To many people, the collapse of the Kirtland Safety Society is a “deal breaker” for Joseph Smith’s Prophetic calling. After all, wouldn’t God make sure a bank set up and run by a Prophet won’t fail? Not necessarily. God uses things (and people!) to accomplish His purposes, and, when His purposes are accomplished, those things (and people) must necessarily wane from the spotlight. When John the Baptist’s job as harbinger for the Saviour was complete, God didn’t even spare his life. Why should He then spare a bank when its job of financing the Kirtland Temple was complete?
But that isn’t what makes the Kirtland Safety Society significant. After all, there are many under-capitalized businesses of any sort that go bankrupt. Before the Federal Reserve System negotiated buyouts of failing banks and FDIC insured deposits, failed institutions usually ended up paying depositors pennies on the dollar (Milton and Rose Friedman (1980), in their book, Free to Choose, said that banks generally had only 12% of their deposits in cash [NY: HBJ, 73].). What made the Kirtland Safety Society unique among failed financial institutions is that it repaid its debts–dollar for dollar [See Marvin Hill, Keith Rooker and Larry Wimmer’s BYU Studies (1977) article, The Kirtland Economy Revisited, 391-475 at: http://byustudies.byu.edu/shop/pdfSRC/17.4HillRooker.pdf].
The closest parallel I could find is the collapse of the Bank of the United States in 1930, where depositors were repaid 92.5 cents on the dollar. Say the Friedmans (1980), “There is little doubt that if it had been able to weather the immediate crisis, no depositor would have lost a cent” . Moreover, other banks refrained from saving these financial institutions for the same reason: bias. The KSS’s neighbors hated the Latter-day Saints, and the BUS’s neighbors were anti-Semites [Ibid.].
All this seems to indicate that, far from being a scam, the KSS had sufficient assets to repay creditors, but was undermined by a cash crunch caused by a deflationary US government.
UPDATE: RoastedTomatoes, you’re right; a hat-tip to you! I did use the wrong source, though that article by Brother Hill, et alii, is a good source. HC 3:174, and 6:429 are the correct source. There may be others.