By John Steele Gordon
By all accounts, Philadelphia should have become the financial center of the United States. It was the largest city in the country in 1789, when the Constitution came into effect, and was the temporary capital as well. Being the capital, the Bank of the United States, Alexander Hamilton’s central bank, opened there in 1791.
The country’s first real stock exchange, the Philadelphia Board of Brokers, opened in 1790. And Philadelphia would long be in the forefront of banking innovation. It was home to the first commercial bank (1782), the first mutual savings bank (1816, tied with Boston), the first savings and loan association (1831) and the first national bank (1863).
But by the 1850s, Wall Street had become by far the largest financial market in the country and, indeed, had already become a metonym for the American financial world. Philadelphia was only a distant second.
What happened?
First, of course, was that New York, although devastated by the Revolution and seven years of British military occupation, recovered quickly and began to grow faster than Philadelphia. Its magnificent harbor — with its easy, waterborne access to the interior and southern New England via the Hudson River and Long Island Sound — gave it a larger local market. By 1800 it had become the largest city in the country and its lead only grew in later decades.
Second, the Jeffersonians, opposed to large banks on principle, successfully fought the renewal of the charter of the Bank of the United States in 1811. Without the headquarters of what had been by far the most powerful bank in the country, Philadelphia became just one more financial center. Although a Second Bank of the United States was chartered there in 1816, it never had the clout that the first bank had possessed. President Andrew Jackson, a Jeffersonian to his core, killed it as well in 1836, another major blow to Philadelphia banking.
Third, New York state, taking advantage of the only gap to be found in the whole length of the Appalachian Mountains, built the Erie Canal, which opened in 1825. Previously, the commerce of the burgeoning Midwest, blocked by the mountains, had no choice but to go down the Mississippi and through the port of New Orleans. With the canal, that commerce could now travel through the Great Lakes and the Hudson River to New York City.
New York exploded in size — adding as much as 10 miles of new streets per year — as it quickly became, in the words of Oliver Wendell Holmes Sr., “that tongue that is licking up the cream of commerce of a continent,” and the size of its financial market and banking activity exploded with it.
Then, in the great crash of 1837, Pennsylvania, with a large state debt of $20 million, defaulted on both principal and interest. As the reserves of the big Philadelphia banks were largely invested in their state’s bonds, they were financially devastated by the default. New York state, with a debt of only $2 million (and with a steady revenue stream from the Erie Canal) survived the crisis as did its big banks.
Finally, in the 1840s Samuel F. B. Morse invented the telegraph, which spread rapidly across the country. Financial markets can never be larger than the area within which communication is effectively instantaneous, making local financial markets necessary. But with the telegraph, people across the country could take advantage of the best prices that are always to be found in the largest market. By the mid-19th century, Wall Street had become the only important financial market in the country.
