknotes from “country” banks, as they were derogatorily known. The farther away the bank that issued the note, the more the receiving bank took off the note’s value.

“Its funds scarce, its notes abundant, its credit doubtful, the Farmers’ Exchange Bank was rotten fruit. Dexter plucked it not to save the bank, but to save himself.”

How could the Changery invert this financial formula? Simple: Its managers decided to not even try to remit banknotes to banks in the hinterlands – or anywhere else, for that matter. For Dexter and his associates, “money had no home.” They believed any banknote was valuable if it stayed in “free circulation,” or motion. The only danger was that if the bill ever came to rest, its value would “regress to paper.”

“Many country banks were poorly run, but the Farmers’ Exchange Bank was degenerate.”

Of course, by freeing paper money from its uneasy link to specie, the Changery could blithely invest in all sorts of new ventures: buildings (including the hugely expensive Exchange Coffee House), bridges, turnpikes and other costly projects. The result was a new “commercial Eden,” with Dexter, a Changery trustee, as its munificent creator. Boston merchants and businessmen disliked country banks’ banknotes because determining their value was difficult. Plus, because of these banks’ remoteness from Boston, presenting their notes for remittance in specie was difficult. Dexter liked country banknotes for these exact reasons. For him, an impossibly remote bank was the ideal supplier of notes – as long as he was involved in issuing them.

“The burning of the Exchange held a portent, an object lesson: the end of an Icarus tale written first in paper, then in bricks and now in ash.”

In the first decade of the 1800s, Detroit – home of the newly chartered “Bank at Detroit,” or Detroit Bank – was about as far from Boston as you could get by regularly available means of travel. Detroit Bank was capitalized at “$80,000 and no more than $400,000.” Such figures were hugely suspect: “$80,000 was more than double the value of what Michigan produced in a year.” Indeed, precious little economic activity took place in the state’s backwoods and cash was scarce. What was the bank’s true purpose? Ask its founders, who were all paper men from Boston. Indeed, the indefatigable Andrew Dexter Jr. was a major shareholder.

“The bank bills...had ‘less value...than the rubbish now lying in the cellar of the building’. ”

The new bank soon churned out vast reams of paper money. Its notes quickly flooded into Boston. At the same time, the Changery asked the Detroit Bank for a loan. In effect, Dexter and his cohorts applied to themselves for a loan. Not surprisingly, they approved their own loan request. Clearly, they had created the perfect money machine. Dexter used the same ingenuous formula with banks he bought or in which he held financial interests, all in remote New England locations: Pittsfield, Massachusetts; Augusta, Wiscasset and Bucksport, all in Maine, and in Keene, New Hampshire. Many knew Dexter was responsible for showering Detroit banknotes (and other notes, as well) on Boston, but they did not know Dexter’s game. It was real estate.

The Exchange Coffee House

Flush with money that he, in effect, printed or loaned himself, Dexter decided to construct a grand “temple of finance” called the Exchange Coffee House, a place where businessmen and financiers could meet, buy and sell goods and services, enter partnerships and close deals. He planned to fund his new building with mountains of his beloved paper money, using the same “speculative capitalism” that fueled America’s early development. At first, Dexter had a legitimate scheme for the building. By the end, it degenerated to pure scam.

The Farmers’ Exchange Bank

Despite his newfound wealth, Dexter needed other investors to fund his expensive project. At the time, Boston merchants had begun a whispering campaign against the Detroit banknotes. Of course, all of Dexter’s banknotes were light as feathers. The worst ones emanated from another one of his banks, the Farmers’ Exchange Bank in Gloucester, Rhode Island. This thoroughly wretched institution rented ground floor space from the local Masonic Hall, which fronted a dirt street. The bank did not store its meager holdings in a proper safe. Instead, bank officers shoved what little money it had into a dry well – literally, a hole in the floor.

“In 1837, Dexter’s bubble burst for the last time, imploding along with the speculative economies of the city, the region, the nation and beyond.”

Farmers’ Exchange Bank had a particularly bad reputation for not redeeming its notes for specie. For Dexter, that was one of its most salutary features. Indeed, he finagled hard to take it over because of that meretricious reputation. Once in control, he quickly started printing Farmers’ Exchange banknotes. He made the bank’s pitiable cashier, William Colwell, work around the clock signing the notes. The newly printed money went to only one place: Dexter’s coffers in Boston. As soon as new bills arrived, Dexter quickly dispensed them to workers, suppliers and other creditors to keep construction moving ahead on the Exchange Coffee House. It emerged as a grand hotel, business exchange, meeting place and social hall – an unlikely dream made strikingly real – with millions of bricks, tons of mortar, lavish furnishings and stretches of marble at the then-luxury price of $1 per linear foot. At seven stories, it was the nation’s tallest building. A majestic rooftop dome made of tin topped the building like architectural punctuation gleaming in the sun.

“What would Andrew Dexter make of this latter-day market in the paper he made and unmade, and which made and unmade him in turn? He would cackle at the prices, certainly.”

In all, Farmers’ Exchange issued more than $600,000 in banknotes that Dexter used to build the Coffee House. Yet the bank’s dry well safe held a mere $86.48 in coins. Nothing backed Dexter’s banknotes. As the Rhode Island notes flooded Boston, local merchants became suspicious. One of them, Nathan Appleton, instituted a hard-hitting public-relations campaign against Dexter’s suspect currency. When Appleton and a cartel of businessmen refused to take the Rhode Island bills, their trading value plummeted. Soon, they were worth “sixty cents on the dollar, or less.” A cry for bank reform went up in Boston and elsewhere, including Washington, D.C. Rhode Island’s state government shut down Farmers’ Exchange Bank, the first such bank closure in American history.

“The money game had long made ordinary people feel like pawns in some cosmic game.”

Dexter crashed and burned and so, literally, did his spectacular building. On November 3, 1818, the great structure caught fire and burned to the ground. People in Connecticut, Maine and New Hampshire could see the shimmer of the fire’s mighty glow. One night, the Exchange Coffee House, splendid and regal, towered over Boston’s otherwise low-flung environs. The next day, only a decade after it was completed, the building was a smoldering ruin. Like a magician’s trick, which the building was in terms of financial legerdemain, in the end, it was only smoke.

“‘Awful as was the catastrophe,’ one Boston editor recalled in 1872, ‘there were many others amongst us who richly enjoyed it’.”

Wiped out and disgraced, Dexter absconded to Nova Scotia. Staying “a step ahead of his creditors,” he then moved to his uncle’s Yazoo tract in Alabama, where he became a failed land promoter, hustling for “Alabama Town,” later named Montgomery. Embittered, Dexter lamented his “inferior position.” His “big gambles yielded but fleeting gains.” His debts mounted. Paper man Dexter ended up tumbling “through the borderlands” between the U.S. and Mexico, now Texas. Eventually, he returned to Alabama. One journalist said he was locked up as a debtor. Could be. No doubt exists that by 1837, the year he died of yellow fever in Mobile, he was penniless.

Fast Forward Two Centuries

Today, Dexter’s Farmers’ Exchange Bank banknotes are collector’s items. Many people own them, and a great number remain in existence since Dexter printed so many. You can buy one of his “Dexter Dollars” on the Internet. A $2 bill costs about $64. If he were still around, Dexter surely would be pleased at how much his peripatetic paper money has appreciated in value.

About the Author

Jane Kamensky chairs Brandeis University’s history department. She has won numerous, prestigious academic awards and fellowships. The author of Governing the Tongue, she is an expert on North American history before 1830.

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The Exchange Artist

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A Tale of High-Flying Speculation and America's First Banking Collapse

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