How New York Grew to become the Middle of American Finance
While London can still rival New York City as the world’s premier financial center, there is no doubt that Wall Street on the southern tip of Manhattan is the center of American finance. But it wasn’t always like that. The very first bank and stock exchange in the United States was actually founded in Philadelphia, PA, and for a time that city, not New York, was the pillar of American finance.If youIf you
Despite Philadelphia’s first mover advantage, however, several geographic, economic, and political factors contributed to The Big Apple overtaking the city of brotherly love and becoming the country’s premier financial center.
The central theses
- New York City became the world’s financial epicenter, despite Philadelphia having a first mover advantage.
- New York won over Philadelphia thanks to its dominance in commerce, largely thanks to the completion of the Erie Canal in 1825.
- New York became a leader in American finance after the Second Bank of the United States failed to renew its charter in 1836.
The Philadelphia story
One of the first signs of Philadelphia’s initial financial supremacy was the founding of the Bank of Pennsylvania in 1780 and its role in funding the Revolutionary War.If youAs the country’s largest city and capital during the last decade of the 18th century, it became the site of the country’s first state-chartered bank – the First Bank of the United States. As the de facto central bank, it established Philadelphia as the first center of American finance.If youIf you
The First Bank’s failure to renew its charter in 1811 for political reasons did not disturb that supremacy, as the financial instability after the war of 1812 would contribute to the charter of the Second Bank of the United States in 1816, also in Philadelphia. As the only nationwide chartered bank in the country – and given the special privileges that came with it – the bank wielded its power and influence over the rest of the country’s state-chartered banks, something remarkable in the history of U.S. banking regulation.If youIf you
The Philadelphia Stock Exchange has further demonstrated its place as the leading financial center. In fact, the Philadelphia Stock Exchange, founded in 1790, predates the New York Stock Exchange (NYSE), and as recently as 1815 London banks were looking to Philadelphia rather than New York to buy American stocks.If youIf you
Recognizing the dominance of the Philadelphia security exchange market, New York decided to formalize its exchange by creating the New York Stock and Exchange Board in 1817, which later became the NYSE.If youWith a new stock exchange and home to more banks than its southern competitor, New York wanted to lure investors away from Philadelphia.
By then, New York had surpassed Philadelphia as the nation’s leading retailer. It was one of the most important coastal trading cities in 1789, overtaking Philadelphia in value of imports in 1796 and in value of exports the following year. While New York’s commercial superiority was clearly evident in 1815, New York’s rise was not evident until the Erie Canal was completed in 1825.If youIf you
New York’s supremacy in retail has a lot to do with geographic factors, but has also been aided by a number of more contingent developments. Not only was New York a central location for incoming European traders, but its ports also proved much more convenient than those of Philadelphia or Boston. The Hudson River was deeper and found to be much more navigable and less prone to freezing than the Delaware and Charles Rivers.
New York’s geographic advantage was supplemented by the construction of the Erie Canal (1817–1825) and the establishment of Black Ball Lines in 1818.If youIf you If youWhile the Erie Canal connected the Hudson River with the Great Lakes and thus with the fastest growing parts of America west of the Appalachian Mountains, the Black Ball Line offered the first regular transatlantic passenger service. Both the canal and the line helped solidify New York’s place as America’s commercial hub and central transportation hub.
As the first port of entry for many immigrants, New York became a convenient place to settle, resulting in inexorable population growth in the city that would be 10% larger than Philadelphia’s by 1820 and up to twice the size in 1860.If youThe influx of immigrants also helped to further increase production and trading activity.
The adventurous spirit
These new immigrants also brought with them a more adventurous risk-taking spirit, which contrasted with the more cautious nature of the Quaker heritage in Philadelphia. As a result, New York quickly developed a reputation for being a city of innovative companies with an entrepreneurial ethos conducive to speculative investment behavior. Speculation further fueled voluminous trading in the New York securities markets by flooding them with liquidity.
To finance the increasing stock trading in New York, a market for call loans developed. With securities as collateral, traders could borrow money from banks to use for further speculative investments. This behavior proved mutually beneficial to New York banks and the stock market, as the banks earned interest on the loans while the money borrowed enabled them to continue trading in securities.
New York wins the upper hand
By the 1830s, when Wall Street had become the dominant trading center in the country, it now retained the most important deposits of all American banks. The only thing that really kept New York from claiming the title of premier financial center in the country was the existence of the Philadelphia-based United States Second Bank, whose charter was scheduled to expire in 1836.If youIf you
What had become extremely irritating to Wall Street bankers was the fact that New York was the main source of federal customs revenue, but instead of being deposited with New York banks, they were deposited with Second Bank. While then-President Andrew Jackson had his own reasons for opposing Second Bank, the interests of Wall Street bankers were expressed through Martin Van Buren, an influential New Yorker who became Jackson’s advisor.
Regardless of the motives, the Second Bank of the United States failed to renew its charter in 1836, which essentially determined New York’s fate as the center of American finance.If youThat fate would be further strengthened by the National Banking Acts of 1863 and 1864, which would put New York at the top of a hierarchical banking structure.If youThe version of the law of 1864 stipulated that all state banks in New York must hold 15% of the legal cash reserves.If youIf you
The bottom line
Although Philadelphia is home to the country’s first bank and stock exchange, the initial advantages would not be enough to maintain its financial dominance over the growing influence of New York City. Leveraging its unique geographic features, New York has overtaken Philadelphia as the country’s hub for transportation and immigration.
From there, New York quickly outperformed its southern competitor in trade and eventually gained American financial supremacy – a role it maintains to this day.