We take it for granted today that New York City is the nation's financial capital. But why New York? Why not Boston or Philadelphia, Baltimore or Charleston -- or any of the other East Coast cities? In Capital City Thomas Kessner tells the story of how an undistinguished port city rose to become the center of finance in the United States -- and the world.
With the opening of the Erie Canal and access to the Great Lakes and the Midwest, New York became the principal port and chief trading center of a growing nation. Some of New York's merchants -- most notably the all-but-forgotten Moses Taylor -- discovered that lending money to shippers was more profitable than shipping itself. As shipping prospered and money accumulated in New York, a growing banking center emerged. By the time of the Civil War, New York was the chief financier of the Union cause.
From across the land, New York attracted the driven, ambitious men who would direct the postCivil War expansion of the nation, underwriting the development of the West and the building of the world's largest railroad network. Cornelius Vanderbilt, Jay Gould, Andrew Carnegie, J. P. Morgan, and John D. Rockefeller were drawn to New York's business culture of daring capital, bold investment, and economic venture. New York banks set the interest rates for the nation. New York's stock exchange fixed the price of securities. New York investors financed and dominated the large new corporations, and Wall Street became synonymous with the power of money. Despite panics and depressions, labor movements and populist crusades, Wall Street converted American industry from family-owned businesses to integrated corporations that drew on banking, accounting, and legal services all located in new office buildings in a booming downtown business district. New York was literally reconstructed by business interests that determined the location of parks, transportation, and museums. A new upper-class culture developed and influenced other leading cities.
When John Pierpont Morgan first arrived on Wall Street, not a single industrial concern was listed on the New York Stock Exchange. By the time he completed the U.S. Steel consolidation, the NYSE listed more than 1,000 companies, including the foundation businesses of the twentieth-century economy.
Capital City is the story of how Morgan, Carnegie, Rockefeller, and colleagues no less colorful helped transform New York and change the nation in the process.
|Publisher:||Simon & Schuster|
|Product dimensions:||6.25(w) x 9.25(h) x 1.25(d)|
About the Author
Thomas Kessner is professor of history at the Graduate School of the City University of New York. He is the author of Fiorello H. LaGuardia and the Making of Modern New York, and the recipient of many awards and prizes for research and teaching. He lives with his family in Brooklyn, New York.
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from Capital City
Moses Taylor, the large importer of Cuban sugar, had once promised clients and investors the kind of singular attention that had built the old countinghouses. He promised to make the essential decisions about what to buy and at what price; how and when to sell; and whom to trust with merchandise. But the New York business environment had grown more complex, offering many new opportunities since the time he had begun importing from South America.
As late as 1815, on the eve of New York's commercial boom, finance and credit were limited to face-to-face transactions among merchants who knew and trusted one another. And credit itself was still viewed as an expedient best used sparingly. A merchant who made excessive use of credit was regarded with suspicion, and defaulting on a debt was seen as a moral, not a business, failure. That is why it was considered appropriate to punish indebtedness with prison. The larger business perspective was framed by what has been called a moral economy, where a businessman was expected to charge not the most profitable, but rather the "just" price (based on cost plus a modest profit), and to accept limits on how he made, borrowed, and used his money. He was expected to place pursuit of the general good ahead of his own profits, and those profits that he did earn were to be used in a manner that comported with the community's needs and standards.
The greatly accelerated pace of commerce and its widening reach following peace with England in 1815 wore away the strict constraints of this moral economy. Economic relations based on communitarian ideals yielded before a capitalist urge that focused on profits ahead of other considerations. The impersonal market, with its system of supply and demand, competition and the profit motive, replaced moral criteria as the switching system for the economy.
The new market perspective led to corresponding changes in borrowing. The limited credit market of the moral economy had restricted loans to kin and trusted business clients. One loaned money to trusted acquaintances, and even then only sparingly. But the larger, more active, more dispersed markets after 1815 required an expansion of currency beyond the amount on hand if economic growth was to be sustained. This broad demand for new currency placed pressure on merchants and others in business to extend more loans in order to keep their businesses growing. Without enough hard cash in circulation, only borrowed money could provide the capital for large-ticket modernization, for transforming an agricultural nation into a modern system. Only the fiat money created between lender and borrower could pay for new transport, manufacturing, and trade.
The intense demand for credit (expressed in part through the high rates that loans commanded) loosened habitual hesitations. Borrowing and indebtedness came to be viewed not as a personal failing, but as a way of doing business. Within perhaps a decade, New York's leading businessmen internalized the new notion that debt was a constructive and necessary feature of modern economic growth and that as long as the economy was sound and business healthy, it was possible to create new currency without undue risk and even a high assurance of profit. The law, too, made credit less risky by treating debt and default more leniently, adopting liberalized bankruptcy statutes and ending the policy of jailing debtors who failed to repay their loans.
Moses Taylor had initially declined to advance credit to his clients. He preferred to use his cash for his own business needs rather than to lend it out to others. But Taylor was too keen a businessman to ignore the novel turns of a modernizing economy. Despite his earlier demurrals, by the late 1830s he was discounting notes and procuring bills of exchange for foreign clients.
Taylor learned another important lesson about credit. In the past, when a merchant loaned money to a client, it was a service meant to bolster his own business. If he made money from the loan, it was incidental to his main purpose, which was trade. But as businessmen exchanged pieces of paper obliging them to pay or collect monies with a confidence that only a few years back had been reserved for gold, debt became the primary means for financing business, investment, and speculation. The business of credit of providing loans and other debt changed from being incidental to becoming itself a business that offered handsome returns. Taylor, for example, found that making loans brought him even better profits than Cuban sugar, so he turned more and more of his attention to the credit business, purchasing shares in the New York City Bank and becoming a director in 1837. According to a man who was himself an experienced banker in these years, directors were chosen for their "wealth, commercial experience and influence in attracting a good class" of borrowers. Clearly, Taylor, who had made his first fortune in the well-tracked paths of hemispheric trade, was pursuing new possibilities that extended well beyond sugar.
As he found that he earned higher profits from renting out capital than from keeping it tied up for months at a time in seafaring cargoes, Taylor handed over direction of his countinghouse to a partner and turned to investing and manipulating capital. The man who had earlier resolved to focus on his sugar business, to avoid speculation and protect his integrity, now spent his days evaluating investment ventures and assessing the projections of entrepreneurs seeking loans for new businesses. Entrepreneurs took him into their confidence, asked for his advice, and appointed him to their boards. Others offered partnerships ("& Co." in a firm name signified one or more silent partners) in return for funding. By the 1840s his earnings, once derived exclusively from trade, came largely from interest and dividend income, as Taylor helped lead the transition between the age of South Street's hands-on commerce and the Wall Street era of investment banking and venture capitalism.
The primary source of credit for major undertakings was still in England and continental Europe, but as the United States consolidated its indigenous credit resources, New York's merchants and financiers took the lead in issuing notes, releasing bonds, and injecting capital. From one bank in 1790, the city had twelve in 1825; and by midcentury Wall Street and its environs had become the nation's banking capital and credit had itself become a big business. Notes from its twenty-five banks were widely regarded as superior to all other commercial paper. Merchants around the country willingly paid a premium for "New York Exchange" (Manhattan banknotes) with its universal recognition and easy bankability. Reassured by the sheer volume of New York's money supply and set at ease by a newly established safety fund for Manhattan financial houses, banks from all sections of the country, and from Canada and Europe as well, shipped their balances to the metropolis. Of an estimated seven hundred incorporated banks in the United States in 1850, nearly six hundred deposited their reserves in Manhattan, which held more than 85 percent of the nation's bank balances.
This flood of cash brought rapid expansion (in just two years between 1851 and 1853, forty new banks opened in the city, as over the next four years foreign and domestic deposits jumped by 70 percent) and sharper competition. Banks vying with each other for this new business threw off the musty traditions that had cosseted banking for centuries. The more venturesome introduced interest on deposits and to pay for this innovation initiated what came to be known as the "call market."
In the past, deposits were commonly treated as idle funds that were stored for safekeeping. Now these funds were put to work, to earn money by being loaned out "on call" that is, for an indeterminate period, payable when the bank "called" in the funds. This innovation meant doing risky business with other people's money, but New York banks happily broke with habit and custom to make new business. As a result, the nation's reserves, which in the past had occupied nothing more productive than vault space, were converted through the call loan market into active capital, funding investment locally and economic growth across the nation.
With its rudimentary central government, Washington was in no position to exert any oversight over these activities or to restrain the more reckless among the financial institutions. On their own, Gotham's banks took the initiative to tighten banking practices, but the most consequential product of their collaboration was the New York Clearing House (NYCH). Its origins lie in an effort to solve a rather mundane problem: The soaring volume of business transactions in Manhattan meant that a proliferation of banknotes drawn on local banks were regularly presented for payment to their sister institutions. These notes would then have to be physically transferred to the issuing bank for redemption in gold. These transfers took place at the week's end, which meant that for a few hours each Friday, lower Manhattan's narrow canyons turned into a bedlam of clerks dashing with notes and stressed porters rushing gold to the banks to meet the rain of checks coming their way. Crowds of messengers converged on harried bank tellers, who hastened to complete the transactions while keeping track of the tally. Business slowed to a crawl, and the loan markets spiked each Friday as financial houses competed for funds to make their reconciliations.
The process was primitive, disorganized, and fraught with error. To correct this, the city's leading banks formed the New York Clearing House, a bank for bankers. Initially it was limited to settling the interbank accounts in an orderly fashion (by 1857 the NYCH had put an end to the weekly scramble for funds and was settling accounts of as much as $20 million daily), but this consortium grew into a larger role than anticipated. Through its criteria for membership, the Clearing House enforced reserve requirements. It also served as lender of last resort, tiding members over short-term difficulties. Given its location and the fact that its members were the most powerful financial institutions in the nation, the NYCH came to function as an unofficial central bank, providing more than a modicum of control over banking practices. During the national crisis of the Civil War, the New York Clearing House coordinated the purchase of hundreds of millions of dollars of government securities on behalf of the Union.
This control over much of the discretionary capital in the nation represented an expanded role for New York. As men like Astor, Taylor, and Stewart built phenomenally successful businesses, Gotham's merchant capital and the deposits from around the country with which it was mingled created a national money market that seeded new business growth across the nation. Nowhere was this process of new investment pursued more actively than on New York's market in corporate securities.
The corporation was initially a form of business organization designed to attract financial backing for local and state projects that could not be funded through taxes. These quasi-public corporations built roads, supplied water, erected bridges, and ran ports. In order to make these projects attractive to private investors, state and municipal governments granted them extraordinary privileges. Individual corporations received exclusive rights of way, tax exemptions, powers of eminent domain, and the exceptional protection that limited the liability of investors so that they could not be held personally responsible for corporate debts. Over the years legislatures, eager to promote development, extended the use of corporations, granting its precious exemptions to projects for developing new territories, fortifying outlying districts, chartering universities, and expanding trade. These corporations were not designed with profits in mind, and in fact New York's Erie Canal Company was one of the first transport-related corporations to turn a profit. Its example proved riveting, encouraging the development of transportation corporations around the United States after the 1830s.
The next step in the evolution of corporations came with the first large industrial corporations, the railroads. While some of these companies did involve partnerships with local governments, most railroads were funded by private sources. The rationale for awarding them the prized corporate charters lay in their immense impact on the common economic environment. And there was no denying that impact, as the iron horse compressed space by slashing travel time. Before the railroad, writes Arthur Hadley, "the expense of cartage was such that wheat had to be consumed within two hundred miles of where it was grown." In 1830, with no more than twenty-three miles of track in the entire country, it took three weeks to travel overland from Chicago to New York. Over the next thirty years, rail companies laid thirty thousand miles of track into the wilderness, linking cities, villages, and farms across the land, greatly extending the trading circle. By then the trip from Chicago to New York took just three days.
Many of the larger rail projects were too ambitious for an individual or a set of individual owners to undertake. Such a railroad might form a joint stock company that raised money by selling shares of ownership to investors on the securities markets. The largest of these markets was originally in Philadelphia. But the panic following Andrew Jackson's veto of the charter for the Second Bank of the United States (also headquartered in Philadelphia) ultimately cost the Quaker City its hold on this market in the late 1830s. For a brief moment, Boston, awash with textile and shipbuilding money, stepped into the void, underwriting large business investments. But the Brahmins proved too cautious for this market. "Our rule of action," William Sturgis wrote characteristically, "always is to earn money...& to let corporations get out of debt & keep out of debt." Boston's tightly organized commercial elite formed a circle of conservative men who were more concerned with avoiding loss than venturing for gain.
In the 1840s, textile mills were still the most ambitious investments, and they were capitalized at not much more than around $1 million; Boston's capitalists could handle that level of financing. But as railroads grew into regional carriers and then into entire systems, like the New York Central and the Pennsylvania, capitalization ran into tens of millions. This proved too rich for Boston's tightfisted financiers. Their overcautious business approach and the financial crisis of 1847, which forced a number of Brahmin investment houses to close, put an end to Boston's brief reign as America's investment capital. In 1845, when Moses Taylor sought capitalization for expanding one of his companies, he arranged a bond issue for $100,000 in Boston; by the 1850s, Taylor raised funds for his companies almost exclusively in New York.
Awash in cash, home of the nation's bank reserves and the call loan market, New York took over the leadership of the securities market. In its early days, members of the New York Stock Exchange would come together twice daily in staid surroundings to offer bids as an approved list of securities in municipal bonds and public corporations was read off. On one March day in 1830, thirty-one shares were exchanged; by mid-1850, investors from all over bid in chaotic cacophony on hundreds of thousands of shares of railroad stock, bank securities, and municipal bonds each day.
The Gotham market had proven itself, and in these volatile years of failed European revolutions and ensuing political unrest, it attracted new capital from London, Paris, Geneva, Frankfurt, and Bremen, as investors searched the globe for reliable outlets to invest their speculative capital. On the eve of the great railway boom, the Erie, the New York Central, the Hudson River, the Harlem, the New Jersey Central, and the Reading all turned to the New York money market for their funding. Southern and western roads, which for more than a decade had raised cash in Boston, now issued their securities from New York. There was another change. In the past, bonds had been issued in sterling denominations or made payable in London. Now their principal and interest was payable in New York dollars.
Experienced in executing trades, serviced by a pride of lawyers, accountants, and lenders, boldly innovating such new speculative devices as call loans and margin loans, New York's fertile business environment funded and built the new railroad corporations. Here, Henry Varnum Poor and his editors published the authoritative American Railroad Journal. Gathering information from all over the globe, the journal promoted common standards, dispensed new industry information, and kept an eye on shoddy practices and financial improprieties. Here, also, the Winslow, Lanier Bank established the first specialty house, catering exclusively to the railway industry. Far-flung roads depended on the bank to purchase their rails and locomotives, supervise their finances, and provide management services; for smaller lines the bank even set business strategy. And here in Manhattan were to be found the supercontractors with the expertise and the capital needed to carry out the complex railroad construction projects. (These same firms went on to build America's urban infrastructure, laying sewer systems, erecting waterworks, paving miles of streets, and building public schools across the country.)
By midcentury, Moses Taylor stood at the center of this world of investment and new industry. Enlightened, urbane, well-informed about the imperatives of American business growth, the erstwhile importer of Cuban sugar rode the wave of change in New York's business scene. In the years after he relinquished day-to-day control over his mercantile business Taylor assembled a portfolio that included investment loans, mortgage bonds, real estate, insurance shares, and bank stocks, as well as some businesses that fell to him through loan defaults. His work as director of First City Bank and his investments brought him in excess of $100,000 a year. He had not much altered his modest lifestyle even as his profits kept mounting, so he had a growing cache of discretionary income for which he sought a productive use. This capital he now invested in industries, three in particular that formed the core of the emerging industrial economy: coal and iron mines; the Atlantic Cable telegraph; and the glamour industry of the age, railroads. As an acquaintance remarked, Taylor was a master not only of striking "when the iron was hot, but, when need required, struck the iron until it became hot." In 1856, Taylor assumed the presidency of First City Bank, greatly extending his opportunity to make irons hot.
While an increasing number of Taylor's investments were located far from Manhattan, these dispersed properties were controlled from New York. Taylor's large anthracite coal and iron holdings in Pennsylvania led him to invest in the Delaware, Lackawanna and Western Railroad and to become one of the new road's directors. Initially, this road was to link Scranton, Pennsylvania, with the Erie railroad, but the Taylor-dominated board adjusted these plans to forge a direct connection between the Wyoming valley and New York City. Company founders had followed a policy of maximizing immediate dividends. This too Taylor altered in favor of a more conservative policy that set aside 13 percent of the road's net earnings for a depreciation allowance. Taylor installed handpicked associates to direct daily operations, hire personnel, and upgrade services. Financing and fiscal control was transferred to his own bank.
It did not take long for mine operators in Pennsylvania or railroaders in the Wyoming valley to learn that they had sold more than their debt on the New York market. Accustomed to serving local needs and objectives, these businesses found themselves tethered to a golden yoke of distant capital, with New Yorkers taking over their books, their board meetings, and their business strategies. It was far from all bad, as the New York aegis replaced processes both bewildering and random with rational order and established solid business traditions. Still, this control by remote financiers significantly altered the business calculus of the companies involved, supplanting priorities like local need, regional economic considerations, the preferences of workers, and even the interest of the firm itself in favor of broader corporate priorities.
Taylor, for example, had his coal, iron, gas, and railroad interests patronize one another (rather than local businesses) and work collectively on larger projects. When a number of his coal companies (which extended as far as Chicago) suffered heavy losses during a period of fierce industrial warfare, Taylor ordered these companies to consolidate. He then carved up the territories into competition-free zones, closing up some of the franchises, with painful local effects. The removed reckoning of New York investors with their broad plans and diverse portfolios replaced the narrower contexts of the local economy and the private owner.
Local investors had misgivings about these trade-offs, but the allure of New York's cash overrode these hesitations. This is clear from this letter from a Pennsylvanian, pleading with Taylor to invest in the Lehigh and Lackawanna Railway:
For several years I have worked earnestly and unselfishly for developing the state interest..., but you with one word...can now do in a few months what it would take us years to do....We have met with the usual fate of Pioneers have been able to do nothing except what our limited capital could do. But when it comes to completing 40 miles of Railroad...it will all depend on you as to what is done.
For more and more localities, "what is done" came to depend upon New York-based investors like Taylor.
Why New York? What made New York so different from its principal urban counterparts? If structural attributes provided Manhattan with commercial and financial advantages, they also gave rise to a unique business environment. Charles Latrobe, a perceptive Englishman, compared American cities in the 1830s. Philadelphia, the first city of the new nation before the turn of the century, he found the most elegant and well laid out, but New York was the most "bustling." Even earlier, the British consul had reported that Philadelphia's trade was "on the decline in all its branches....Commercial men here seem to have lost all their accustomed enterprise."
There was no shortage of enterprise in Manhattan. Its merchants exploited every advantage, bent every effort, and sought every opportunity to pursue investment, expansion, and profit. Few who passed through Manhattan missed its uncommon speculative elan, its venturesomeness, and its distinctive egalitarianism. Here new wealth competed with old on equal ground. In this town money was the great equalizer. It dominated discussions, served as sport and culture, and stirred an incomparable competitive environment. Anthony Trollope, visiting in 1862, observed: "Every man worships the dollar, and is down before his shrine from morning to night." "Here," added essayist James D. McCabe, "as in no other place in the country, men struggle for wealth. They toil, they suffer privations, [and] they plan and scheme and execute with persistence that often wins the success they covet." Elsewhere poverty was a misfortune; in New York it was an enemy to be defeated. Aside from its superior initiative, energy, zeal, and inventiveness, wrote one Philadelphian, New York attracted the most ambitious and talented from all over. By 1855, Manhattan held close to 630,000 inhabitants, more than ten times the population at the beginning of the century, and the volume of its exports and imports shot up at an even more remarkable pace.
Like New York, Boston too had a magnificent harbor, and a Baring Brothers correspondent comparing commercial firms in the two cities preferred Boston's. They were "entirely safe," careful, and predictable. Boston's leading maritime families had achieved local prominence back before the Revolution and never relinquished it. Held fast by an integument of kin and tradition, their narrow group of Peabodys, Crowninshields, Saltonstalls, Derbys, and perhaps fifty more interrelated families formed a business circle closed around pedigree and the rules of gentlemanly behavior. Among these elite Bostonians, family was stressed above business considerations. When "strangers...connect themselves in business," wrote Thomas Handasyd Perkins to brother James, "great uneasiness" and "low suspicions" often result. The family firm did bolster dynastic stability, but it also sheltered weak members who might otherwise have fallen from the privileged order. Moreover, it disposed Boston's elite to focus on conserving family fortunes rather than venturing to make them grow. Tormented by fear that the patrimony might be frittered away in unwise investments, Brahmins limited heirs to living off trust account dividends, while sheltering the principal.
In contrast, Gotham nourished a disdain for precedent, for the past's confining influence. New Yorkers placed no Brahmin-type restraints on their bequests, and while many of their successful men came from comfortable backgrounds, many more than elsewhere made it on their own, as did Astor, Stewart, and Taylor. Anson Phelps, America's leading metal importer, began as a poor orphan; millionaire merchant Thomas Tileston's origins were as a penniless printer's apprentice; civic and business leader Philip Hone started at the bottom. New York's wealthy class was fresher, more upstart, and more audacious. Outsiders who rose to the top of the city's commercial houses many of them New Englanders and immigrants imparted to the city a hybrid energy, a blend of experiences and pasts, a stir of backgrounds less deferential to any one tradition or collection of customs. Henry Adams once remarked about Boston: "The painful truth is that all of my New England generation, counting the half century, 1820-1870, were in actual fact only one mind and nature; the individual was a facet of Boston." There was no single New Yorker indeed, no single New York.
Boston emphasized order, preserving capital, and striking a proper balance between commerce and family, profit and culture, scruple and cashbook. Conservatism and prudence signal Brahmin virtues, curbed adventurousness, innovation, and boldness. Boston's leading merchants fashioned their Athenaeum to foster both commercial interest and literary pursuits. No such ambivalence restrained New York's Chamber of Commerce, whose goal was unequivocal: to promote the commercial prosperity of its members. In New York, Henry Varnum Poor observed, the man of action and business supplanted the figure of intellect and religion. The city's modest cultural attainments were respected as ornaments upon worldly success rather than for their own importance.
Every once in a while Gotham offered a sop to learning, as when the Mercantile Society of New York announced a series of distinguished lectures by "Mr. Longfellow, the poet," Horace Mann on education, and "R. W. Emerson, an impressive speaker possessing a peculiar style and mode of thinking," on the philosophy of history. But no New Yorker, no matter how boastful, dared echo Oliver Wendell Holmes's claim about his cherished Boston, that it "is...the thinking center of the continent and therefore the planet...." For all of their superior airs, however, Bostonians bowed before New York's economic power. The same Oliver Wendell Holmes for whom beloved Boston occupied the center of the universe was forced to confess that New York was becoming the "tongue that is licking up the cream of commerce and finance of a continent," while Charles Eliot Norton lamented to James Russell Lowell: "We are provincials, with a very little city of our own....A few years hence and Boston will be a place of the past, with a good history no doubt, but New York will be alive."
Copyright © 2003 by Thomas Kessner
Table of Contents
Table of Contents
Foundations: Licking Up the Cream of Commerce and Finance of a Continent
New York's Napoleon
The Rottenness in New York Will Ultimately Destroy It
The Fall and Rise of the New York Economy
Shaping Modern Capitalism
The Age of Morgan
What People are Saying About This
The Wall Street Journal In Capital City, Kessner has achieved for his subject what James McPherson accomplished for the CIvil War.
David Nasaw author of The Chief: The Life of William Randolph Hearst New York, New York: what a wonderful town - and an even better story, as told by Thomas Kessner in Capital City.
Mike Wallace co-author of The Pulitzer Prize-winner Gotham: A History of New York City to 1898 Graceful and lucid.
Kenneth T. Jackson editor of The Encyclopedia of New York City Thomas Kessner has triumphed again in showing us how the past can help us understand the present.