Dinosaur Derivatives and Other Trades

5 What is Financial Innovation?Railroads and the Credit Crisis

“As the births of living creatures at first are ill-shapen, so are all innovations…”

—Of Innovations, Francis Bacon (1561–1626)

The New York and Erie Railroad Company (the NY&E) went through some hard times. Chartered by the New York state legislature on April 24, 1832, it was created as a reaction to the establishment of the Erie Canal. That canal had created a northern trade corridor from Albany to Lake Erie, and the people in the southern parts of New York State had been promised a similar trade route that would go directly from New York City to the nearest of the Great Lakes.

The initial foundation for the railroad was established in 1835. But the Great Fire of New York in that year and the subsequent economic collapse, scuttled the fortunes of most of the NY&E's initial investors. So, from the very beginning, the NY&E's financial standing was extremely fragile. Given these problems, substantive construction of the line did not get under way until 1838, and it was not until 1841 that trains began traveling on part of the line. The whole railway network was not finished until 1851, linking Piermont in Rockland County, New York, with Dunkirk on Lake Erie. But throughout this period, the NY&E was beset with financial ...