Where Culture Meets Money

(Carlo Allegri/Reuters)
How Wall Street became Wall Street, and how to build on it.

NRPLUS MEMBER ARTICLE H ave you ever wondered how Wall Street became . . . Wall Street? It is an interesting story in that it contains a genuine unicorn: a government “investment” — two of them, in fact — that actually turned out to be pretty good as something more than a make-work program.

The story of high finance begins on boats. In the ancient Mediterranean world, shipping loans were developed as the first real risk-hedging instrument, without which much of the trade of the time might have been too financially risky to undertake. That would have left the Greco-Roman world needlessly impoverished. (No doubt there were gangs of toga-wearing populists at the time lecturing the merchants about how the financialization of the economy contributed nothing to the public good and made good Zeus-fearing Romans dangerously dependent upon foreign goods. Nothing ever really changes.) When trade and a money economy began to reemerge at the end of the Middle Ages, finance took on a new level of sophistication as Genoese financiers developed more complex marine-insurance contracts. The island-dwelling English people had a keen interest in maritime trade, and the group of insurers doing business out of Lloyd’s Coffee House eventually formed the first modern insurance market, today known as Lloyd’s of London.

In the 18th century, on the other side of the world, a few Americans had a big idea: New York City might be made into an economic powerhouse by building a canal that would connect the Hudson River to the Great Lakes, thereby linking the Atlantic shipping trade with the emerging western settlements. What the canal advocates had in mind was shipping manufactures to the interior and bringing agricultural commodities out for export. That was already happening at the time, but on a very limited scale, because goods and people had to be moved by pack animals over difficult terrain and through mountain passes that could be made impassable by a winter storm.

Eliminating ground portage would cut transportation costs radically — by as much as 95 percent. That is the key thing about an infrastructure investment of that kind: By removing certain barriers or creating certain connections, it raises the value of all the capital involved with it. The produce of all that western farmland, and, hence, the land itself, was much more valuable with the canal than it had been without it. New York governor DeWitt Clinton, the canal’s most ardent advocate, was mocked for his grandiose plans, but he was proved right.

The story of finance in New York City was a lot like the story of finance in London: Its origins were linked to the shipping business, and its place of birth was a coffee house — Tontine Coffee House, at 82 Wall Street, a venue purpose-built by an association of stockbrokers to serve as a commercial center. That group eventually became the nucleus of the New York Stock Exchange. New York traders had for years played second fiddle to their Philadelphian counterparts even though New York was the larger city. But the opening of the canal in 1825 changed that, and New York’s emergence as a center of finance in addition to a center of trade in goods was accelerated by another product of the early 19th century: Samuel Morse’s telegraph, developed with the support of a $30,000 grant from Congress used to build a test line between Baltimore and Washington. The business of finance and the business of information technology have been linked since the beginning. Those coffee houses were business centers because they helped to facilitate the exchange of information.

There were losers.

The Erie Canal put a lot of people out of work, and it diverted a lot of income from muleskinners and ancillary businesses along the old overland trade route. The ascent of New York City was bad for Philadelphia, which lost investment and status to the Yankee upstart and has not forgotten it. The supercharging effects on New York-based finance surely increased the income and power of Wall Street financiers relative to shipbuilders and farmers. Contemporary documents from the early days of New York record Wall Street locals complaining about the transformation of their formerly residential neighborhood into a commercial corridor, with rising real-estate prices driving them to the undesirable edges of the city. The telegraph and its descendants laid the foundations for truly global markets and supply chains, disrupting longstanding local and regional business practices and relationships. But only a blockhead would believe that we human beings would be better off if the world had stood still and we were still dragging loads of corn through the Appalachian mountains in wagons.

Another lesson from Wall Street is that success breeds success, because culture matters, which is another way of saying people matter. Financial-services companies set up shop in New York City for so many years because that was where the good people were, in much the same way that the technology business has remained based in Silicon Valley even with the disadvantages imposed by California’s high taxes, expensive housing, and regulatory overreach. This, too, is a familiar story: In the early 20th century, more than 100 automobile companies were founded in the United States, most of them in New England and Ohio. The ones that thrived were mostly in Michigan, which had long been a center for building marine engines and for that reason had a work force that was well-suited to designing and building cars.

You need the investment and the culture. One by itself won’t do. Culture without the investment is only unrealized ambition; investment without the culture is a model for failure. Moving an Apple facility or a financial-services company to the parts of rural America that have the hardest time with economic development would not create a lot of jobs for locals: You’d have to import the highly skilled work force you’d need, and the local benefits would be secondary. That’s the conundrum: There aren’t a lot of jobs in much of rural America because there aren’t enough workers to attract the investment. And you don’t want to move the people there, because the people aren’t there. It is not the kind of problem that lends itself easily to a public-policy fix.

What does this mean for how we think about economic development?

For one thing, it means that the kind of infrastructure projects that President Lincoln and his contemporaries called “improvements” should be evaluated by their long-term effect on capital rather than by their short-term effect on wages or employment. The main criterion for such investments should be whether they make existing capital more productive. We have for too long internalized the nonsensical distinction between labor and capital as though these were separate enterprises and separate interest groups. Building a highway from x to y will create a lot of jobs in the short term, but it is only worth it if there is a good reason to connect x and y. A make-work project is not an investment — it is a welfare program with a work requirement.

Second, leaders in the so-called red states who wonder why their low taxes and lighter regulatory burden isn’t enough to get an Apple or a Facebook to move there should think long and hard about culture. In Republican-leaning Texas, it is progressive Austin and internationally minded Houston that are home to the most forward-looking businesses and industry groups. Dallas does okay, too, but it is missing something at the heart of Austin’s success — and Boston’s success and Silicon Valley’s, too. Which brings us to . . .

Third, universities are great connectors of capital and culture. The presence of world-class universities played an irreplaceable role in shaping the culture of Silicon Valley (Stanford), Boston (Harvard, MIT), Austin (University of Texas), and other centers of American innovation. Institutions of higher learning contributed a great deal to New York City and Los Angeles as well, though those metropolises are too large to be dominated by the influence of a single institution or two. Having a great university is not enough on its own — New Haven and Princeton remain backwaters — but such an institution can be a magnet for innovative people, ideas, and capital. The contemporary conservative habit of sneering at them (as opposed to reforming what needs reforming in them, which is good and necessary work) goes right along with the bumptious cultural posture that has cost the Republican Party the allegiance of the affluent, educated suburbanites and urban professionals who once were its bulwark.

There is more to competitiveness than a low cost of doing business — that is why so much more foreign direct investment comes to the United States than to China, and why the countries that see the most foreign direct investment are mostly not poor: Investors are not flocking to Germany or the Netherlands in search of low wages and tax rates or less regulation. There were many places in the United States where it would have been a lot cheaper to operate a stock exchange than in Manhattan.

If we want to be the home to the next Wall Street or the next Silicon Valley, then we should think about how those ecosystems came to be. And if the answers do not fit into neat ideological narratives, then the problem is probably with our ideologies rather than our history.

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