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Home Community Banking

How working-class New York savers — and a community bank — helped underwrite the Erie Canal

November 4, 2025
Reading Time: 4 mins read
How working-class New York savers — and a community bank — helped underwrite the Erie Canal

The Erie Canal in Lockport, New York, ca. 1855.

By Evan Sparks

Around 9 in the morning of November 4, 1825, a canal boat called the Seneca Chief, towed by steamboats, passed through the mouth of the Hudson River into New York’s harbor. Roused by cannon fire and church bells, tens of thousands had gathered by the river to catch a glimpse of the boat.

Aboard the Seneca Chief was New York Gov. DeWitt Clinton. Accompanied by a flotilla and cheers from New Yorkers, Clinton and his entourage were the first travelers to complete a water passage from Buffalo all the way to New York City on the newly completed Erie Canal.

To formally inaugurate the new era of commerce and transportation in the United States, the flotilla anchored off Sandy Hook. Clinton lifted a wooden cask of water — filled 10 days before from Lake Erie in Buffalo. Clinton pulled the bung and held the cask over his head, pouring the fresh lake water in the salty ocean, a ceremony memorialized as the “wedding of the waters.”

‘A colossal job’

The canal had an immediate and remarkable effect on the young republic. Prior to its construction, there was no easy way to get goods between the growing Midwestern states and the urbanizing east coast. Farmers would have to ship their goods downriver to New Orleans and thence to other destinations. While many had tried to build canals — including George Washington, who invested in a never-finished canal along the Potomac — the Appalachian Mountains defeated engineers.

The only spot in the eastern seaboard where a canal made sense was a stretch of New York state between Albany and the eastern end of Lake Erie. Using the course of natural waterways, like the Mohawk River, and channeling the outflow of the Finger Lakes to water a canal, a group of disconnected dreamers began drawing up plans for a canal.

“It was budgeted at around $8 million, which was not far from the annual expenditures of the federal government at that time,” says John Steele Gordon, an economic historian (and the author of this magazine’s “From the Vault” column). “It was just a colossal job. They were going to have to take 11.4 million cubic yards of material out in order to build the canal — that’s more than three times the size of the Great Pyramid of Egypt.” And they would have to do it with manual and animal labor.

Construction began in 1817 in what’s called the “long level,” a lengthy stretch from Utica through Rochester in the center of the state that required minimal locks. (The engineering obstacles of the western end, where the canal would have to clamber up the Niagara Escarpment to reach Buffalo, and the eastern end, where it would have to traverse the falls of the Mohawk near Albany, were left for later.) The first stretch opened in 1819, and more segments followed.

Paying the bills

The Erie Canal backers had long sought federal funding for the canal, but it got caught up in competition between north and south. (Virginian Presidents Thomas Jefferson and James Madison were wary of the effects a New York canal would have on their commonwealth’s relative position.) European investors scoffed; the Erie Canal was orders of magnitude longer and more difficult than any built before, and they believed Americans did not have the engineering know-how to execute the project.

Instead, the canal became something of a grassroots project. The canal commissioners selected local contractors to be responsible for building individual segments. They reasoned that locals would know the terrain and best be able to manage costs. According to historian Gerard Koeppel, “The canal builders largely remained the modest local farmers and small upstate merchants with a vested interest in the canal’s successful completion.”

The canal was also financed on a grassroots basis. In 1819, the New York legislature chartered the New York Savings Bank under the leadership of Thomas Eddy, a merchant and financier who had pioneered the business of insurance underwriting. Eddy and his cofounders desired to help encourage “provident habits” among working-class New Yorkers who did not have other access to the security of banking.

Restricted by its authorizing legislation to investing in U.S. and state securities, the savings bank immediately began buying canal bonds issued by the state. By the end of 2019, it had $150,000 in deposits, “of which more than $40,000 was invested in canal stock,” writes Koeppel. By 1821, with the canal well on its way to completion, the savings bank held nearly 30% of outstanding canal loans. In 1833, it was the largest single investor in the canal.

Underwritten by bond issues purchased by the bank and other investors, as well as taxes on land adjacent to the canals and tolls on the completed sections, bigger investors got interested. Expenses rose as the canal moved inexorably toward its two ends, but wealthier New York investors rose to meet them. British investors belatedly jumped on the bandwagon, and by 1829, foreigners owned half of the canal’s outstanding debt.

The effects of the canal were immediate and striking. It caused massive population growth in western and central New York, turning Utica, Rochester, Syracuse and Buffalo into some of the nation’s largest cities. It also drove “what’s known as the New England Diaspora, because New England, for all its many charms, has pretty lousy, agricultural capacity,” says Gordon. “The farmers moved from the stony soil of New England with short summers into the rich, deep loam of the Middle West.”

Water transport proved immensely more economical than surface transit for cargo. “To get a ton of flour from Buffalo to New York City before the canal had cost about $120, and had taken a few months,” says Gordon. “With the canal, it cost $8 and could be done in six days.”

And the effect on New York City was unmistakable. In 1800, New York’s port handled about 9% of America’s foreign commerce. By 1860, the success of the Erie Canal and the railroads that eventually accompanied it brought the share to 62%, says Gordon. “The Erie Canal put the ‘empire’ in the Empire State, because all that produce that had gone down the Mississippi now started going through the Great Lakes, to the Erie Canal, to the Hudson and then down to New York City, which became the greatest boomtown the world has ever known.”

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Evan Sparks

Evan Sparks

Evan Sparks is editor-in-chief of the ABA Banking Journal and senior vice president for member communications at the American Bankers Association.

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