#1020 1817 · New York State (DeWitt Clinton) · Public infrastructure finance
New York built the Erie Canal on debt repaid only by its own future tolls
the problem
New York needed $7 million for a canal with no federal funding, and taxing citizens for it risked political revolt
background
President Jefferson and then Madison had rejected federal funding for a canal linking the Great Lakes to the Hudson River, calling it premature or unconstitutional, and Southern leaders in Congress had little interest in subsidizing a project that would mainly benefit New York's trade position. The projected cost, roughly $7 million, was close to the entire annual federal budget of the era — far beyond what New York could raise by simply taxing its own citizens without provoking serious political backlash.
Asking the legislature to fund the canal from general tax revenue meant asking every New Yorker to pay for a waterway that mostly benefited merchants and farmers along its route, an unequal burden likely to sink the project in the legislature before a single shovel moved. The state needed a way to borrow the money against something other than its taxing power.
what everyone would do
Raising the money through general state taxation was the obvious route, and it meant asking every citizen to fund a canal whose benefits fell disproportionately on merchants and farmers near its route — a burden likely to doom the bill in the legislature.
what they saw
New York saw the canal didn't need taxpayers to vouch for it, only its own future tolls. Bonds repaid by the canal's earnings let the project fund its own construction, without betting the state's treasury.
the move
New York issued canal bonds, later recognized as among the first American revenue bonds, whose interest and principal were repaid not from general state taxes but specifically from the tolls the canal itself would collect once open, backed further by dedicated levies on salt, auction sales, and steamboat passengers.
why it works
Tying repayment to a specific, forecastable revenue stream — tolls from a monopoly waterway with obvious demand — let investors evaluate the canal on its own merits rather than the state's general fiscal health, unlocking capital that general-obligation taxation could never have raised without a political fight. It also aligned the state's incentive with the project's usefulness: profitable, well-used infrastructure paid for itself, while a canal nobody used would have simply defaulted rather than draining the general treasury.
the payoff
Tolls repaid the canal's bonds within about 15 years and funded 600 more miles of canals; freight costs fell from $120 to $8 a ton.
where it breaks
It only works when the future revenue is genuinely likely and roughly forecastable — a canal, bridge, or toll road with clear demand is a much safer bet for a revenue bond than a speculative venture with no track record, and states that later tried the same trick for uneconomical canals and railroads produced a wave of defaults in the 1840s.
what came after
The canal's toll income turned New York City into America's dominant port, its share of national foreign trade rising from 9% in 1800 to 62% by 1860, and its revenue-bond structure became the standard template American states and cities later used to finance railroads, water systems, and public infrastructure.
references
- [1]How working-class New York savers — and a community bank — helped underwrite the Erie CanalABA Banking Journal, American Bankers Association, 2025bankingjournal.aba.com