Telegraphy became immediately useful for the financial markets as it helped spread the scope of participation in investment opportunities. News and gossip about companies and prices were transmitted throughout areas where a rising investment class was emerging. Getting this information allowed investors to make decisions about investing in companies or withdrawing their capital from the financial markets. Telegraphic communications not only assisted financial trading but helped constitute the modern financial trading system.

Three geographic centers of financial activity emerged during the 19th century. Boston, New York, and Philadelphia inherited a trading culture from their Dutch and British immigrants and took advantage of the growing economic wealth in the colonies as well as events in Europe. Philadelphia was the early leader and by the Revolutionary War, the Philadelphia Board of Broker had organized the first American stock exchange. In New York, brokers and traders regularly met under a sycamore tree at what became later 68 Wall Street. In 1792, some 24 of these businessmen signed the Buttonwood Agreement setting up a more formal exchange, although they continued to meet in taverns and coffeehouses to conduct their trade.[1] Boston suffered from the inability to formalize its arrangements, which it did not accomplish until 1834.

Until canals, mining, munitions, railroads, steamships, and the telegraph associated with westward expansion allowed for domestic companies to emerge, financial activity was based on the European powers. American mercantile development was still in its infancy and financial activities were intrinsically bound to Europe. Most trading in the early days of the USA involved government bonds. The Dutch, English, French, Spanish and Portuguese all had extensive trading networks throughout the world and those in the American colonies with money to invest kept a close eye on European events.

England’s power was on the rise due to the power of trading networks, its navy, and prominence as an industrial power. London was surpassing Amsterdam as a port city, aided in part by a national market connected by roads as well as artificial and natural waterways. Great Britain was emerging as the world economy’s reigning superpower and despite its problems with the American colonies, the two were strongly linked by commerce, culture and history.

Travel and communication, intrinsically linked at the time, were crucial issues for the development of American financial trading activities. A good example was the news of the 1776 Declaration of Independence signed in Philadelphia that took as long to reach Charleston as it did Paris, some 29 days.[2] Sailing ships were the primary transatlantic mode of communications, but it took a day more to reach Philadelphia than New York. This meant brokers in New York had an extra day to receive and analyze the incoming information. In some situations, they might head out on horseback to the “City of Brotherly Love” and “use their advance information to the disadvantage of the Philadelphians”. A flag-based semaphore system was set up by the Pennsylvania merchants through the state of New Jersey, connecting hilltops from Philadelphia to New York. News and other information could travel from one city to another in as little as ten minutes.[3]

The successful conclusion of the Revolutionary War set the stage for Wall Street, but not without controversy and a fateful decision for the future of the US. Secretary of the Treasury Alexander Hamilton traded New York’s political leadership, for a the opportunity to solidify its financial dominance. The deal that solidified Wall Street’s financial power was the same one that sent the capitol of the US to the swampy banks of the Potomac River. Hamilton was worried that the debts accumulated by the states for the war effort were not being paid. He feared this would weaken the US’ ability to conduct foreign trade and other countries would not take the new nation seriously. Others, particularly James Madison disagreed, as it required new taxes. Also, states that had paid off their debt resented helping the others. Southern states also feared the growing power of the north. After months of arguing, a deal was struck that sent the federal capitol south to an area near Virginia now known as the District of Columbia. Subsequently, the Treasury issued the $80 million in federal bonds that would be the start of Wall Street’s financial inheritance.[4]

The second funding project that solidified New York’s status as a financial center was a large infrastructure project. The Erie Canal was the largest US public works project in history – until the interstate highway system of 1956. In 1817, the issuance of bonds for the Erie Canal led to the building of the 363-mile artificial river that connected New York City, and thus Europe, to the American heartland. The Erie Canal displaced New Orleans as the intermediating city to the American Midwest and turned Chicago into a financial hub for the West’s bountiful trade in natural resources. It connected New York’s Hudson River to the Great Lakes and solidified Manhattan’s position as the nascent nation’s commercial center.

Chicago grew quickly after 1833 from a fur trading center to a major metropolis providing valuable lumber, wheat, meat and other “commodities” to the rest of the country and Europe. In 1848, the Chicago Board of Trade was formed, the same year telegraph lines connected New York to the “Windy City.” The telegraph may not have been as important for Chicago’s status as an entrepot of nature’s bounty as the grain elevator and the railroad. Still, it provided an important tool for both speculative and arbitrage opportunities and created a degree of regularity for commodity prices throughout the Midwest. Quoting from William Cronon’s award-winning (1991) book, Nature’s Metropolis at length:

In the wake of the telegraph, news of western harvests brought instant shifts in New York markets, while news of European wars or grain shortages just as rapidly changed prices in Chicago. Local events–a drought say, or an early frost–ceased to be so important in setting prices for grain or other crops. If local circumstances forced up prices at one place, the telegraph allowed knowledgeable buyers to go elsewhere, driving local prices back down. As markets became more efficient, their prices discounted local conditions and converged with regional, national, and even international price levels. The wider the telegraph’s net became, the more it unified previously isolated economies. The result was a new market geography that had less to do with the soils or climate of a given locality than with the prices and information flows of the economy as a whole.[5]

At first, messages from the East Coast had to be routed through Detroit and could take some 18 hours to arrive. But by the Civil War, some 50,000 miles of telegraph wire had been constructed throughout the country, and efficiency increased dramatically. In any case, even the communications capability of early telegraph system was a major improvement over the speed of boats and horses. By the late 1850s, The Chicago Board of Trade had become one of the most important commodity markets in the world because of the new communications technologies.

These events meant New York was quickly becoming the center of American commercial activity. Legislative events drove many Philadelphia banking interests to the Big Apple, especially the Pennsylvania decision to outlaw private banking. In 1817, the New York Stock & Exchange Board was established with a listing of 30 stocks, a new constitution, and new rules for trading. In honor of the famous Tontine Coffee House’s “Board Room” where members regularly met, the term “Board” was included in the new stock exchange’s name. The opening of the Erie Canal, which connected the Hudson River to the Great Lakes solidified Manhattan’s position as the nascent nation’s commercial center. Investment banking companies such as Prime, Ward, & King and August Belmont & Company (which represented the House of Rothschild, the world’s largest banking interest) were set up to channel European capital into the New World.[6]

In 1842, the New York Stock & Exchange Board moved into the Merchants Exchange at the intersection of Wall Street and Williams Street. A huge hall, lined with red canopies, it sheltered the daily crowd of indigenous brokers with their strange system of hand signals and the ever-present hum of gossip and negotiations. Trading was conducted in two daily sessions and promptly ended by 3pm. At the end of each session the “authentic news of the stock speculators” was announced. In the mid-1840s, the telegraph was first utilized to transmit information from the stock market to investors and newspapers around the country. In 1845, the Magnetic Telegraph Company was formed and lines were soon being built connecting New York to Boston, Buffalo, Philadelphia, and points further west.[7] Forty words could be sent for dollar and reports containing prices and news but also rumors and innuendoes were well received around the country.

The telegraph accelerated and diffused the U.S. financial system while also centralizing its coordination in New York City. As the young country expanded westward, the telegraph followed to spur investment and coordinate the flow of resources east. The Erie Canal created a vital logistics link from Chicago to New York, helping each become important financial centers and distribution points for the flow natural resources from the American West. The telegraph also helped facilitate capital coming in from Europe, which was crucial for the development of a railroad network throughout the country. As each of these developments occurred, Wall Street continued to strengthen its position as the world’s emergent entrepot and financial cluster. It also was a major driver of information technology, which was proving to be an integral part of the US financial system.[8]

Notes

[1] Information on the emergence of stock markets in the US from In the Market: The Illustrated History of the Financial Markets. pp. 114-115.
[2] Ferdinand Braudel. Civilization and Capitalism. Volume 3: The Perspective of the World. p. 390.
[3] Semaphore system in the US between New York and Philadelphia from In the Market. p. 115.
[4] Already the tensions between the northern and southern states were starting to emerge. They crystallized in a debate between two war heroes, Thomas Jefferson and Alexander Hamilton who together made the fateful decision to move the capital to Washington DC in exchange for the federal government taking on debt of the Revolutionary War.
[5] From Nature’s Metropolis.
[6] Rise of the New York stock exchange from In the Market. pp.122-125.
[7] Standage, T. (1998) The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century’s On-line Pioneers. NY: Berkley Books. pp. 25-55.
[8] Standage, T. (1998) The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century’s On-line Pioneers. NY: Berkley Books. pp. 25-55.

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Anthony J. Pennings, PhD is the Professor of Global Media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Honolulu, Hawaii during the 1990s.

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Category: financial news, financial technology, telegraphic political economy
Tags: Alexander Hamilton > Erie Canal > Great Lakes > semaphore > Telegraph > William Cronon

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