Don’t Bet Against New York
The financial collapse of 2008 and the Great Recession have had, not surprisingly, a major adverse impact on the economy of the country’s financial center, New York City. There have been over 40,000 job losses in the financial community alone and both city and state budgets are deeply dependent on tax revenues from this one industry. There has been much talk that New York might take years to recover—if, indeed, it ever can.
But if one looks at the history of New York there is reason for much optimism. The city’s whole raison d’être since its earliest days explains why.
The Puritans in New England, the Quakers in Pennsylvania, and the Catholics in Maryland first and foremost came to what would be the United States to find the freedom to worship God as they saw fit. The Dutch—who invented many aspects of modern capitalism and became immensely rich in the process—came to Manhattan to make money. And they didn’t much care who else came to do the same. Indeed, they were so busy trading beaver pelts they didn’t even get around to building a church for 17 years.
Twenty years after the Dutch arrived, the settlement at the end of Manhattan had only about a thousand inhabitants. But it was already so cosmopolitan that a French priest heard no fewer than 18 languages being spoken on its streets. By that time New Yorkers were trading tens of thousands of beaver pelts a year, and slaves, lumber, oysters, and a myriad of other products as well. New York merchants were soon trading not only with Europe, but with the West Indies, Africa and even ports in the Indian Ocean.
The British began to covet the little city set in the center of one of the world’s great natural harbors, with easy water access to the interior of North America via the Hudson River. The Dutch governor, Peter Stuyvesant, built a wall to protect the city from attack from the north, but in 1664 the British sailed up from the south to put the city under the guns of the Royal Navy and Nieuw Amsterdam became New York without a shot being fired.
The Dutch merchants adjusted quickly and the city continued to expand. The lands along the Hudson River proved well adapted for growing wheat and the British governor gave New York City a monopoly on milling flour, which quickly became a major export. As the 13 colonies grew, four cities emerged as the most important: Boston, New York, Philadelphia and Charleston, with Philadelphia the largest.
Unlike the other three cities, which were only briefly occupied by the British during the American Revolution, New York suffered grievously in the conflict. Under British occupation for seven long years, much of the city was destroyed by two great fires and much of its patriot population fled. After the British (and a large number of loyalists) withdrew, however, the city recovered with astonishing swiftness. By 1800 it had passed Philadelphia in population and has been the country’s largest city ever since.
Then, in 1817, three events produced what would come to seem an annus mirabilis for New York. First, the Black Ball Line was formed to provide regularly scheduled passenger service to Europe, the first such service in the world. New York immediately became the country’s hub for ocean-passenger transportation, which it would remain until the era of modern, long-distance air travel began in the 1970s.
Second, the New York Stock and Exchange Board (renamed the New York Stock Exchange in 1863) was formally organized. Philadelphia was still the most important financial center, but New York would overtake it in the 1830s when Pennsylvania defaulted on its state debt, devastating many Philadelphia banks. By the 1840s “Wall Street” had become a metonym for the American financial world. By the 1850s, thanks to the telegraph invented by Samuel F.B. Morse (a New Yorker, of course), which allowed traders all over the country to trade there, it had become the only important financial market in the country.
It was, however, a market devastated by panics roughly every 20 years in the 19th century, when “the immense fortunes which we heard so much about in the days of speculation . . . melted like the snows before an April sun,” as former Mayor Philip Hone wrote after one of them. But each time, as the American economy recovered and grew ever larger, so did New York City.
Most important, in 1817 the digging of the Erie Canal began. This huge project—it would be the longest canal in the world when completed in 1825—would connect New York City with the fast-growing areas of the country west of the Appalachian Mountains. Produce that formerly had to be shipped down the Mississippi and through the port of New Orleans to reach eastern and European markets could now flow through New York.
And flow it did. New York City quickly became what the poet Oliver Wendell Holmes (the father of the Supreme Court justice) called “that tongue that is licking up the cream of commerce and finance of a continent.” In 1800, 9% of the country’s exports had passed through New York. By 1860 it was 62%. In 1820 New York had about 10% more people than Philadelphia. In 1860 it had twice as many.
New York became the biggest boom town the world had ever seen, roaring northwards up Manhattan Island at the rate of two blocks a year. Since Manhattan is about two miles wide, that meant that the city was developing about 10 miles of new street-front per year, year after year after year. No wonder John Jacob Astor is supposed to have said on his death bed that his only regret was not having bought all of Manhattan.
The Civil War might have dealt New York a crippling blow, for the city brokered most of the South’s vast cotton trade. Indeed, so important was the cotton trade to the city that in 1861 Mayor Fernando Wood actually suggested that the city follow the lead of the Confederacy and secede from the Union.
But the war proved a bonanza for the city as the national debt soared from $65 million to $2.7 billion, and a war-induced boom caused industry to expand rapidly. Wall Street exploded in size as federal and state bonds flooded the market, and industry issued securities to finance expansion. By the war’s end New York was second only to London as a world financial center.
By the turn of the 20th century, New York was the equal of London, both as a financial center and as a port. It had also become a major center of manufacturing. With upwards of a million immigrants a year flowing through New York and supplying cheap labor, New York turned out clothing and a multitude of other light manufactures. Like Britain before it, New York had become the workshop of the world.
The stock-market crash of 1929 and the Great Depression that followed it again devastated New York. Wall Street hemorrhaged jobs as the Dow lost 90% of its value. Co-op apartments on Park Avenue were being given away to people who would pay the maintenance. Hoovervilles sprang up in Central Park and along the East River.
But only 15 years later, after World War II, New York was the center of the world, the richest and largest city in the country that, untouched by the war, had 50% of world GDP. But while New York was immensely rich and powerful, it was not well governed. To pay for ever-rising welfare costs, the city raised taxes again and again and still had to borrow to meet current expenses, hiding the fact with phony bookkeeping.
Businesses that once had no choice but to have their headquarters in New York began moving to the suburbs and to other cities as communications costs declined. Cheaper transportation allowed manufacturing jobs to bleed away to places that had lower labor costs. Corruption on the city’s waterfront caused shippers to look for other ports and New York lost its place as the world’s largest.
But new opportunities—in publishing, advertising, fashion and communications—replaced old ones, and the city remained a magnet for immigrants. It is the only major city in the Northeast quarter of the country not to have suffered a major loss of population in the postwar suburbanization of the country. Indeed, its population is larger than ever.
With the ferocious bear market of the early 1970s reducing tax revenues and Wall Street banks refusing to finance more borrowing, the city went broke. The streets were filthy, the subways erratic and graffiti-ridden. A seat on the New York Stock Exchange cost less than twice what it cost to buy a taxi medallion.
But once again the city rose from the depths. Some competent mayors and strict oversight by a financial control board allowed the city to get back on its fiscal feet. Attacking quality-of-life crimes, such as graffiti and littering, greatly improved the city’s appearance. An astonishing reduction in street crime made New York the safest large city in the country.
Equally important, “May Day” (May 1, 1975, when fixed broker’s commissions were abolished), the end of the 1970s inflation, and the great world economic expansion that began in 1982 caused Wall Street to see the greatest and most protracted boom in its history. Over 25 years, the Dow Jones Industrial Average soared from 780 to over 14,000. Then came the collapse of Lehman Brothers a year ago. The great boom was over and New York’s most important industry was once again devastated.
Only time will tell if New York will do what it has done so many times: recover from economic disaster to become bigger, better, richer and more diverse than it was before. But I wouldn’t bet against it.
Deep within the heart of this vast metropolis—like the child within the adult—there is still to be found that little hustly-bustly, live-and-let-live, let’s-make-a-deal Dutch village. And the creation of wealth is still the city’s dearest love.
Mr. Gordon is the author of “Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt,” out in a revised edition by Walker & Co. early next year.
By JOHN STEELE GORDON
Wall Street Journal