By John Steele GordonAs a thoroughfare, Wall Street is unimpressive. Narrow and just six blocks long, it runs between Trinity Church and the East River. But as a metonym for the world of American finance it is mighty indeed.
Philadelphia, however, was the country’s first financial center and was highly innovative when it came to banking. Indeed, the Philadelphia area saw the creation of the first commercial bank, the first central bank, the first mutual savings bank, the first savings and loan and the first national bank in the country. It also had the country’s first real stock exchange.
Because it was the nation’s capital at the time, Hamilton’s Bank of the United States was established there in 1791 and that, ipso facto, made Philadelphia the center of American banking.
But when the Erie Canal opened in 1825, the produce of the Middle West that had once necessarily flowed down the Mississippi to New Orleans could now flow through the Great Lakes and the canal to New York and reach East Coast markets more quickly and at lower cost.
In the words of the poet Oliver Wendell Holmes, the father of the Supreme Court justice, New York quickly became “that tongue that is licking up the cream of commerce of a continent.”
With New York a boomtown, its banks and exchanges—clustered around Wall Street—soon grew to be the equal of Philadelphia as a money center. Still, with the Second Bank of the United States, headed by the Philadelphia aristocrat Nicholas Biddle, Philadelphia easily could hold its own.
But President Andrew Jackson hated banks and paper money and was determined to kill the Second Bank, a major blow to Philadelphia banking. In 1832, he vetoed the rechartering of the bank and began moving the large federal deposits there to what were soon dubbed by Jackson’s political enemies “pet banks” in western areas. This uniquely American decentralized approach to banking—frequently addressed in this column—is why, unlike countries like Canada or the United Kingdom, we still have nearly 5,000 banks in this country and dozens of large and regional institutions.
With this influx of deposits, the pet banks were able to greatly expand lending to land speculators, and speculate they did. Federal land sales had averaged about $2.5 million a year in the early 1930s. By the summer of 1836 they were running at $5 million a month. Jackson was determined to stop the speculation and on July 11 he issued the “Specie Circular” as an executive order. Except for those who actually intended to settle on the land they bought from the government, land buyers now had to pay for the land in gold or silver.
Needless to say, this brought the speculation to an immediate halt and increased the demand for specie among the western banks, draining gold and silver from eastern ones. Worse, the federal deposits in the pet banks were scheduled to be turned over to the states on Jan. 1, 1837. The pet banks began calling in their loans, and the highly illiquid land speculators began to default in large numbers, causing many of the banks to fail. A wave of bank failures swept eastward and plunged the country into a deep depression.
Pennsylvania at that time had a very large state debt, over $20 million. When the state’s revenues fell sharply in the depression, it could meet neither the principal nor the interest and defaulted. Many of the Philadelphia banks, holding large amounts of state bonds, soon failed, and Chestnut Street was devastated.
New York State, with a state debt of only $2 million (and large revenues from the Erie Canal) had no trouble meeting its obligations. Wall Street banks were able to weather the storm and soon dominated American finance. They never looked back.