The canal that shaped American finance

0:00This is a massive, massive construction and engineering project, unlike anything we've ever seen. It's like an Apollo program for the era. The canal is, what, 350 miles long, which is an order of magnitude bigger than any canal ever built in America before. And it can cut time travel from Albany to Buffalo from two weeks to just five days. It's actually like a teleporter in Star Trek or something for the era. Well, that's the important point, I think. The cost of shipping, let's say, a ton of wheat from where it was produced to the market in New York City was like one-tenth of what it had been previously.

0:39It's a dramatic reduction. And this is where the U.S. begins to grow rapidly because the transport costs fell so dramatically. week.

0:55Today on the story of money, the 19th century construction project that helped make New York the country's premier financial center. We're talking about the 363 mile long Erie Canal, which links the Atlantic Ocean to America's interior and how its construction almost never happened. But it did. And Gillian, I'm particularly excited about this story because, well, our hero is kind of this weird, underappreciated corner of the bond market that really kind of only exists in America. And I'm talking about the municipal bond market, which are bonds sold by US states, local authorities, schools, even prisons.

1:42And as you know, I feel the US municipal bond market is a pretty magical thing that doesn't really get the attention it deserves. Yeah, yeah, yeah. I mean, we used to work together and you were constantly ranting about muni bonds and why they're so important. Well, they are. They are, Gillian. Okay, so I had to cover crypto all the time. Crypto, the entire industry is around$2 trillion, right? But the US muni market is more than twice is big. It's kind of the antithesis to crypto, which is incredibly sexy, but fundamentally useless and pointless. While muni bonds are super important, hugely valuable, but nobody really cares about it.

2:22But it all started with the Erie Canal, which is why I'm so excited today. Yeah, I mean, I'm glad this is what gets you excited. Most ordinary mortals don't actually feel so passionate about the Erie Canal. Yeah, my tastes are peculiar, I have to admit. OK, so muni bonds are not sexy, but they're critical to how finance works today, not just for the issuers, the governments, but also for the investors. And today we're going to start off by talking about the Erie Canal and the founding fathers and the future presidents who were part of this story, who loved it and some hated it too, and a New York City mayor who, just like today, made a lot of headlines and actually made sure it got built.

3:02Plus, why? Even though the E-Rail Canal isn't used in the same way it was today, 200 years ago, its financial legacy is huge. So, welcome to The Story of Money from The Financial Times with me, Gillian Tett. And me, resident Bob Nudd, special on uni finance, Robin Wigglesworth.

3:26What happens next in The Story of Money? Nuveen has spent over 125 years helping clients answer this question. By investing in the growth of businesses, real estate, infrastructure and natural capital, we continue to deepen our expertise across income and alternatives so investors can confidently write the next chapter of their own portfolio stories. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.

4:03So, to help us tell the story of the Erie Canal and why it matters so much, we have got a financial history superstar with us today. He is the historian Richard Siller, or Dick Siller, Professor Emeritus of Economics at the New York University's Stern School of Business. Welcome, Dick. Glad to be here. I'm sort of excited about this opportunity. So, technically, you're Professor Siller. I'm going to call you Dick, if that's okay. But we're going to be talking a lot in this episode about a book that's one of Robin's favourite. Take it away, Robin. Why do you care so much about this book and why is Dick so relevant to it?

4:38This book is called The Wedding of the Waters. It's written by another one of my favourite financial historians, Peter Bernstein, who sadly passed away in 2009. But this book in particular is so fantastic because it really gets into the nitty gritty detail of how the canal was built. and importantly for a finance geek like us, Gillian, it explained how he was paid for. And Dick, you knew Peter Bernstein and worked with him as well, didn't you? Yes, he was a good friend and I actually admired him a lot. He was not an academic, but his publication record would have entitled him to be probably a university professor at some good university.

5:16So what we're actually talking about today, though, is this book about the Erie Canal. And it begins in the years after the American Revolution. Now, the country has just won the war. The founding fathers are working on getting the Constitution written and unifying the states. And it's all very, very exciting. But as so often, there are some really big glitches. The country is also crying out to be united, not just in political theory, but also through trade and economics. And they didn't really have that, did they? Why was it so hard? Well, the United States was not as large then as it is now, but it was still a very large country.

5:58The Brits in the Peace Treaty of Paris in 1783 basically give the United States all the territory east of the Mississippi River. Now, that territory is broken up by a chain of mountains called the Appalachian Mountains. And that was a barrier to trade. Americans were rushing across the Appalachians to settle places like Ohio and Kentucky so they could produce a lot of agricultural products. But it was hard to get those products to the market. There were some rivers, but basically you had to carry things by wagons, which was very expensive. The Westerners sometimes thought, well, that Eastern government, the new federal government of the United States, isn't doing very much for us.

6:44And so maybe we should go off on our own and break up the country. Even George Washington worried that the country might sunder into two different parts, right? Right. It just showed that at the very top of American society, leaders were thinking that it was important to develop trade connections between the trans-Appalachian West and the Atlantic tidewater. And this is all going to be super expensive and difficult, right? And this is where our main character of this story, DeWitt Clinton, enters the picture. Because he's the politician, Gillian, who really got the Era Canal built. And in the process, unwittingly sparks the creation of the mighty US municipal bond market.

7:27But Dick, can you tell us a little bit about DeWitt Clinton? He's not like a name that people know, at least us Europeans know that much today, but he was a huge figure at the time. Yeah, hands up. I've never even heard of him properly before. Well, he's forever associated with the great success of the Erie Canal. But DeWitt Clinton was an early American from a political family. He got into politics. He was mayor of New York for a number of terms. And he was also governor of New York State for a number of terms. He was well-educated and apparently a very effective, eloquent speaker and had a way of getting people to follow him.

8:07Why did they suck him in to lead the charge around something which is not usually the stuff of high politics, which is how to finance a canal? When Clinton was mayor of New York City, some other leaders of the time, Gouverneur Morris, who was a member of the Constitutional Convention and an important American founding father, sometimes called the pen man of the Constitution, and along with other New Yorkers like the Stephen Van Rensselaer from upstate. These were very prominent New Yorkers, and they had this idea that it would be good to connect the Atlantic tidewater with the Trans-Appalachian West.

8:50And it's their dream, really, to have this canal. Clinton gets involved with the project around 1810 when he joins the canal commissioners. Other people had the idea. Clinton realized it was a great idea, and his political skills made it happen. So obviously canals, you know, it sounds weird to us today, but canals were kind of the railways and the airlines of the era, right? They were an easy way of transporting people and goes from one place to the next. But the Erie Canal project is just vastly larger in physical challenges. and I was wondering whether the private money was there to do this kind of thing.

9:31So why did the Erie Canal Commission come up with this project specifically? Well, I think the failures inspired DeWitt Clinton to find another way. There was even an attempt to form a company to make the Mohawk River, which runs along the route of the Erie Canal in upstate New York. There was an attempt to improve it a lot for navigation. They formed a corporation. It was called the Western Inland Navigation Company. And they tried to improve the Mohawk River, but they didn't really have enough money to do it. So they went bankrupt in the end, wasn't it? It was a bit of a disaster. Yeah, I think there was a company that failed.

10:12And, of course, a lot of companies fail. So the Potomac venture, George Washington, involved, it didn't really accomplish its objective, and neither did the Western Inland Navigation Company. So some other way had to be found. And that's where DeWitt Clinton and the Canal Commission come in, starting around 1810. So basically, they decided the private money wasn't there or not there to a great enough extent to actually finance this project. And, you know, I gather looking back at the Bernstein book, he points out that the Cornell basically needed public financing, ownership and control by New York State.

10:53But if they start looking to the state for help, it begs the question of why on earth wouldn't they just go to the federal government? Well, in fact, they did. The backstory there is that Albert Gallatin, who was Thomas Jefferson's secretary of the treasury, Jefferson's term was 1801 to 1809. In 1808, Albert Gallatin writes a famous report on roads and canals. He outlined a comprehensive internal improvement program, roads and canals, to knit the country together economically. And he said only the general government, meaning the federal government, really had the power to raise the money to do this.

11:36What happened was the New Yorkers went to seek help from the federal government. And they could point to Gallatin's report as saying, you know, you ought to help us do this. And Thomas Jefferson, for various reasons, said no. I mean, he thought it was a bad time because in 1808, Jefferson had put an embargo on U.S. trade, which basically shut the country down from trading with the rest of the world. And that created budget problems for the federal government. And we were moving toward a second war with Britain, which is called the War of 1812. And so that was, you know, maybe Jefferson had the idea that the federal government should save its money for the war and not put it into canals.

12:17And I think also that Jefferson saw this as a New York project that wasn't really helpful to his political base in the South. And furthermore, his political base in the South, which often was large slave owners, they didn't want the federal government to do anything major because it might set a precedent for the federal government to interfere with the slave system of the South. Can you explain that link a little bit? What was the link to slavery? Thomas Jefferson was famously a state's rights advocate, which said the federal government should be a minimal government. And if you look at the early decades of U.S.

12:54history, there were a number of Americans that were worried at the time the Constitution was written and during the 1790s when Hamilton was making a lot of financial reforms. And going into the early 19th century, there was in the country, there was a growing opposition to slavery. But in fact, Jefferson's political base was the strongest part of it was the slave owners of the South. And they were worried that the new government had too many powers. You know, if you can build a canal across New York State with federal money, then it's possible that these guys who are against slavery can get the federal government to end slavery.

13:38Remember, Jefferson was president 1801 to 1809. His protege, Madison, was president from 1809 to 1817. And the protege of both of them, James Monroe, was president from 1817 to 1825. And so you had basically, they call it the Virginia dynasty running the country. All three of those presidents were slave owners, and they represented the interests of slave owners. Those were among the reasons, I think, that Jefferson nixed the idea that New Yorkers had of getting federal aid to build the Erie Canal. And this led the canal commissioners in New York by the second decade of the 19th century to say, well, we're not going to get help from those guys in Washington.

14:21We're going to have to do this on our own. How can we do it? Let's get back to 1812. And it seems that by then there's a lot going against the whole idea of whether the Erie Canal will ever fly. I mean, they've already had a whole bunch of canal projects fail. You've had essentially the federal government say no. But in the true all-American spirit, they ain't giving up yet. And so we're going to find out after the break what happens next.

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15:32And we are back. It's 1815 and it's already been shown that these kind of waterway projects, whilst they're needed to help unify the country economically, to foster trade, all that good stuff, they're just too expensive for private companies to do. Many have tried and they will basically failed. And the federal government has said that it isn't eager to jump in either, because while they're mostly concerned about, at the time, this Virginia dynasty led by Thomas Jefferson, well, they want to preserve the peculiar institution of slavery. And of course, well, there's also a war going on with Great Britain at the time, which I think actually at one point, led to Britain burning down the White House, right?

16:16Absolutely. I mean, this seems like the very worst moment to actually try and start a massive project. But, you know, American history is littered with big risk takers who say, well, it looks like a terrible moment to do something. Let's try. And in this case, DeWitt Clinton was thoroughly undeterred because after the War of 1812 was finally finished in 1815, after all that burning and killing, the members of the Erie Canal Commission decide they're going to try and get funding. But they decide to be innovative and do this in a whole new way. So what do they do? The idea of forming the Erie Canal, getting it done, was on the minds of these political leaders and D.

17:04Witt Clinton foremost. And he would give talks about how history shows that the ancient Egyptians had canals, and of course Britain had its canal era, and Americans had some short canals, nothing more than 30 or 40 miles. That worked out pretty well. and so Clinton said it was history showed that canals could be very important but it was difficult to do so you had to find another way. At what point it was like they had this big drive you mentioned that they sort of they campaigned for this quite persuasively and 10 percent of New York's population it was only a million people at the time but 10 percent basically signed up in favor of this project right?

17:45Right 100 ,000 people signed the petition then he had to get it through the legislature. And that was tricky because New York politics was pretty divided. Opposing Clinton was another politician named Martin Van Buren, who later on became president of the United States. So Van Buren had a different political faction. So Clinton had to overcome their opposition, and he did. The canal commissioners decide that the way to do this is to get the New York legislature to approve issuing canal bonds to build the Erie Canal. When the legislature approved it, of course, the initial financing was a lot of small investors invested, you know, small sums to create the first funding.

18:29Then when it became clear that New York is going to do this, then larger institutions and investors stepped in to back it, and that put New York over the top. They were able to raise the$7 million that was municipal bond financing that allowed the completion of the canal. It took eight years, started in 1817, finished in 1825. But even before it was finished, upstate New York was shipping goods through the canal to the Hudson River and down the Hudson River to New York City. So the canal was successful even before it was completed. Wow. So it's a bit like doing a sort of 19th century version of GoFundMe campaign until they actually got the ball rolling properly and more widely.

19:11But although 10 % of the population wrote and said they wanted to see the canal happen, of course, there were quite a lot of people who actually didn't like the idea at all, weren't there? Yes, Clinton took a lot of political heat for backing this project, which people called DeWitt's Ditch or Clinton's Folly. And many people thought that they wouldn't be able to pull it off, that it would fail just like the Potomac Canal failed and the Western Navigation Company failed. I want to go back to the financing bit, because obviously that's one of my obsessions. And to use that terrible American CEO phrase, let's double click on that and find out where the money came from.

19:49Because like you say, this is a massive, massive construction and engineering project, unlike anything we've ever seen. I mean, it's not really even a GoFundMe. It's like an Apollo program for the era. The canal is, what, 350 miles long, which is an order of magnitude bigger than any canal ever built in America before. How exactly did they pay for all this? Was it just, oh, we'll just sell some bonds and that was it? Well, I think they had to make the bonds attractive to investors. And one of the characteristics of the canal financing is that New York State engaged in what I would call responsible or Hamiltonian finance.

20:29So they had to get the investors to believe that the bonds would be a safe investment. And they did this in an interesting way. They levied taxes that were dedicated to paying the interest and eventually the principal of the canal bonds before they started. And there were two types of taxes. New York has a sort of division between downstate, which is basically New York City, and upstate, which is basically an agricultural region. And New York cleverly put on two taxes. One was a tax on salt, which was produced upstate around the city of Syracuse. And they put a tax on auctions in New York City.

21:14New York was a major trading center. Goods would come in from foreign countries. And the way they were distributed initially was to auction them to wholesalers and retailers in America. And so there were a lot of auctions in New York City. So basically, politically, this is where DeWitt Clinton was clever. He put the burden of these taxes on both upstate and downstate. And the idea was that the investors would be reassured that their bonds would be, the The interest would be paid when it was due and the principal would be paid when it was due by dedicating these taxes to paying the cost of the canal.

21:54I mean, it's fascinating, this idea of trying to make sure a maximum number of people have skin in the game to get them all engaged in and supporting. But what kind of investors were they and how much do they have to chuck in initially? There's kind of three steps along the way. Number one, we mentioned that 10 % of the population in New York endorsed the idea of the canal, and a good number of them initially bought the small amounts of$1 ,000,$2 ,000 worth of canal bonds. And that got the canal rolling. And then some financial institutions, New York had actually created savings banks starting around the same time that the Erie Canal started.

22:28And one was called the Bank for Savings in New York City. The savings bank would invest that money in things like government bonds. Fairly early on, they took the savings of small working class people and bought canal bonds. So you had first these small individual investors, then you had institutions like the savings bank putting money into the canal bonds. And by 1822, this canal is moving along pretty well, getting completed. Foreign investors come in, especially British investors. The Napoleonic Wars are over in 1815, and Britain isn't running up so much debt anymore. There's a sort of economic investment boom in Britain, and British investors are looking for places to invest.

23:14They do a lot in Latin America and other places, but they also start buying these Erie Canal bonds because basically American bond yields are higher than you can get in Europe, and there's a lot of money in Europe. So a bit of a classic hunt for yield, but in the 19th century then, beginning of it. But just returning to the bonds, you know, states or colonies in the U.S. had issued bonds for decades before this. What was so special about these New York state bonds to finance the Erie Canal? Now, I'd make two points. One is that the previous municipal financings were rather small, like Philadelphia issued some bonds to build the waterworks.

23:53But that was, you know, some probably could measure it in the hundreds of thousands or at most a million dollars. Now, New York is talking about$7 million of bond financing. To make people be reassured about that large amount of bonds are going to be issued, they did this, what I call Hamiltonian financing. They raised some taxes and dedicated those taxes to servicing these canal bonds. I think the small investors did it for sort of patriotic reasons, but the savings banks of the United States and the foreign investors were interested in a safe investment that had a certain yield that was better than they could find in Europe.

24:30So that kind of the way they structured the financing of the bonds was important in making the financing successful. Just to put in context, I've been looking up the numbers on American GDP. Obviously, GDP data going back that far is pretty dodgy. But people think that the US economy was around 700, 800 million dollars annual economic output. So$7 million worth of bonds today is equivalent to almost a trillion dollars. It was a massive project, right? Yes. And I think maybe that's why we consider it now the genesis moment for the U.S. municipal bond market. One of the things that make this whole story more extraordinary is that all this was occurring as you had the panic of 1819.

25:19Tell us, Dick, briefly what that panic was and whether it damaged or actually helped efforts to get the financing together for the Erie Canal project. Well, the panic of 1819 is rooted in the War of 1812, where government debt soared a lot. I mean, at the end of the War of 1812, the U.S. national debt is like$130 million, which is well above where it had been in any previous year. You might think that a financial panic that was a major panic affecting the whole country would be a bad thing for the Erie Canal project. I mean, no one tried to do massive muni bond projects in the middle of the 2008 financial crisis.

26:00Seems like the worst time possible. That's what you would think in theory. But in fact, New York's finances were fairly solid. And in terms of the panic, the panic actually helped the canal by reducing the prices. You know, prices came down from their inflated levels. So, you know, paying the workers and buying the equipment to build the Erie Canal was cheaper after the panic of 1819. Well, so as time goes on, this Clinton's folly, DeWitt's ditch, it actually looks more like Clinton's conquered the canal. It's his triumphant moment. Let's go into sort of after the canal is built. We've done a bit of foreshadowing already, but it's October 1825 and it's opening.

26:43Canal has been on construction for the past eight years and it's now all of 363 miles of it. That might not sound like much today, but that was monumental at the time, right? And it's ready for business. It's four feet deep. It's 40 feet wide. And it can cut time travel from Albany to Buffalo from two weeks to just five days. It's actually like time travel. This is like a teleporter in Star Trek or something for the era. How does DeWitt Clinton celebrate this? He goes to Buffalo, which is the western end of the Erie Canal, and gets a couple of barrels of water from Lake Erie and puts them on a canal boat.

27:27And then he himself accompanies these barrels of Erie Canal water through the canal to the Hudson River in Albany. That's like 363 miles away, as you mentioned. And then it's about another 130 or 140 miles down the Hudson River to New York City. So Clinton is one of the first passengers to transit the Erie Canal with these two barrels of Lake Erie water. And there's a ceremony when he gets to New York. He goes out into the harbor and dumps the Erie water into the New York Harbor. and this is where Bernstein got his title for his book. Yeah, The Wedding of the Waters. Yeah, good title. And there were a lot of dignitaries present for this too.

28:15So it was a major national event. It's sort of like when we have a space, sending a rocket with astronauts around the moon. This got the same attention in the whole country, not just New York State. And I understand there was even a song written for the event. fortunately for everybody here I'm not going to try and sing it the producers keep trying to make me sing these things but I'm not going to do it but we have queued it up we can actually listen to a little bit of it because actually it's on YouTube it's called The Meeting of the Waters of the Hudson and Erie Let the day be forever remembered with pride Let beheld the proud Hudson to Erie alight For the last stand of time

29:07Well. Wow. Well, I'm rather glad, Robin, you're not singing there. I mean, Taylor Swift, roll over, you know. Exactly. We can all sing about munibonds one day. So clearly this was a massive triumph for DeWitt and also in many ways a massive triumph for the New York City as well. But what did it actually do to trade? Well, that's the important point, I think. The cost of shipping, let's say, a ton of wheat from where it was produced to the market in New York City was like one-tenth of what it had been previously. It's a dramatic reduction, a 90 % fall in transportation costs. And the Erie Canal is an important part of what's called sometimes in American economic history books, the transportation revolution, where improved roads and canals and eventually railroads reduce the cost of moving goods from where they're produced to the market.

30:08And this is where the U.S. begins to be knitted together and begins to grow rapidly because the transport costs fell so dramatically. And the Erie Canal was a major part of that. Yeah. And it also cements New York as the the financial hub of the United States of America, right? Right. There had been markets, you know, for government bonds and bank stocks and insurance stocks in most of the American cities. I've studied this. You know, Boston had a good securities market. New York did. Philadelphia actually probably had a larger securities market than New York because the government was located there in the 1790s.

30:45And so, you know, by the time the canal is finished, and especially by the 1830s, New York as a capital market has eclipsed Philadelphia. I guess we're also based on the question there about what actually happened to the investors. Basically, what they wanted to happen happened. The interest was paid. In fact, you know, we didn't mention this before, but it's worth mentioning how, even before the canal was finished, the tolls on it were sufficient to pay the interest on the bonds. And after the fact, New York didn't really need to increase those taxes on auctions and the tax on salt because the canal was so successful, its earnings were sufficient to pay the interest on the bonds.

31:26When the canal was finished, of course, toll revenues went up a lot, and that was sufficient to pay off some of the bonds when they became due. However, the success had a little bit of a problem. It induced New York to build a lot of feeder canals into the Erie Canal, and those cost a lot, and they were not nearly as successful in raising money. And by the late 1830s, there's a bit of a financial crisis in the U.S., and New York comes through it fine because they stop spending money on losing feeder canals. But other states following New York, I mean, this is the Erie Canal was a great example.

32:06Its success induced other states to try the same thing. And they did it, but their financing wasn't as good as New York and their success in terms of raising toll revenues wasn't as good as the New York experience. So other states actually got to a situation where by the late 1830s, they're defaulting on the debts they incurred to build canals. Yeah, this is a bit of a classic one, right? Somebody does something so successful that everybody emulates it quite naturally, and then we overdo it, and we overdo it, and it ends in a debacle. I mean, those state defaults, I come across this amazing scene in the original version of A Christmas Carol by Charles Dickens, where Ebenezer Scrooge has a nightmare, where he dreams that all his securities are as worthless as American securities.

32:54So by the 40s, the US was essentially, its name was mud in financial circles in Britain, as Charles Dickens nailed. There was a great boom in Canal Building in the 1830s. They borrowed too much money, and then the bottom fell out of the economy in the late 1830s, and they defaulted on their debts. And by that time, Europeans owned a lot of these debts. And as you say, Dickens made fun of them. I think there's a famous quote from Reverend Sidney Smith, an English leader, who said, You shouldn't have dinner with someone from Pennsylvania because Pennsylvania defaulted on these debts and the British are suffering from these wild Americans not paying their interest on their debts.

33:36Dick, as I discussed earlier at the top, I often call the U.S. municipal bond market the anti-crypto because it's fundamentally unsexy and not very glamorous. And people don't really care about it, but it's actually valuable. It actually contributes to economic growth in a very real sense. Can you tell us a little bit about the importance of the municipal bond market to America today? I think of it in terms of things we encounter every day, like the money is borrowed, say, for airports. We all go through airports. The airports are usually financed by municipal bonds. Building schools are financed by municipal bonds.

34:16Water and sewer works. All this stuff is very important to us, but it's not sexy, as you say. We just sort of take it for granted. But the infrastructure of the country, the municipal bond market finances a great deal of it. Yeah. Well, Dick, I have to admit, I think sewage treatment plant bonds is fascinating and very sexy. Of course. The other point you miss is that masses of Americans stick their savings into this, partly because it's tax exempt and also because it's seen as being boring and stodgy. But in doing that, they're doing a really fantastic civic thing in helping to create all the infrastructure that America relies on.

34:59Right. And I think many people think our large amounts of our infrastructure are crumbling now or not in such good shape. And so we need to repair a lot of things that were built maybe 50 or 100 years ago. New York, we remodeled LaGuardia Airport, which used to be one of the worst airports, but now it's considered to be a very fine airport because they use municipal finance to redo the airport. Conclusion I draw is that the municipal bond market is very large now, but it's going to become even larger as we fix up the crumbling infrastructure of the United States. Sadly, the one thing that the magical municipal bond market cannot fix is New York's MTA, But that seems to be beyond the ability of humans to ever do anything about.

35:46Oh, that's too pessimistic, I think. And by the way, LaGuardia these days is fantastic. True. So this Erie Canal project was a win-win-win, it seems, even though subsequent projects weren't quite as successful, in some cases very unsuccessful financially. But I'm curious, to what degree is it still part of the responsible finance principle or reflecting those principles, as you mentioned earlier, Dick? Well, there's an interesting story here. New York practiced what I call responsible or Hamiltonian finance. And just to go back a little bit, Alexander Hamilton made it a big part of his financial reforms in the 1790s to say that if the U.S.

36:29government wants to make its public credit immortal, it should, when it borrows money, it should levy a tax to pay not only the interest on the bonds, but a little bit extra. and that little bit extra will eventually allow you to pay back the bonds. And New York basically followed that procedure when it issued the canal bonds by dedicating the salt and auction taxes to paying them. But the states that later on borrowed a lot of money and in fact defaulted, they didn't practice that sort of finance. So what happened was after that bad experience, the states rewrote their constitutions and kind of put responsible or Hamiltonian finance into their constitutions, saying that if you want to borrow money, you may have to get the permission of voters to do it before you do it.

37:24And you also have to have a plan for financing that municipal debt. This happened in the 1840s and 50s. And basically, this return to responsible finance made the municipal bond market continued to grow. Basically, municipal finance thrived from then on. In the late 19th century, you were building a municipal water system, sewer systems, schools, all the things that local governments do. They could do it much more effectively because they rewrote their constitutions to practice the responsible finance that Hamilton had started and New York State exemplified with the Erie Canal. So the municipal bond market, what is it now, Robin?

38:09Four to five trillion dollars, a really large... Yeah, four and a half. You can go back and study the history of the Erie Canal and the subsequent history of what the states did and the reformed constitutional reforms, which made that market the large market it is today. So you can almost say that the municipal bond market flowed as if from a river from the Erie Canal. You know, I am myself. I'm a voter. Sure. Often you go on election day and you vote for political candidates, but you also have vote on bond issues. You know, the government thinks that you do a certain project. It might be something for schools.

38:45It might be roads. It might be waterworks. Taxpayers vote on that, whether they want to issue bonds for that. So go back to the Erie Canal. The precedent it set eventually was embodied in the whole U.S. municipal bond market. It's an important part of U.S. development. It brings to mind, you know, a country like Switzerland where so many of the finances or rather the financial fiscal powers today remain local and very much driven by the same principles of our responsible finance and a sense of taxpayer responsibility and accountability of the local governments as well. And unsurprisingly, Switzerland has a lot lower level of debt and much more prudence and sense of voter engagement in so many ways.

39:30I was in Switzerland in the year 2000 teaching at St. Gallen. And while I was there, the Swiss had an election. They went out on a Sunday and the election was about getting permission from the electorate to buy a bunch of fighter planes from the US. Going back to this remarkable character, DeWitt Clinton, what actually ends up happening to him in the end. Not long after the canal is finished, and it's a great success, in, I think, 1828, DeWitt Clinton dies at the, maybe in his late 50s or something like that. He disappears from the political picture of the U.S., but he will be forever remembered because of the success of the Erie Canal.

40:11The name Clinton is on, even the name DeWitt is on towns in the U.S. and streets. I live near Concord, New Hampshire, and there's a Clinton street in Concord, New Hampshire. So he is remembered in that way. I mean, most people who see a Clinton street now don't realize that it's probably named for him. But we know that. Roll over Bill and Hillary. They're not the only Clintons that matter. Well, Dick, it's been an absolute treat to have you on. Thanks so much for coming on the show. Oh, you're welcome. I really enjoyed our conversation. And I've learned a lot. I really have, not least, about why canals matter so much and why the other Clinton matters too.

40:53And I'm not yet as convinced as Robin that the muni market, muni bond market, is wildly sexy and exciting, but it's certainly critical to the way our economies work today. So thank you very much indeed as well from me. Yeah, well, Gillian, I am going to convince you at some point, but that's probably enough muni finance for this episode. This is the story of money from the Financial Times. I'm Robin Wigglesworth. And I'm Gillian Tett, and we'll see you back here next week.

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