The Financial Stage of Economic Development


From a south-facing aerie 21 stories (actually, thanks to triskaidekaphobia, 20) above ground level in Jersey City, New Jersey, it is possible in one sweep of the horizon to take in the entire economic history of New York City, and the geographic factors that determined much of it. Espied in the distance is the ridgeline of Brooklyn, sweeping over to Staten Island, marking the terminal moraine of the last glacial period; the detritus from that glacier lay across the path of the Hudson river and effectively dammed it, with the Hudson eventually carving through at what became known as the Narrows. One tower of the Verrazano Narrows bridge is visible across the mile-wide gateway to one of the best-sheltered harbors in the world, Upper New York Bay.

On the New Jersey Shore, the remains of great shipping empires litter the riverfront. The deepwater piers where railroads met incoming cargo ships are still there, but the railroads themselves are gone, save for the Hudson-Bergen Light Rail, running partially along a former Erie Railroad right-of-way; the port was moved long ago to Elizabeth, NJ, by the Port Authority of NY and NJ, despite the shallower waters there that required Army Corps of Engineering dredging to accommodate the newest container ships. Off in the distance, the southwestern horizon grants a view of Newark, which along with Brooklyn and Long Island City was a manufacturing center that helped make New York City, by itself, 10% of the US GDP during World War 2.

The route to Newark was paved in water by the Morris Canal that connected New Jersey with the Delaware River at Easton, PA. The greatest canal, the nation’s first superhighway, is not visible in any sense, but lies over 100 miles to the North. The Erie Canal was built with New York State money and made New York the premier East Coast port (and ironically created most of its wealth in New Jersey, where the railroads and docks that replaced that water-borne shipping eventually located), providing a shallow gradient along which the goods of the vast inland continent could meet the sea-going vessels.

Scanning back toward the New York side of the river, the sheltered harbor attracted the Dutch as settlers, and their street patterns are visible in the near-distance in the contours taken by the lower Manhattan skyline. (The glaciers that swept over the island made Manhattan the southernmost place on the Eastern Seaboard where rock met sea level, making that skyline possible.) The Dutch colony’s northern boundary of Wall Street was the site where, in 1929, the competition to erect the world’s tallest skyscraper took place between 40 Wall Street and the Chrysler Building. Closer in than 40 Wall, the gaping maw of the former World Trade Center site shows as dry land the river mud that once entombed a Dutch Ship, the Tiger.

Obstructing the view of many of these landmarks is a series of new residential towers, almost all of them having no roots in the second millennium. Glass-walled boxes fill the waterfront where once stevedores sweated; many appear to have ceased construction midway, either because of the oncoming winter, or because of the financial winter that has begun to settle on the landscape. Their million-dollar views have caused many of them to be priced exorbitantly, and the collapse of the financial economy on Wall Street suggests that many will lack buyers at prices sufficient to repay the development costs, much as 40 Wall Street itself made no profits for its builders.

New York, then, started with a tremendous geographical advantage, and grew through several stages: merchant port town as Dutch and English colony, gateway to the vast North American heartland, import-replacing manufacturing powerhouse, financial intermediary to the US and European economies, and ending with a luxury housing bonanza built on top of all that had previously contributed to its previous economic strength. Although the path from trader to manufacturer to financial colossus to fiat-money-exploiting scam artist seems a Gotham-unique tale, it recalls nothing so much as the fate of another great port city, Genoa.

Genoa is often known for its second-city act to its more famous (and tourist-venerated) rival, Venice. A visit in 2007 showed that this is unjust; indeed, it added a new city to the tourist-substitution list for Italy: Genoa for Venice, Ravenna and Verona for Rome, Lucca for Siena (there is no substitute for Florence!). Using the ever-excellent Cadogan Guide as a source, the following history is outlined.

Genoa was one of the four great medieval maritime republics, along with Venice, Pisa and Amalfi. Each built its fortune first on trade, bringing spices from the East and restoring the trade networks severed after the Roman empire collapsed. Trade, while risky, was always profitable. Genoa, not content to profit merely by the economic route to power, undertook to build itself a small empire. It conquered Pisa in the 13th Century, and set about adding territory to its domain; a Genoese, Giustiniani, led the defense of Constantinople in 1453. Conflict with Venice cost it much economic vitality, but its fate was perhaps most sealed when a navigator from it, Christopher Columbus, opened the New World to Spanish and Portuguese dominion, reducing the importance of Mediterranean trade.

Venice soldiered on as a trader and military power, helping defeat the Turks at Lepanto in 1571, but Genoa now pursued a different course. A saying cited by Facaros in the Cadogan guide is that "gold was born in America, died in Spain, and was buried in Genoa." Genoese bankers now became the financiers to Spain, and became wealthy as a result. They moved north of the medieval city and built their lavish palaces on the Strada Nuova (renamed by locals without a shred of pride in their independent history for that centralizing usurper, Garibaldi); unlike the palazzi of the Grand Canal in Venice, many of these buildings can be visited today as public structures, with one housing a university, three of them museums, and most of the rest banks.

Genoa focused less on the things that had made it great, its port and trading abilities, and more and more on financing activities. It began to need to sell off parts of its possessions, with the most fateful divestiture being the sale of Corsica to the French in 1766, three years before Napoleon Bonaparte would be born there, a French Citizen now able to enroll in military school in that country. Napoleon would later end Genoa’s (and Venice’s! After 1100 years!) independence when he invaded Italy in 1797. Genoa would recover economic vitality only in the 19th century when railroads connected it to the manufacturing powerhouse of Milan, allowing it to serve as the port to the world for that great city; the accretion of great structures continued in that century. Much of the medieval and Renaissance city was bombed by order of that old war criminal, but much has been restored today, and makes a fascinating visit (sadly, that most Italian institution, the well-timed [Friday] wildcat railroad strike, kept one writer from exploring Medieval Genoa by foot).

The lessons of Genoa apply to all cities and nations whose path to greatness was built on "the economic means to wealth," but that later sought to use finance to further their ends. The United States, in particular, has used the fiat dollar as a method of tribute from the rest of the world, growing more accustomed to luxury while selling off assets so that the net of foreign asset holdings in the US exceeds that of US holdings overseas by over three trillion of those fiat paper dollars.

New York has likewise suffered from its embrace of financial services and remote government. When its port was its own affair, the state invested its own money in raising its importance; although Austrians will disagree with this expenditure of public wealth, the original Federal system limited the damages to the citizens of New York and those who bought Erie Canal bonds. The railroads and shipping companies made their own private investments in infrastructure, and this profit-seeking behavior enriched the whole region.

New York’s decline began with surrendering control of its port to a less-accountable bi-state agency, the current Port Authority of New York and New Jersey. Its financial dominance was likewise assaulted by the Federal Reserve, chartered by that even-less-accountable consolidated Federal Government. The bubble financing began; the ephemeral wealth and tax collections eventually drove the state budget near to $130 billion, not far from California’s total expenditure, for a population twice the size; the salaries and rents paid in financial services helped drive other industries from the city, not to return. (It will be interesting to see how much tax revenue is collected on the empty buildings constructed at the height of this boom; in any case, they, and the government that expected them to support itself, are now white elephants.)

How far New York will fall remains to be seen. The world seems to have less need of financial engineers who can turn junk mortgages into AAA-rated bonds. The global economic crisis has lessened demand for those expensive waterfront apartments, so New York may not have enough pieces to sell off to maintain solvency. The city will indeed live through interesting times.

There are two hopeful indicators for New York from the tale of Genoa. First, many of the buildings constructed in the financial boom, while uneconomic and literally irreplaceable due to construction costs, are sumptuous and will stand and delight for centuries, as 40 Wall and Grand Central do today. Secondly, when the city returns to its historic advantage centered on its port, a large continent seeking trade with a now-larger world will still require the services of a place where ocean-going ships can interact with the land and quick-witted sharpies can cut fast deals, and New York should then be ready.

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