new york takes its place at the center of the world -- 11/30/15

Today's selection -- from American Colossus by H.W. Brands. At end of the American Civil War, the United States had become the world's largest economy. During the War, national wartime legislation banned state banks from issuing currency, introduced a national currency (the "greenback"), and imposed the first U.S. income tax which had the practical effect of supporting that currency. All of this centralized and boosted U.S. financial activity, and when durable transatlantic telegraphic connections were finally achieved in 1866 -- New York took a giant step toward its place as the center of the financial world:

"The wartime measures diminished the anarchy in the [state bank currency based] money system, but considerable uncertainty remained. The constitutionality of [this] financial program was open to seri­ous question. The Constitution said the federal government can 'coin' money. Did that mean it could print money as well? Did the proscription against state bank notes follow from the com­merce clause, from the elastic clause, or from Treasury secre­tary Salmon P. Chase's imagination? As for the income tax, that seemed a patent violation of the constitutional ban on 'direct' truces not proportioned to population.

Until the courts settled the constitutional questions, the postwar financial markets faced the problem of accommodat­ing the dual money system. Gold dollars and greenbacks com­peted directly with each other for the affections of merchants and investors, and indirectly for the affections of everyone else. ... The relative prices of the two currencies fluctuated according to the laws of supply and demand, and the fluctuating attracted speculators, who tried to anticipate the direction of the market. From anticipation to manipulation was a short, tempting step.

"Gold transactions took place in a special room in the neighborhood of lower Manhattan that had become the financial hub of the country. In colonial days Boston had been the center of finance, followed by Philadelphia in the early national period. But New York's central location, its unsurpassed harbor, and the ambi­tions of the heirs of its Dutch founders made it a worthy rival to its northern and southern neighbors. New York's traders organized themselves on Wall Street in the 1790s, gathering under a but­tonwood tree to forge an agreement establishing rules for buying and selling bonds and shares of companies. The traders eventually moved indoors, gaining credibility with the growth of the city's economy, especially after the opening of the Erie Canal in 1825. The demise of the Philadelphia-based Bank of the United States (at the hands of Andrew Jackson) crippled New York's primary rival, and by the time California gold began flowing east, New York was the clear leader in American finance. The energy of its brokers in selling Union bonds during the Civil War cemented its primacy.

"By that time New York's reputation and reach were international. London and Paris still did more financial business than New York, but the comparative maturity of the European econo­mies caused bold investors to look to developing countries for higher returns. Of the developing countries, the United States appeared the most promising. The rate of return on investments in American railroads and telegraphs, for instance, outstripped that on most investments in Europe. America's periodic panics were disconcerting, but the revolutions and civil wars in Latin America and the mutinies and insurgencies in India and other parts of Asia made the United States seem quite stable in com­parison with those areas. And after the revolutions that rocked Europe in 1848, it seemed more stable than several countries much closer to home. The American Civil War briefly frightened fainthearts among European investors, but long before Appomattox sealed the Union victory, the international investors had written off the Confederacy and were writing American securities back into their portfolios.

"As it happened, the telegraph linked New York to the markets of Europe just as the war was ending. Samuel Morse's invention had spread across the eastern half of the United States during the 1840s and to California in the early 1860s. By detaching commu­nication from transportation (for the first time in history, except­ing the odd smoke signal and semaphore), the telegraph further consolidated American financial markets in New York. The fundamental commodity bought and sold in financial markets is information, and once information slipped the bonds of gravity and friction it tended to cluster where it was most valuable -- that is, in the largest markets. The Atlantic cable extended informa­tion's reach, and, by reducing the message time from London to New York and back from several weeks to several minutes, it allowed European investors to operate in the American market almost as efficiently as brokers and speculators with offices on Wall Street itself."


H.W. Brands


American Colossus: The Triumph of Capitalism, 1865-190


Anchor Books a division of Random House


Copyright 2010 by H.W. Brands


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