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A Man, a Plan, a Canal: Erie!The $7.9 million bet that made America.

By Daniel Gross
Posted Thursday, March 31, 2005, at 3:05 PM ET

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Erie Canal: Internet's forebearer?

Is the subject of a new book by an economic consultant that describes "how a revolutionary technological network molded the triumph of the United States as a continental power and as a giant in the world economy": a) the railroad; b) the telegraph; c) the telephone; or d) the Internet?

The answer: none of the above. Peter Bernstein's occasionally rhapsodic book is devoted to a stagnant, 4-foot-deep ditch that has long since fallen into disuse. Big digs tend to inspire big narratives, like David McCullough's epic saga of man vs. mud in the Panama isthmus. But in Wedding of the Waters: The Erie Canal and the Making of a Great Nation, Bernstein saves the soaring prose for the economic drama surrounding the Erie Canal, completed in 1825. The author of the excellent history of risk, Against the Gods, Bernstein argues that the muddy aqueduct was perhaps the greatest and most economically effective public works project in American history. "By bringing the interior to the seas and the seas to the interior, the Erie Canal would shape a great nation, knit the sinews of the Industrial Revolution, promote globalization … and revolutionize the production and supply of food for the whole world."

In the early 19th century, canals were one of the many crucial pieces of economic infrastructure—a banking system, industries, capital markets—that Europe had and we didn't. Among the commercial and political elite in the newborn United States, a canal became an object of fantasy. George Washington, a surveyor before he became a soldier, had tried—and failed—to build a canal through the Appalachians in Virginia. In New York, connecting the mighty Hudson River with Lake Erie became a popular cause, especially among merchants in the small island that stood at the point where the Hudson flowed into the Atlantic: New York City.

The canal, which would ultimately follow the path of the Mohawk River from Albany inland, had to negotiate two big sets of falls and a larger set of obstacles. A private corporation chartered to build a canal—the Western Inland Lake Navigation Company—had difficulty raising money. The national government had surplus cash to fund internal improvements, but the agrarian Thomas Jefferson and his Virginia successors weren't interested in spending federal funds to help New York.

Once DeWitt Clinton, the dominant figure in New York politics (he served as mayor of New York for much of the period from 1803 to 1815, and as governor from 1817 to 1823, and again from 1825 to 1828), climbed aboard the canal flatboat, momentum grew. But given the failure of previous private efforts, it had to be financed, owned, and controlled by the state of New York. Work began in earnest on July 4, 1817, after the state Legislature approved plans for the state to float canal debt, which was to be paid down by tolls on freight. Predictably, some New York business interests opposed the project, fearing higher taxes. "Clinton, the federal son-of-a-bitch, taxes our dollars to build him a ditch," went one bit of doggerel.

For more than eight years, $12-per-month laborers, assisted by horses and blasting powder from E.I. Dupont de Nemours, battled the weather and the mosquitoes. As economic activity ground to a halt after the panic of 1818, the cost of both money and labor fell sharply—and fortuitously. "By 1820, the canal commissioners were drawing contracts at prices 30 to 40 percent below what they had paid during the first three years of construction," Bernstein notes. In the end, the Canal Fund had to issue $7.9 million in debt to fund the project—perhaps the last New York public works project to come in at or under budget.

The lavish 1825 opening ceremonies lasted nine days. A flotilla led by Clinton (it included Noah's Ark, a boat carrying a bear, a pair of eagles, two fawns, and two Indian boys) proceeded through the canal to the Hudson River. After floating triumphantly past the crowds jamming the shore at Brooklyn Heights, Clinton ceremoniously dumped the fresh water of Lake Erie into the salty depths of New York harbor.

The Erie Canal was an engineering triumph, to be sure. But Bernstein notes that it was also an economic triumph. This was one of the first great American examples of network effects—later seen with the telegraph, telephone, and ultimately the Internet. Connecting more and more people through a system makes the individuals more productive and capable and makes the network itself a powerful economic force.

The canal made possible the settlement of the upper Midwest and transformed the nation's "primary axis from north-south to east-west." Clinton's ditch turned canal towns into seaports, the Hudson Valley into an industrial zone, and the Midwest into a breadbasket. Happiest of all was New York City, which became the central span in the "bridge between the inexhaustible supplies of grain from the Midwestern United States and the inexhaustible demand for food from Europe." In the quarter century after the wedding of the waters, the nation's growth rate rose to a whopping 4.6 percent a year, compared with 2.8 percent annually for the period from 1800 to 1825.

Of course, it took the railroads, the telegraph, and a strong national currency to create a truly integrated national market in the late 19th century. But Bernstein's case is pretty convincing. Oddly, he shies away from the greatest—and seemingly most obvious—historical lesson of the Erie Canal: the necessity for direct government involvement in building the expensive commercial arteries that have been so vital for economic growth. Left entirely to its own devices, the private sector likely never would have produced the Erie Canal, the railroads, the interstate highway system, or even the Internet.

Today, what's left of the Erie Canal meanders—largely unused—through an upstate New York that has been bypassed by the last several economic booms. Its economic utility seems so minute that the development rights to the canal's shore were sold to a politically connected developer for a mere $30,000. A sad fate for the creation that French economist Michael Chevalier in 1835 described as: "simple as a work of art, prodigious as an economic artery."

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
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