Two centuries ago, the future of New York was in play. At the time, the city served as both America's political and its financial capital. One the one hand stood Alexander Hamilton, that self-made innovator of finance. He worried that it would be "bad" not to institutionalise the city's political status. On the other hand stood James Madison, George Washington and Thomas Jefferson, who did not hide their dislike of New York and argued that the federal government must sit further south.

In the end, Hamilton traded away New York's future as political capital in order to get the southerners to agree that the new federal government would assume the states' debts. The compromise plan moved the official capital to Philadelphia and, eventually, Washington.

This separation of capitals was not necessarily negative. Now New York felt free to devote itself to its two favourite things: the happy chase after cash and the pursuit of relative competitive advantage. Partly thanks to Hamilton and the institutions he established, the city became a global financial capital.

Today, New York is once again in play. At issue this time is its status as global financial capital. In the 1990s, that status was already being eroded; September 11 2001 and its consequences have accelerated the decline. And now, just as before, the actions of individual statesmen will determine whether that decline is reversed. Of particular importance are the choices of another innovator and self-made man of markets and money: Michael Bloomberg, New York's mayor.

But first to the challenge facing Mr Bloomberg. Today, we tend to think of the 1990s as a golden age for New York, largely because of the decade's bull market and the successful anti-crime policies of Rudolph Giuliani, Mr Bloomberg's predecessor. The rise of "Silicon Alley" seemed to prove the strength of the city's economic future as well.

Nonetheless, the crucial data do not support this image. While jobs were created in some areas, overall the number of money-related jobs fell. In 1990 the city boasted 300,000 jobs in the banking and securities sectors, according to New York's Independent Budget Office. By 1995, that figure had slipped to 271,000. Even in 2000 - the height of the boom - there were only 285,000 such jobs. Meanwhile, high finance found homes in corners of America that had never before competed with New York.

Some of this was inevitable - the rise of Silicon Valley and the internet, for example. But bad policy also played a role. New York schools produced surly and innumerate workers for whom employers nonetheless had to pay a premium in wages and tax. The city's high cost of living and its progressive tax schedule clashed to produce real bracket creep, so that even middle-class people shouldered heavier tax burdens than their counterparts elsewhere. As for the wealthy, their tax burden was so enormous that they fled, becoming tax refugees.

Then came September 11 - and with it new threats. The first is the general gloom of the city. Even after nearly a year and a half of clean-up, Wall Street feels deserted - particularly around Christmas. Many companies that moved away temporarily have returned only a few jobs, while expanding elsewhere. Washington - today, as in Hamilton's time, rivalrous - has added insult to injury by announcing security plans to require Wall Street companies to relocate a share of their staff to sites at least 200 miles from New York.

A second factor darkening New York's prospects has been the market crash. By June this year, New York counted only 262,000 securities and banking jobs, significantly down from even the 285,000 figure.

The market crash has in turn damaged the city budget disproportionately for, as author William Tucker puts it, "New York feeds off the carcase of Wall Street". In New York, wages from securities jobs alone account for 20 per cent of the revenue the city collects from its income tax. Then there is the fact that the city's pension programme for municipal workers is a defined benefit arrangement - and one premised on the optimistic assumption of 8 per cent growth. Taxpayers must make up the shortfall for the city.

All this means that what was chronic erosion is fast becoming a crisis. Could it be worse than the last big crisis, in the 1970s? In certain ways - because of electronic trading, for example - the answer could become Yes. In his response the mayor has made at least three missteps.

The first is to concentrate on edifice: the main Bloomberg message on Wall Street is that rebuilding it in spectacular fashion will generate recovery. But constructing "kissing towers" to replace the Twin Towers (as one proposal mooted) is to miss the point. In New York, the first step to growth has traditionally been the improvement of invisible financial architecture a là Hamilton. Making Wall Street an enterprise zone would do more than pouring concrete.

The mayor's second error has been to waste political capital on projects largely irrelevant to New York's future, such as banning smoking in restaurants and bars. His aim is clear - he wants to earn "quality of life" points, as Mr Giuliani did. But such obsessions make him look prissy, just as a remark by Jefferson about New York's "depravities" made him seem prissy.

Mr Bloomberg's greatest sin, though, is to advance an overall agenda that further undermines New York's fiscal competitiveness. In recent months, the mayor has imposed a 20 per cent property tax increase on homeowners and pushed for a tax on commuters. These steps will certainly drive out jobs - many of which were considering packing their suitcases already. The tax increases also demonstrate a lack of the respect for the economic principle of elasticity that Hamilton possessed. If only Hamilton were around to remind Mr Bloomberg of his famous rule: "moderate duties are more productive than high ones".

All of this is disconcerting to an electorate that voted Mr Bloomberg in not for his view on smoking or taste in architecture but because they were confident that he, as a businessman, would be the appropriate guardian of the city and its financial future. Time is short but the mayor can still decide: will he protect Hamilton's legacy, or will he squander it?

© Copyright 2002 Financial Times