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CHAPTER 2

“An Enlarged American Scale”

Incorporated banking was just one activity that interested early American political entrepreneurs. The state had as its sovereign power the ability to bestow a charter, monopoly grant, or other exclusive privileges on any individual or coalition. Among politically connected would-be investors and directors with financial and political interests outside Manhattan, transportation ventures were often just as attractive as financial ones. In fact, to the extent that internal-improvement promoters from upstate New York favored the chartering of banks, it was often with an eye toward steering bank capital and credit toward the construction of turnpikes, canals, and other transportation projects that would make upstate land more desirable and salable by connecting it to marketplaces.

The scale of potential profits to be generated by transportation development in northern and western New York was large enough that contemporaries found potential profits difficult to calculate. By one measure, New York’s state government in 1790 possessed $75 million in unsold public lands. Meanwhile, in the western part of the state two Massachusetts merchants headed a syndicate that either owned or owned the right to buy from Iroquois tribes six million acres of land that stretched to Lake Erie, for which they had paid $1 million in 1788.¹ For all the vastness of these expanses, however, the most valuable land in the state was concentrated along a narrow ribbon: the banks of the Hudson River. This was not because soil elsewhere was infertile or unusable but because it could not be reached. All but the most durable agricultural products shipped to New York City or Albany from faraway farms spoiled before arriving or became so expensive because of shipping costs that it was impractical to attempt such trade. The only way to render such distances irrelevant was to increase the speed, quantity, and transparency of exchanges by altering both the physical and the institutional landscape of the state.

Although people living far from cities were most directly injured by this status quo, political entrepreneurs who speculated in upstate and distant land purchases were better positioned to persuade state lawmakers to adopt remedies. In the early 1790s, a coalition of politically connected land speculators and bank promoters lobbied New York’s legislature to incorporate two companies that would be charged with building canals northward and westward from Albany. At the time, the city itself had a population of just several thousand people. It was situated, however, in Albany County, one of New York’s most populous, with more than 75,000 inhabitants.²

These canal projects promised almost immediate benefits: just the prospect of slashing shipping costs could reward land speculators with speedy profits as soon as they could unload their holdings onto ambitious upstart farmers. For some promoters and lawmakers, longer-term interests were also at stake: a desire to consolidate the vast territory of New York State by populating it with settlers, some of whom would dispossess Iroquois Indians and connect New Yorkers across the state’s spanning stretches. There were also nationalist reasons to support the projects: forming commercial connections to easterly markets would speed the integration of western states and territories into the federal union.³

However, for all the gains, financial and political, promised by the two canal companies, both faltered. The Northern and Western Inland Lock Navigation Companies had been created alongside a new Bank of Albany, the state’s second bank. The canal companies were chartered on 30 March 1792 and the bank’s petition for incorporation was approved by the legislature on 2 April 1792. The bank and canal companies shared many of the same investors and sponsors, most notably Philip Schuyler, the onetime general and former U.S. senator who lobbied for all three incorporations from his seat in the state senate. When they were incorporated, the canal companies counted Federalists, anti-Federalists, and future Republicans among their directors and shareholders, including Stephen Van Rensselaer—likely the wealthiest man in the state—as well as Chancellor Robert R. Livingston. Despite having this political and financial capital at their disposal, however, the companies soon ran short on funds and repeatedly found that their charters, crafted by the legislature to restrain the powers and privileges that were inherent in state-issued grants of incorporation, hobbled them from fully executing their missions. Just months after the companies were incorporated, Schuyler and the companies’ directors returned to the legislature seeking to amend their charters so that they could acquire wider rights of way—the amount of land bordering either side of the canal. They needed this land not only to cobble together a commercially viable route for their projects but also to have enough room to do the practical work of clearing that land of trees and obstacles while doing construction. Legislators overwhelmingly supported this request over the property-rights objections of some state jurists and residents of affected counties.⁴ The companies’ dependence on lawmakers turned out to be chronic. Neither corporation was able to sell enough stock shares to give it the money to complete its work, so the companies’ directors repeatedly sought and were often granted relief by the legislature, both in the form of loans and as outright grants of cash.⁵

Figure 2. Stock certificate (probably 1797) issued by the Western Inland Lock Navigation Company. Note that the Northern and Western Companies shared stock certificates, leaving a blank space before “Inland Lock Navigation Company” to be filled in as needed. Source: Private collection.

Although the canal companies’ charters, in retrospect, left the companies inadequately capitalized to perform the scale of their required work, legislators were not ultimately responsible for their failure; the companies’ directors and managers did more than their part to reach that end. As president of both firms, Philip Schuyler personally mismanaged the companies’ operations and finances while attributing stumbles and opposition to his rivals’ “corrupt motives”—a serious accusation to lodge in the early republic. In 1793 Schuyler appointed himself as the Western company’s engineer even though he had no experience or expertise in the field. Two years later, Schuyler began hiring Irish convicts who were unpopular with locals; he paid them so little that they went on strike. In 1796 the Western company’s already decaying wooden locks opened and began charging toll rates so high that petitions flooded the legislature in opposition. By 1797 the Northern company folded with more than $100,000 in debt, while the Western company’s most important asset was the right of way it would later sell to the state of New York before construction began on the Erie Canal in 1817. By then the company was almost entirely owned by speculators from New York City.

In a book about early American political economy, it is easier to choose to write chapters about state-chartered enterprises that either were successful or collapsed after many decades of longevity. Short-lived or poorly run firms do not loom large in historiographies of business or economics mainly because of survivorship bias in the selection of case studies and also because companies that failed in the 1790s did not leave behind large paper trails of letters, account ledgers, or legal and legislative records. Failed firms never had the chance to have memoirs published commemorating their founding or subsequent anniversaries; the principals in those firms were understandably reluctant to revisit their mistakes in print or commit them to posterity, and often the papers related to those businesses were never kept, let alone archived.⁶ The available source bases for examining companies like the Northern and Western Inland Lock Navigation Companies are therefore thin.

Although the companies themselves may be difficult to reconstruct in this instance, the lessons that contemporaries took away from the failures of New York’s early canal policies are readily accessible. In fact, the Erie Canal that was eventually constructed in 1817 was designed, financed, managed, and organized in response to the perceived shortcomings of these two canal companies that had been chartered twenty-five years earlier. Most notably, the legislature’s decision to finance the Erie Canal with debt—in the form of bonds—rather than through the sale of ownership-conferring stocks, did not arise because legislators had turned hostile to corporations or monopolies in 1817. To the contrary, most lawmakers were themselves shareholders or directors in state-chartered enterprises and were therefore familiar with the habit of structuring the state’s marketplace with the use of public-private mixed-economy institutions. But this firsthand experience was also furnished with knowledge about what had happened to the Northern and Western Inland Lock Navigation Companies, enabling those later canal promoters to anticipate the problems that arose when private and public interests diverged within a transportation-infrastructure corporation.

What, then, had they learned?

One of the most high-profile writers on the political economy of canal policy during the 1790s was Elkanah Watson, the onetime director of the Western Inland Lock Navigation Company who was later ousted by company president Philip Schuyler over their clashes concerning the management of the firm. When he first joined the company, Watson was a peripatetic 35-year-old merchant who had moved to Albany from North Carolina after a series of business failures in the West India trade. Watson’s memoirist proudly recalled him moving to the town when it was home to no more than five families; by the 1780s, he was known as “that paving Yankee” for initiating repairs and improvements to the city’s main thoroughfare, making him one of Albany’s first authentic political entrepreneurs.

Although it drew forth his enthusiasm, the idea of building a canal to stretch from Albany, which lies on the northern end of the navigable portion of the Hudson River, westward to Lake Ontario or Lake Erie was hardly an original idea when Watson began writing on the subject.

In 1724 the colonial Province of New York’s surveyor, Cadwallader Colden—father of the future Erie Canal memoirist—proposed linking the Great Lakes to the Hudson River. As Colden observed, the vast, unsettled, and undeveloped Southern and Northern tiers of New York were served by waterways that were neither navigable nor oriented to boost commercial interests. Looking at a modern-day map of New York’s rivers tells the same story: the Susquehanna River basin leads to the center of Pennsylvania, the Delaware and Neversink Rivers hastily leave the state to bisect Pennsylvania from New Jersey, the St. Lawrence basin carries travelers northward to Quebec, and the Finger Lakes feed the Oswego’s drainage into Lake Ontario. Colden’s written tour of the province envisioned joining the Atlantic Ocean to Lake Erie via the Hudson and Mohawk Rivers, followed by traveling on the Oneida, Oswego, and Seneca Rivers, which eventually leads to the fierce maw of Niagara Falls. There, a fifth of the fresh water in the world makes a 90-degree turn before falling 170 feet from Lake Erie into a churning spiral of Lake Ontario. In the eighteenth century, only the Hudson River could carry goods from the interior of New York to another in-state port or marketplace. Connecting the state’s interior to the Hudson promised to direct trade inward, developing a western market within New York that could be integrated with the state’s eastern portions. Without such improvements—large, sustained, and coordinated investments in the construction of artificial roads and routes—the potential for economic development and agricultural improvement in New York would remain strangled by nature. With the exception of the Hudson River, the state’s rivers all seem to flow the wrong way.⁷

Drawing inspiration from Colden’s vision, an Irish-born engineer named Christopher Colles in 1784 presented the New York legislature with a proposal to begin “removing the obstructions” on the Mohawk River as part of a larger plan to “promote” both the “settlement of the interior country” and “inland navigation.” Submitted alongside petitions for the incorporation of banks and a Chamber of Commerce in New York City, Colles described a plan to “let a number of Gentlemen subscribe the sum of 13,000£ and let application be made to the Legislature to embody them into a Company, vested with powers to carry on the said work.” In short, Colles was asking for a corporate charter. If the legislature would grant him this wish, along with 250,000 acres of “waste and unappropriated lands” from the state, Colles’s new company would find “sober, honest, industrious farmers or workmen” to labor on the new water route, after which they would each take charge of 150-acre parcels of that land, turning unimproved and unused territory into “a settled neighbourhood.” “Internal trade will be increased,” Colles predicted, “foreign trade will be promoted … the country will be settled … the frontiers will be secured.” Moreover, he continued, “in time of peace, all the necessaries conveniences, and if we please the luxuries of life may be distributed to the remotest parts of the Great Lakes which so beautifully diversify the face of this extensive continent.” Urging legislators to look to British policy as a model, Colles called his proposal one “of considerable public as well as private advantage … to direct the stimulus of private interest to public purposes.”⁸

New York lawmakers lauded Colles’s proposal, but they had another idea about how to implement his planned work. A state assembly committee recommended that “if Mr. Colles, with a number of adventurers”—their term for investors—decided to undertake the planned improvements, “they ought to be encouraged by a law giving and securing to them, their heirs and assigns for ever, the profits that may arise.” Thus, although Christopher Colles had asked legislators for a corporate charter to structure public and private investments on behalf of a project that would serve “both the public and individuals,” legislators suggested giving him a legal privilege that looked more like a monopoly grant instead. Colles’s plan “merit[ed] encouragement,” but lawmakers simply had no appetite “to cause that business to be undertaken at public expense” by giving him access to public lands.⁹ Without a corporate charter or those 250,000 acres, however, it was unlikely that Colles would ever be able to attract sufficient investments to complete his proposed work. The corporate form, after all, was an attractive way to organize a business because, when ideally executed, it offered a way to legally structure a coalition of financiers, lobbyists, and promoters who could capitalize a firm, allowing the company’s board of directors to then hire managers who could competently run the enterprise. Without such a charter, Colles would have to instead recruit a wealthy patron or scramble to assemble less durable partnerships by promising them percentages of a monopoly privilege.

But even this less-than-ideal possibility never came to fruition. Despite a positive recommendation from one of their own committees, New York’s state assembly hesitated to act on Colles’s petition in 1784. He applied again to the legislature in 1785; instead of recommending a monopoly grant, lawmakers appropriated $125 for Colles to research and write “an essay toward removing certain obstacles in the Mohawk River” for their consideration. In 1786 Colles again sought aid from the legislature, this time petitioning the state senate, but he was once again rebuffed. Colles made no further petitions to the legislature with plans to finance inland navigation between the Hudson River and the Great Lakes, nor did anyone else for the remainder of the 1780s—a period one canal promoter later called a “profound silence.”¹⁰

The idea of building a canal persisted, however. In 1791 a more state-centered vision of commercial development was outlined by New York governor George Clinton in his annual legislative address. “[O]ur frontier settlements … are rapidly increasing,” wrote the governor, “and must soon yield extensive resources for profitable commerce.” Therefore, he recommended a “policy of continuing to facilitate the means of communication with them, as well to strengthen the bands of society, as to prevent the produce of those fertile districts passing to other markets,” meaning Quebec. Legislators responded by vowing to investigate “the most eligible move of effecting and defraying the expense” of improving the Hudson and Mohawk Rivers, and later adopted a bill that funded a survey to “estimate … the probable expense that would attend the making of canals sufficient for loaded boats to pass.”

By 1792 that report was complete, and Governor Clinton again touted an Albany-to-Lake Ontario canal as a “measure, so interesting to the community” that it would “command the attention due to its importance” in part because of its “very moderate expense.” His call mobilized two associations of investors to begin lobbying state lawmakers for corporate privileges to build two canals, one to link portions of the Mohawk River near Little Falls, New York, and another to join Lake Champlain to the Hudson River. Each canal was seen as a rapidly achievable project, and because the investors assured lawmakers that they would rely entirely on private capital for construction they claimed they would need the state to bear only the expense of land surveys, for which lawmakers appropriated £100 in March 1791.¹¹

Undertaking an ambitious project—or a pair of them—by handing it to a corporation was less controversial in the 1790s than it had been in the 1780s. By the 1790s, such a project seemed feasible because of a greater availability of capital and credit. In New York City, Alexander Hamilton’s plans for a national bank, with the national government’s assumption of state debts, was helping to make the city a center for financial transactions and exchanges: money could be borrowed or repaid, stocks and U.S. bonds could be traded, and insurance policies could be taken out on recently placed shipping orders.¹² With more brokers and bankers handling more financial instruments—stocks, bonds, banknotes, checks, and bills of exchange, to name a few—New York’s microeconomy was becoming more financialized, offering political entrepreneurs more opportunities to participate in a growing economy of influence.

Yet to one New Yorker, the plans being proposed in the spring of 1792 were too modest. Elkanah Watson had personally surveyed a westward canal route in late 1791 and thought Governor Clinton’s wished-for canal would—and should—be far more ambitious (and expensive). He quickly sought to convince state senator Philip Schuyler of the same. In Albany, both Watson and Schuyler had reputations for being political entrepreneurs involved with development projects that blended private capital with public authority. Schuyler, however, was a far wealthier man than Watson, and he preferred to pave routes to prosperity with paper. When Watson approached him, he was pressing colleagues to support the incorporation of the Bank of Albany, one of the pet projects Schuyler adopted after returning to the state senate once he had completed a term as a U.S. senator.

Watson tried to convince Schuyler that a lack of vision and imagination—rather than actual capabilities or capacities—was hindering state legislators from demanding more ambitious plans of petitioners seeking to form canal companies. The two proposals recently approved by lawmakers to create the Northern and Western Inland Lock Navigation companies had been passed after considerable lobbying by Schuyler, but to Watson they represented only “half the business” of canal building in New York State. “The charter[s] should stretch,” he said, “to admit the commerce of the great lakes into the Hudson River, and vice versa.” Legislators had instead settled for too meager a set of proposals, and Watson felt that Schuyler agreed with his sentiments. “No one of that body,” Watson wrote, referring to the legislature, and “not even the Governor,” he continued, “appears to soar beyond Fort Stanwix [present day Rome, New York] except yourself.”¹³

For Watson, visionary ambition in canal building had patriotic connotations. He later explained that much of his inspiration was drawn from a two-day visit he had made to George Washington’s home at Mount Vernon in 1785. Four years before becoming the first U.S. president, Washington organized and became president of a canal company called the Patowmack Company, a venture jointly supported by the governors of Maryland and Virginia to improve the channels of the Potomac River, dig smaller branch canals, and build locks to traverse its waterfalls. Watson pronounced the project “worthy of the comprehensive mind of Washington” because it was to link the Atlantic Ocean with the Mississippi River and reach as far as Detroit. “Hearing little else for two days from the persuasive tongue of this great man,” Watson recalled, “I confess completely infected me with the canal mania, and enkindled all my enthusiasm.” It lit, Watson said, “the canal flame in my mind.”¹⁴

Recalling this visit and seeing a need to act as boldly as the hero of the Revolution, Watson pressed Schuyler in the spring of 1792 to use his influence in the state house to block passage of the two pieces of canal legislation—bills Schuyler had lobbied to pass—on the grounds that the proposed projects would be too small to sufficiently develop the state’s resources. Watson boasted that, unlike most state legislators, he had traveled through both western New York and Europe. He had seen firsthand how “luxuriance of soil, mildness of climate, and easy access to market” could be brought together with a canal, telling Schuyler,

Perhaps no part of the world, so distant from the sea as our western country, presents such irresistible allurements to emigrants, as well from the eastern hive as from Europe…. Nothing will tend with so much certainty to accelerate the progress of these great events, and to open a door to the happiness of unborn millions, as to render a water communication at once cheap and easy of access. Exclusive of continuing an intercourse with the greatest chain of lakes in the known world, it will give a powerful stimulus to a new creation in the very heart of this State.¹⁵

Watson therefore did not believe that a larger canal would simply emulate European exemplars; he predicted it would spark transformative economic development.

From his perspective as a traveled observer, a vantage point he considered superior to that of legislators mired in institutional habits and precedents, Watson thought he had the credibility to put forth a new way of thinking about American political economy. His argument drew on the writings of two of the most prominent European political-economy theorists of the period: Emmerich de Vattel and Adam Smith. Both viewed turnpike, bridge, and canal building as a way to build links among existing commercial centers. Connecting markets in cities and towns provided opportunities for producers and consumers to engage in commercial exchanges; therefore, the cost of building a channel of commerce—a canal or road—paled in comparison to its usefulness.¹⁶

Some American canal promoters like Elkanah Watson—and, later, De-Witt Clinton—readily imbibed European political economists’ arguments in favor of transportation-infrastructure investments while discarding part of their underlying analysis. The glaring difference between a New York canal and a British turnpike was that the former would not link a chain of already established marketplaces—it would instead plow through unsettled territory. Watson acknowledged and embraced this difference by suggesting that European ideas had to be adapted on an “enlarged American scale,” writing, “If we proceed on the European mode of calculation, waiting in the first instance to find the country through which canals are to pass, to be in a state of maturity and improvement, the answer is at hand—No! But calculating on the more enlarged American scale, and considering the physical circumstances of the country in question, should the canals precede the settlements, it will be justified on the principles of sound policy.” To begin building out-of-doors support for this “sound policy,” Watson decided to start writing essays and sending them to newspapers in New York City under the pen names “A Citizen” and “An Inland Navigator.”¹⁷

In those articles, Watson expanded on his idea that canal development should be seen as a catalyst to encourage territorial settlement. Building existing towns with active commerce could not be a precondition for public infrastructure investment in America; instead, that had to be the goal of such policies. To this end, constructing “channel[s] of commerce,” ones more bold than the two corporate proposals before the legislature, would soon inspire transformative development. “A vast wilderness will, as if were by magic, rise into instant cultivation,” Watson predicted. Canal building represented an opportunity to actively instigate commercial growth and shape the state’s destiny, both to satisfy its own internal needs and to raise its profile as a state that was both a partner and a competitor with other states. Therefore, although Watson’s reasons for wanting to see a New York canal reach the nation’s western territories might have seemed more self-consciously cosmopolitan than Governor Clinton’s professed desires to settle the interior of the state, it was grounded in a realpolitik, state-centric conception of interstate commerce in the federal union.¹⁸

In his written appeals to both the public and Philip Schuyler, Watson took pains to lay out his concerns that New York might lose out to competing states’ commercial-development policies. By 1792 Watson looked at George Washington’s Patowmack Company and saw it as well on its way toward breaching the Mississippi River, diverting the profits of western commercial expansion to Virginia. As admirable as Watson thought that ambition to be, he also feared it would deliver a devastating and permanent blow to New York’s long-term commercial prospects. “[A] channel of commerce,” he explained, “may receive an early bias to a different point,” but “when once established in any particular direction, it is generally found difficult to divert it.”

To give Washington’s concern “a fair competition” and to avoid losing out on western development altogether, Watson therefore wanted New York legislators to think more boldly and imaginatively about their project. Moreover, as a political entrepreneur himself, Watson perceptively recognized that the scale of the project would forever be tethered to the sources and structure of its financing. The proposals before the legislature were to build canals by creating two corporations. Lawmakers were becoming more familiar with and supportive of the corporate form; corporations were also useful tools for attracting investors with private capital and managing their interests.

Yet Watson believed that the larger canal he wished to see built could not be financed by a corporation. To be clear: Watson was not suggesting that private interests would fail to build a sound canal or would constrict the settlement of the state, nor did he think that toll rates might become so heavy as to render the canal empty. Rather, he thought that if the canal were to ever truly be a public good, where the public reaped the benefits of the project in full, that outcome could not be delivered by a private venture.

To Watson, the proposed canal’s path and utility were so self-evident that he believed it should be treated as a natural channel of commerce—similar to a waterway or river—instead of being subject to the same political-economy practices that gave protections of monopolistic exclusivity, special regulations, and private privileges to other artificially built bridges and turnpikes. He recognized that even thinking about internal-improvement projects in this way would require a theoretical and an intellectual pivot among lawmakers before it could be institutionally elaborated in changes to the way the state expected such projects to be organized, financed, and executed. At the time, no American model existed—neither in state-statute books nor in the institutional memory of legislators or out-of-doors political entrepreneurs—for how a state could directly plan, fund, and construct a project as grand as the canal Watson was proposing. Nevertheless, only “a scale of a truly enlarged [canal] policy” that involved the state funding the project “out of its own ample means” would “leave the passage free and open” for future generations. If the policy goals of canal building were settlement and economic development oriented toward the interest of the state, the state then bore responsibility for financing the project. This was the “enlarged American scale” Watson envisioned for the nation’s applied political economy, one that acknowledged and departed from European political economy to better suit domestic needs.¹⁹

Recognizing that he was proposing something novel, Watson urged lawmakers to exercise their fiscal imaginations. “Are we advanced to a sufficient state of maturity to justify an undertaking of this magnitude?” he rhetorically asked. Moreover, he thought that if the state was focused on economic-development outcomes, it would want the canal to have as many users as possible, making hefty toll collections counterproductive. Because a New York canal would not link ready-made markets but would instead enable development along an arterial channel, Watson did not think it was viable to pay for the enterprise directly through either benefit taxation—a tax paid by the people who would benefit from living alongside the canal—or through tolls collected from the users of the canal. Because the state’s interest was in seeing as much development as possible, it would not have the same interest in turning a profit from toll collection as private or incorporated owners would. “Private individuals having a toll in view,” he wrote, would realize profits that “would probably be small for a few years, but the increasing benefit which will arise from this species of property, will keep equal pace with the augmenting settlement and cultivation of the country.” In time, “posterity will be burthened with a weighty tax (in the article of toll) to the emolument of the successors of the first adventurers, which ought not to exist in a land of liberty, where the intercourse should be as free as the air which we breathe.”

In Watson’s mind, therefore, the canal was simply too important to be privately owned; its toll revenues would be far too large to be properly placed in the hands of private interests. What was needed, therefore, was for states to once again take on debt. Yet instead of paying for a war, these new obligations would fund internal-improvement investments that would pay for themselves over time. Watson thus anticipated the financial arrangements that would one day fund the canal’s construction, suggesting that the state go into debt and issue its own bonds rather than delegate canal construction to privately held corporations and their stockholders. “If executed gratuitously by the public,” Watson predicted that such a financing method would be low risk; “the State in effect will be retarded only a few years,” he explained, before “receiving a tenfold return for all its disbursements” in canal construction outlays.²⁰