While London may still rival New York as the world's leading financial center, there is no doubt that Wall Street, located at the southern tip of Manhattan, is the center of American finance. But it was not always so. The very first bank and stock exchange in the United States was actually created in Philadelphia, Pennsylvania, and for a time they were What city, not New York, which served as the mainstay of the American financial world.
However, despite Philadelphia's first-mover advantage, several geographic, economic and political factors helped the Big Apple overtake the City of Brotherly Love to become the nation's leading financial center.
Key Findings
- New York became the financial epicenter of the world, even though Philadelphia had a first mover advantage.
- New York gained ground over Philadelphia through its dominance in commercial trade, thanks in large part to the completion of the Erie Canal in 1825.
- New York became the leader of American finance after the Second Bank of the United States failed to renew its charter in 1836.
Philadelphia story
One of the first signs of Philadelphia's initial financial dominance was the creation of the Bank of Pennsylvania in 1780 and its role in financing the Revolutionary War. As the nation's largest city and operating capital in the last decade of the 18th century, it was home to the nation's first federally chartered bank, the First Bank of the United States. Acting as the de facto central bank, he established Philadelphia as the original center of American finance.
The failure of the First Bank to renew its charter in 1811 for political reasons did not disrupt this supremacy, as financial instability after the War of 1812 contributed to the creation in 1816 of the Second Bank of the United States, also located in Philadelphia. As the nation's only federally chartered bank, and given the special privileges it afforded, the bank exerted a power and influence over the nation's remaining state-chartered banks that was remarkable in the history of U.S. banking regulation.
The Philadelphia Stock Exchange once again demonstrated its place as a leading financial center. Indeed, the Philadelphia Stock Exchange, founded in 1790, predates the New York Stock Exchange (NYSE), and even as late as 1815, London banks turned to Philadelphia rather than New York to buy American securities.
Turning points
Recognizing the dominance of the Philadelphia securities market, New York City decided to formalize its exchange by founding the New York Stock and Exchange Board in 1817, which later became the NYSE. With a new stock exchange and more banks than its southern rival, New York sought to lure investors away from Philadelphia.
By this time, New York had already surpassed Philadelphia as the nation's leader in commercial trade. By 1789 it was a leading coastal trading city, surpassing Philadelphia in import volume in 1796 and in export volume the following year. Although New York's superiority in commercial trade had become clearly evident by 1815, it was not until the completion of the Erie Canal in 1825 that New York's dominance became apparent.
Geographical advantage
New York's superiority in trade was largely due to geographic factors, but a number of more fortuitous events also contributed to it. Not only was New York a central location for arriving European merchants, but its ports proved to be far more convenient than those of Philadelphia or Boston. Being deeper, the Hudson River was much more navigable and less prone to freezing than the Delaware River and Charles River.
New York's geographic advantage was complemented by the construction of the Erie Canal (1817–1825) and the creation of the Black Ball Line in 1818. While the Erie Canal connected the Hudson River to the Great Lakes and thus to the fastest-growing parts of America west of the Appalachians, the Black Ball Line provided the first-ever regularly scheduled transatlantic passenger service. Both the Canal and the Line helped cement New York's place as an American center of commercial trade and a central transportation hub.
As the first port of entry for many immigrants, New York City became a convenient place for them to settle, helping to spur the city's unstoppable population growth, which would grow 10 percent larger than Philadelphia's by 1820, and nearly double that of Philadelphia by 1820. 1860. The flow of immigrants also helped to further increase manufacturing and commercial activity.
Adventurous spirit
These new immigrants also brought with them a more adventurous and risk-taking spirit that contrasted with the more cautious nature of Philadelphia's Quaker heritage. As a result, New York has quickly gained a reputation as a city of innovative businesses with an entrepreneurial spirit that encourages speculative investment behavior. Speculation further increased trading volumes in the New York securities markets, keeping them liquid.
To finance the growing volume of stock trading, a call market emerged in New York. Using securities as collateral, stock traders could borrow money from banks for further speculative investments. This behavior proved mutually beneficial for New York's banks and its stock market, as the banks earned interest on the loans and the borrowed money allowed them to continue trading in securities.
New York takes over
By the 1830s, having become the dominant commercial center of the country, Wall Street now held the major deposit balances of all banks in America. The only thing that really stood in the way of New York's claim to be the nation's leading financial center was the existence of the Philadelphia-based Second Bank of the United States, whose charter expired in 1836.
What irritated Wall Street bankers extremely was the fact that New York was the main source of federal customs revenue, but instead of being deposited in New York banks, it was deposited in the Second Bank. Although then-President Andrew Jackson had his reasons for being hostile to the Second Bank, Wall Street banker interests were given a voice through Martin Van Buren, an influential New Yorker who became Jackson's adviser.
Regardless of the exact motives, the Second Bank of the United States failed to renew its charter in 1836, essentially sealing the fate of New York as the center of American finance. This fate was further exacerbated by the National Banking Acts of 1863 and 1864, which placed New York at the top of the hierarchical banking structure. The 1864 version of the law required all national banks to maintain 15% reserves of legal money in New York.
Bottom line
Despite being home to the nation's first bank and stock exchange, Philadelphia's initial advantages were not enough to maintain financial dominance over New York's growing influence. Using its unique geographic features, New York was able to overtake Philadelphia as the nation's transportation and immigration center.
Thereafter, New York quickly surpassed its southern rival in commercial trade and finally achieved financial supremacy in America, a role it retains to this day.
