Wright, The First Wall Street

Sometimes it’s refreshing to step back from all the current political folderol and read about a time when American economic and political systems were being developed. Let me recommend Robert E. Wright’s The First Wall Street: Chestnut Street, Philadelphia, and the Birth of American Finance (University of Chicago Press, 2005). It’s not a new book, but the recent financial turmoil makes it an even more worthwhile read today than when it was published. Readers of all political stripes can find some eerie parallels here and there. In contrast to most books on finance, it’s also very well written.

This post will share a series of (unfortunately disconnected) snippets from the book. They don’t do the book justice, but maybe they’ll inspire readers interested in financial history to turn to the original.

Philadelphia was the financial center of America until 1836. It had the advantage of being the nation’s political capital for the better part of 25 years and its commercial capital as well. Both early U.S. central banks had their headquarters in the Chestnut Street district. Equally important, “Philadelphia’s early financiers were the nation’s greatest innovators, responsible for America’s first forays into negotiable ground rents; marine, fire, and life insurance; commercial, savings, and investment banking; building and loan securities; and securities markets.” (p. 11)

A side note for those who are unfamiliar with ground rents: “Despite its name, a ground rent was really more of a perpetual mortgage than a lease. The buyer got full title to the land. So long as he paid the annual ‘rent,’ which was actually the interest on a perpetual loan, he could do with the land as he pleased. He could even sell it, subject to the ground rent. Best of all, the rent could never increase and the contract never expired. For just a few coins each year, he could secure his economic independence. Before ground rents were effectively outlawed late in the nineteenth century, hundreds of thousands if not millions of people took advantage of their unique attributes.” (p. 19)

Early commercial banks were very cautious lenders. Apparently the Bank of New York made “only ‘one bad Debt of about twenty pounds’ through the first seven years of its existence.” (p. 77) The Bank of North America, whose interest rate was capped by law at 6%, “carefully screened loan applicants, selecting only the best of the best.” Those who were rejected had to go to Chestnut Street’s back alleys and pay considerably more. (p. 38) Surprisingly, the best of the best was not an exclusively male club. “Elizabeth Helm, one of many examples, enjoyed extensive dealings with the Bank of North America as early as 1792, when over $18,000, a princely sum for the day, flowed through her account. She made large cash deposits every fortnight or so, continually drawing down her balance with checks made out to her suppliers. When her account fell a little short, a quick loan bridged the gap until her next deposit.” (p. 79)

Philadelphia’s Chestnut Street may have been the nation’s financial center, but Wall Street was hot on its heels. “Soon after a new institution appeared in Philadelphia, an eerily similar-looking one cropped up in Manhattan. The Bank of New York formed soon after the Bank of North America’s monopoly ended with the Revolutionary War. New York brokers signed the Buttonwood Agreement, which created a proto-New York Stock Exchange, shortly after Philadelphia brokers formed a proto-exchange. The Bank for Savings popped up shortly after the Philadelphia Savings Fund Society organized. Ditto with all three major types of insurance, building and loans, and other financial innovations. Save for ground rents, which New York never adopted, the general rule was: Where Chestnut Street led, Wall Street followed.” (p. 148)

How Wall Street eventually wrested power away from Chestnut Street is far too long a tale to tell here. Suffice it to say that government in the persons of Andrew Jackson and Martin Van Buren waged a fierce campaign against its own central bank--the “monopolistic” Second Bank, founded in 1816 and headquartered in Philadelphia. Nicholas Biddle, “the most storied banker in U.S. history to that time” and “firmly at the helm” of the bank, unwittingly helped them out. (p. 150) Eventually, the Second Bank failed. “Biddle was largely to blame; without board approval, he directed some $16 million into risky cotton speculations and the ill-fated run [on Wall Street banks] was his idea.” The failure of the Second Bank “further cemented Wall Street’s new position atop the nation’s financial system.” (p. 163)