Capital of Capital: Money, Banking+Power in New York City 1784

Surveying the meeting, a knowledgeable observer would have noted the group’s shared interest in the city’s commercial economy, but also their diverse backgrounds. Most of them, like Samuel Franklin and Nicholas Low, were established merchants, long accustomed to shipping cargoes across the Atlantic and the Caribbean to and from East River wharves. But their numbers also included Alexander McDougall, son of a dairy farmer, who had become a seaman at age 14 and a ship captain, privateer, and trader thereafter. Some of the subscribers were native-born New Yorkers, like Isaac Roosevelt and Comfort Sands, men of Dutch and English ancestry, but others were immigrants. One of the latter, a young Caribbean-born attorney named Alexander Hamilton, had become a prime mover and the most active organizer in the efforts to found the bank.

Most strikingly, the individuals converging on the coffee house that morning represented opposing sides in the revolutionary struggle that had divided New Yorkers over eight bitter years. Only three months earlier, General George Washington and the Continental Army had marched triumphantly into the city, ending a seven-year British occupation and concluding the War of Independence. Now, former loyalists such as Joshua Waddington and William Seton were creating the bank with ardent revolutionaries like McDougall and Hamilton, both of whom had served as officers under Washington. Soon, banks would become a focal point for anger and political controversy in New York and throughout the nation. But for the moment, the new institution represented only economic ambition and growth.

The end of the war confronted New Yorkers with unprecedented opportunities and challenges. The city was now the capital of New York State (1784), and it would soon become the nation’s capital (1785). But New York was also still reeling from the traumas of the British occupation years: runaway inflation, devastating fires that destroyed hundreds of buildings, and recurrent influxes and out-migrations of war refugees. The thousands of redcoats and loyalists who had recently left the city took most of the specie supply—the gold and silver coins that formed the basis of trade—with them into exile. Yet New York entrepreneurs were already seeking to revive the city’s maritime trade and find new markets: in February 1784, investors, including bank supporter Isaac Sears, had sent forth the Empress of China, a ship laden with 30 tons of medicinal ginseng root from the American interior, bound for Canton, to seek a return cargo of chinaware and tea. In the same spirit, the bank’s promoters hoped the new institution would stimulate confidence and economic growth as Manhattan assumed its place among the new republic’s leading seaports. Wherever banks were established, Hamilton later explained to George Washington, “they have given a new spring to agriculture, manufactures, and commerce.”2

Credit—the lending of money for profit—had long been the lubricant of New York trade. The city’s (and nation’s) existing money supply, an odd assortment of foreign coins and paper bills of credit issued as loans and payments by colonial and state governments, had never been sufficient to pay for the cargoes that merchants imported from Britain and elsewhere. As in the colonial era, New York merchants continued to rely on private networks of credit and debt. Importers, usually charging an interest fee for the privilege, allowed the shopkeepers who bought their goods to delay payment until after they had sold the merchandise to consumers for cash. This process might take months as American farmers planted, harvested, and sold their crops for spending money or local store credit. Such chains of credit often stretched from European or Caribbean export merchants to New York importers, from them to local wholesalers and retailers, and finally to the country storekeepers who sold the imported tools, cloth, dishes, sugar, tea, and coffee to farmers and villagers—the final buyers.

Such discounting brought profits to the bank’s shareholders in the form of interest fees collected up front, while easing transactions and accelerating the speed at which the city’s merchants could get ready money to pay their own debts and invest in new commercial endeavors. By the spring of 1785, the bank had already discounted $1.3 million in notes. As one of the bank’s early newspaper ads asserted, its existence “surprisingly augments the force of doing more business in less time and with greater facility to all parties.” This financial liquidity would enable the city’s economy, and its global commercial ties, to grow more quickly.3

The Bank of New-York provided other services as well. It “accommodated” merchants by renewing their loans over time in exchange for additional interest payments. It offered depositors a safe place to keep their business funds, and they could write checks and drafts on their bank accounts to pay creditors. After becoming President Washington’s Secretary of the Treasury in 1789, Hamilton requested that the bank offer its services to the new federal government headquartered in New York City. Hamilton arranged a $50,000 loan to the government, and the bank also came to hold the accounts of most cabinet members, many congressmen, Vice President John Adams, and probably Washington (under the signature of his aide Tobias Lear). In 1794, Hamilton also arranged a $300,000 loan to the government to help fund one of his pet projects, the Society for Useful Manufactures, which sought to turn the village of Paterson, New Jersey, into a planned industrial community. Hamilton thus embedded the bank in his plans for a federal union that promoted commerce and industry, a vision in which cities like New York and their financial resources were the engines. He saw no conflict of interest in a new economy where, he believed, public and private sources of wealth would together foster prosperity and national greatness.

Most critically for New Yorkers outside the exclusive circles of shareholders and depositors, the Bank of New-York and the other commercial banks that followed it issued loans and payments in the form of “bank notes,” backed by the gold and silver coins they held. The U.S. Constitution prohibited the states from directly issuing coins or paper money. But state governments, including New York’s, permitted private banks within state boundaries to issue paper notes, which could be redeemed (exchanged) at the bank for the equivalent value in specie. Supplementing coins and IOUs in circulation, this supply of paper money flowed through the economy, augmenting barter, payment in kind, and other cumbersome and slow forms of payment. Like the merchants’ discounts, bank notes brought ease, speed, and liquidity to the transactions of the broader population both in the city and beyond. As an observer noted of New York City banks in 1818, “large quantities of their paper were always in the hands of the community, and remained for long periods in remote districts of the state.” As banks sprouted up in Manhattan, Albany, Philadelphia, Boston, Salem, Baltimore, and elsewhere, New Yorkers and other Americans increasingly used this paper money, issued by numerous banks in a bewildering variety of shapes, sizes, and designs, when they bought goods and services or received their pay.4

The main branch of the Bank of the United States first offered shares for public sale in July 1791 and then opened on Philadelphia’s Chestnut Street five months later; the New York branch opened its doors on Pearl Street in April 1792. In both cities, however, the bank triggered manic speculation. Convinced that government-backed bank stock would soar in value, many New Yorkers feverishly bought and sold shares as quickly as they were offered. The Merchant’s Coffee House, where most of the stocks were auctioned, became the scene of daily bidding frenzies and rumor mongering by dealers seeking to manipulate the going price. Because Hamilton wanted the bank to be a presence throughout the economy, shares were initially offered in the form of scrip that allowed buyers to put down a small fee and then pay off the balance over 18 months; this permitted less affluent purchasers to dabble in the emerging securities market in the hope of making large profits. One alarmed observer claimed to see “mechanics deserting their shops, shopkeepers sending their goods to auction, and not a few of our merchants neglecting the regular and profitable commerce of the City” as they traded scrip and bank shares.8

Above all, numerous Americans now feared that a small circle of wealthy and influential men—Hamilton and his allies—might use bank capital to buy influence, corrupt government, and subvert the republic. Several of the founding fathers felt this way about banks in general. “An aristocracy of bank paper is as bad as the nobility of France or England,” wrote John Adams, who classified bankers as “swindlers and thieves” (even though he opened an account at the Bank of New-York). Thomas Jefferson, who blamed Hamilton’s bank scrip for triggering “the rage of getting rich in one day,” agreed; to him, a banking system was “an infinity of successive felonious larcenies.” As Benjamin Rush saw it, “private credit and loan offices … [beget] debt, extravagance, vice, and bankruptcy.” Heated disagreements between champions and foes of banking would shape the nation’s political future.9

Indeed, by the mid-1790s, in New York and throughout the country, the controversy over banks was helping to spur the rise of the first national party system, pitting Hamilton’s Federalists against the Democratic-Republicans of Jefferson and James Madison. These political fault lines would soon prompt the founding of New York City’s third bank, the Bank of the Manhattan Company.

Burr, a leading Democratic-Republican politician and a shrewd opportunist, managed to line up the votes in Albany for chartering the water company. But as the vote drew near, he also inserted an extra clause into the act’s final draft, enabling the Manhattan Company to use its surplus capital in “monied transactions or operations.” Federalist assemblymen and state senators overlooked or ignored the clause as they voted the charter into law. Only later did Federalists, including Hamilton, realize that Burr’s “Politico-Commercial-Financial-Bronx-Operation” had enabled Hamilton’s Democratic-Republican political rivals to establish their own bank.10

The Bank of the Manhattan Company, which opened at 23 (later 40) Wall Street in late 1799, became a base for organizing and sponsoring Democratic-Republican Party activities in New York City. Jeffersonians in New York had long complained that the city’s two existing banks were dominated by Hamilton’s Federalists, who loaned to their political supporters and discriminated against Democratic-Republican merchants. Although the charge was exaggerated (the Bank of New-York did lend to some Jeffersonians), Burr’s party now possessed a bank of its own. The Manhattan Company’s directors, although not exclusively Jeffersonian, included men who helped elect Thomas Jefferson president by canvassing and getting out the Manhattan vote in 1800. The bank’s existence also affirmed the rise of an urban, commercial variety of Jeffersonian republicanism which, rather than looking askance at banks, used them to make loans to politically friendly merchants and artisans. “The cause of republicanism … is intimately connected with the prosperity of our institution,” Democratic-Republican De Witt Clinton wrote to the bank’s cashier in 1808. Like the Bank of New-York, the Manhattan Company also attracted female investors, presumably including members of families active in Jeffersonian politics; of the company’s first 388 shareholders, some 53 were women.11

The Manhattan Company’s founding also held other implications for New York banking. The charter established a tradition that connected banks directly to urban development, even though the firm’s water supply system—which ultimately used Lower Manhattan’s Collect Pond, a Chambers Street reservoir, and wooden pipes laid beneath the streets rather than the Bronx River—never proved adequate for the growing city’s needs. And although Burr did nothing illegal by inserting his clause, his subterfuge coincided with the onset of an era in which the chartering of new banks often became a matter of bankers bribing the right legislators in Albany. The 19th century, with new opportunities and risks, was at hand.

There was another, unintended result of the death of the national bank in 1811. When the United States declared war on Great Britain in 1812, the federal government lacked a central bank to help it mobilize the nation’s financial resources to pay troops, buy provisions, and borrow money from the American public. Into the gap stepped a group of savvy businessmen based in New York City and Philadelphia, eager to help the nation win the war, for a price. The German-born merchant John Jacob Astor, already making a fortune in the China trade and in Manhattan real estate deals, became a key New York player; so did a shrewd trader named Jacob Barker. Along with Philadelphia’s Stephen Girard and David Parish, these men became, in essence, private bankers to the U.S. government; the “loan contracting” they undertook for the Madison administration—buying massive blocks of federal war bonds at a discount on behalf of syndicates of investors and then selling them at a profit to retail dealers, investors, and commercial lenders such as the City Bank—foreshadowed the investment banking of a future generation. By the end of the war, Astor, Girard, and others had raised millions of dollars to help the U.S. government fight and survive the War of 1812, while profiting handsomely themselves. The transactions clinched Astor’s connection to the City Bank, which would one day become the nation’s largest bank. They also established a precedent for Wall Street to bankroll America’s future wars.

Merchants were the key players in New York’s early 19th-century banking. Indeed, most “bankers” were primarily merchants who spent a few hours each week reviewing discounts in the bank office and the rest of their time overseeing their own businesses and engaging in a wide range of civic activities. Only gradually did the work of the bank’s cashier, bookkeeper, and clerks become recognized as full-time careers. Even men who, by mid-century, had become specialists in banking were usually veterans of the city’s booming overseas and coastal trade. Philip Hone, for example, had become wealthy as an auctioneer selling imported British goods to Manhattan wholesalers; by the time he was president of both the American Exchange Bank and the Bank for Savings in the 1840s, he had also been the city’s mayor, a backer of a successful canal linking Pennsylvania coal fields to the Hudson River, a trustee of three insurance companies, and a noted philanthropist. City Bank board member Benjamin Marshall, an English Quaker immigrant, was an exporter of Georgia cotton and an importer of English cotton textiles, as well as a founder of the Black Ball Line of packet ships shuttling between Manhattan and Liverpool. For these men, using banks to lend and borrow money (and to diversify their assets) was a natural by-product of their role as “merchant princes” who regularly needed capital to keep cargo ships plying between New York and Liverpool, Hamburg, Charleston, Mobile, Havana, Batavia, Canton, and other ports.

The bank deposited the savings of working-class laborers and servants in accounts earning modest interest accruing from “safe,” presumably low-risk loans the bank’s trustees made on their behalf. Unlike commercial banks, this mutual savings bank—legally owned by the depositors, but managed by volunteer philanthropists—would not discount the IOUs of merchant borrowers, but it would be able to invest deposits in interest-bearing federal and New York State bonds. Working people would learn the value of thrift, accumulation, and the delayed gratification that came from putting wages into savings rather than squandering them on alcohol and luxuries the poor supposedly could not afford. Although many early depositors turned out to be affluent parents opening accounts in order to teach thrift to their children, thousands of laborers flocked to the bank to receive their personal passbooks and deposit whatever savings they could eke out of their pay. So did thousands of single and married women; by 1857, the majority of Bank for Savings accounts belonged to women.

In the four decades that followed the founding of the Bank of New-York in 1784, New York City had gone from a struggling, war-damaged town to, in De Witt Clinton’s words, “the great depot and ware-house of the Western world.” The labor, resources, and mercantile energies of its people had made it the most populous city, the busiest seaport, and the leading immigrant landfall in North America. Encouraged by visionaries like Hamilton, Astor, Barker, and others, New York’s merchants had pooled their capital to found a steadily growing number of commercial banks; poorer New Yorkers put their money into savings banks; and a small number of affluent businessmen pioneered the techniques of private investment banking. In turn, these sources of credit and capital infused the city’s overseas trade, the construction of its vital canal artery to the interior, residential expansion, population growth, and daily work in innumerable direct and indirect ways. Many New Yorkers, like other Americans, continued to fear and resent the power and wealth of banks and bankers and to desire greater popular access to the opportunity and prosperity that bank credit, deposits, and shareholding afforded. Yet few could deny that New York’s primacy as the nation’s Empire City was inextricably linked, as both cause and effect, to its burgeoning banks.13

With the Safety Fund in place and four decades of banking experience behind them, many New Yorkers looked forward to a future in which their financial institutions would play an ever-expanding role at home, across the country, and in trading ports around the world, wherever Americans needed credit to buy and sell goods and make money. No one could foresee that a new decade would put New York’s banks at the center of a nationwide political and economic firestorm.