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By Root 7848 0

on the stout, short figure of Nathaniel Prime. A onetime coachman to a Boston merchant, Prime had arrived in New York in 1795. He made money buying and selling bank stocks; married Cornelia Sands, daughter of a wealthy merchant; and became a private banker, holding customers’ funds on deposit and loaning them money. As the business grew, he took in partners—first Samuel Ward, scion of an aristocratic New England family, then the commission merchant James Gore King. In the early twenties the firm moved into loan contracting, a field that Astor’s syndicate had pioneered during the war when it bought government bonds wholesale and sold them retail (a radical departure from the previous practice of selling new issues of stocks or bonds directly to purchasers). Prime, Ward, and King applied the same technique to Erie Canal bonds, buying up large quantities for resale to their clients.

Among their best clients was the highly respected Baring Brothers firm of London. Britain’s leading “American house,” the Barings had sold the bonds of the young republic since its foundation, helped it finance the purchase of Louisiana, and acted on its behalf even during the War of 1812. In 1823 the Barings bought their first Erie Canal bonds from Prime, Ward, and King. Eager British investors snapped them up, and the Barings began to buy more. Other financial houses jumped in, and by 1829 a majority of Erie Canal debt was owned overseas.

Prime, Ward, and King moved on to underwrite internal improvements in the American West. The firm purchased bond issues offered by Ohio, Louisiana, and Mississippi and retailed them to London banking houses. The Bank for Savings too looked west, financing a canal that connected Cleveland, on Lake Erie, with Portsmouth, on the Ohio River. These initiatives were not only fabulously profitable in themselves, but they also ensured the diversion of more and more commerce toward the Erie Canal.

New York’s prominence in national and international banking was enhanced by yet another canal-related phenomenon: the quickening tempo of trade on the floor of the Tontine Coffee House stock exchange. In 1817, no longer content with the old “Buttonwood Agreement” of 1792, the city’s several dozen brokers had formed the New York Stock and Exchange Board, tapping Nathaniel Prime to serve as its first president. The ability of the reorganized market to attract capital was confirmed by the millions of dollars that soon poured through the doors of the Coffee House in pursuit of canal stocks—not only those of the Erie but of private ventures like the Delaware and Hudson (whose promoters set up a grate in the Coffee House to demonstrate the value of anthracite coal as a fuel). The profitable and regular trading in canal securities gave new vitality to Manhattan’s capital markets, but the Exchange also proved a source of instability. In 1825 unscrupulous dealers whipsawed the stocks of the Morris Canal and Banking Company, driving the price up and down until the entire market broke under the strain and required several years to recover fully.

Rampant speculation could be good for the banks, however. Speculators borrowed heavily from bankers, who were happy to make “call” loans—payable whenever the bank “called” or demanded repayment—because the stocks that served as collateral could be sold without difficulty. It was a wonderfully profitable business, and it enabled New York banks to pay higher rates of interest than those in other cities. This in turn induced out-of-town “correspondent” banks to leave their excess funds in Manhattan, swelling the amount available for loans to speculators.

By 1830—less than two decades after construction began on the Erie Canal—New York had overtaken Philadelphia as the nation’s premier money market. Its banks controlled significantly more capital (and were safer too, because the state had just established an insurance fund to guarantee notes issued by member banks). The New York Stock and Exchange Board handled a greater volume of stocks, and its prices, quoted in newspapers throughout the country,