How New York Became the Center of American Finance

While New York City is still rivaled by London 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 hasn’t always been that way. The very first bank and stock exchange established in the U.S. was actually in Philadelphia, and for a time it was that city, and not New York, that stood as the pillar of the American financial world. Despite Philadelphia’s first mover advantage, however, a number of geographic, economic and political factors helped New York overtake the city of brotherly love to become the nation’s leading financial center. 

One of the first signs of Philadelphia’s initial financial supremacy came with the establishment of the Bank of Pennsylvania in 1780 and its role in helping to finance the Revolutionary War. As the nation’s largest city and acting capital during the last decade of the 18th century, it would become the location for the nation’s first federally chartered bank – the First Bank of the United States. Acting as a de facto central bank, it established Philadelphia as the initial 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 following the War of 1812 would help to bring about the chartering of the Second Bank of the United States in 1816, also located in Philadelphia. As the nation’s only federally chartered bank – and given the special privileges that came with it – the bank exerted its power and influence over the rest of the nation’s state-chartered banks, which was notable in the history of U.S. banking regulation.

Philadelphia’s stock exchange further illustrated its place as the leading financial center. Indeed, the Philadelphia Stock Exchange, established in 1790, is older than the New York Stock Exchange (NYSE), and even as late as 1815 London banks looked to Philadelphia rather than New York to buy American securities.

Realizing the dominance of Philadelphia’s security exchange market, New York decided to formalize its own exchange by establishing the New York Stock and Exchange Board in 1817, which later became the NYSE. With a new exchange and home to more banks than its southern competitor, New York looked to lure investors away from Philadelphia.

By this time, New York had already surpassed Philadelphia as the nation’s leader in commercial trade. It was the top coasting trade city by 1789, overtaking Philadelphia in the value of imports in 1796, and in the value of exports in the following year. While New York’s superiority in commercial trade was clearly evident by 1815, it would not be fully consolidated until after 1825.

New York’s supremacy in trade has a lot to do with geographical factors, but it was helped along by a number of more contingent developments as well. Not only was New York a central location for inbound European merchants, but its ports proved to be much more convenient than either Philadelphia’s or Boston’s. Being deeper, the Hudson River proved to be much more navigable and less prone to freezing over than both the Delaware River and the Charles River.

New York’s geographical advantage was supplemented by the construction of the Erie Canal (1817–1825), and with the establishment of the Black Ball Line in 1818. While the Erie Canal connected the Hudson River to the Great Lakes and consequently to the fastest-growing parts of America west of the Appalachian Mountains, the Black Ball Line provided the first-ever regularly scheduled transatlantic passenger service. Both the Canal and the Line helped to solidify New York’s place as America’s center of commercial trade and central transportation hub.

As the first port of entry for many immigrants, New York became a convenient place for them to settle, helping stimulate an unstoppable rise in the city’s population that would grow to be 10% larger than Philadelphia’s by 1820 and as much as twice as large by 1860. The flow of immigrants also helped to increase manufacturing and commercial activity even further. 

But these new immigrants also brought with them a more adventurous risk-taking spirit that stood in contrast to the more cautious nature of Philadelphia’s Quaker heritage. As a result, New York quickly developed a reputation for being a city of innovative business enterprise with an entrepreneurial ethos that lent itself to speculative investment behavior. Speculation further enhanced the voluminous trade in New York’s securities markets by keeping them awash with liquidity.

In order to finance the increasing amount of stock trading in New York, a market for call loans developed. Using securities as collateral, stock traders could borrow money from the banks to be used for further speculative investments. This behavior proved mutually beneficial for New York’s banks and its stock market as the banks earned interest off of the loans while the borrowed money allowed for further securities trading. (For more, consider taking a closer look at Wall Street history, the birth of the NYSE, and how bubbles form.)

By the 1930s, having become the nation’s dominant commercial center, Wall Street was now keeping the major deposit balances of all of America’s banks. The only thing really keeping New York from claiming the title of the nation’s leading financial center was the existence of the Philadelphia-located Second Bank of the United States, whose charter was set to expire in 1836.

What had become extremely irritating to Wall Street bankers was the fact that New York was the main source of Federal Customs receipts, but rather than being deposited in New York banks, they were deposited at the Second Bank. While then-President Andrew Jackson had his own reasons for being antagonistic towards the Second Bank, the Wall Street bankers’ interests were given a voice through Martin Van Buren, an influential New Yorker who became Jackson’s advisor.

Regardless of the precise motives, the Second Bank of the United States failed to renew its charter in 1836, essentially determining New York’s fate as the center of American finance. This fate would be further strengthened by the National Banking Acts of 1863 and 1864, which would put New York at the top of a hierarchical banking structure. The 1864 version of the act stipulated that all national banks must maintain 15% reserves of lawful money in New York.

Despite being home to the nation’s first bank and stock exchange, Philadelphia’s initial advantages would not be enough for it to maintain its financial dominance over New York’s growing influence. By utilizing its unique geographical features, New York was able to overtake Philadelphia as the nation’s transportation and immigration hub. From there, it quickly surpassed its southern competitor in commercial trade and finally gained American financial supremacy – a role that it maintains to this day.