By CYNTHIA CROSSEN

‘How shall I attempt to describe the most awful calamity which has ever visited these United States?” wrote Philip Hone, a businessman and former mayor of New York, in his diary. “I am fatigued in body, disturbed in mind, and my fancy filled with images of horror which my pen is inadequate to describe.”

The date was Dec. 17, 1835, and lower Manhattan lay in ruins. Some 700 buildings covering 52 acres—the heart of New York’s flourishing business district—had been incinerated by an accidental fire so intense that copper roofs and iron shutters poured hissing metal onto the streets. Volunteer firefighters from around the region hauled their hand pumps through the snow to the site, only to watch helplessly as gale-force winds spread flames from one building to 50.

By the time the fire was extinguished, a quarter of Manhattan had been reduced to cinders. Gone were the Post Office, the Stock Exchange, the recently completed Merchants’ Exchange and hundreds of small businesses and warehouses. The fire claimed only two lives. But the other costs were astronomical: $20 million in property damage and more than 4,000 out of work.

“Many who at sunset on the 16th of December were rich and prosperous, found themselves on the next rising of that sun reduced to indigence,” wrote Eliza Leslie in an 1838 issue of Parley’s magazine.

This was the first time New York City would have to rebuild itself from the ground up, and many doubted it could be done. City officials applied for federal aid but were turned down. At the same time, 23 of the city’s 26 fire-insurance companies declared bankruptcy, unable to pay what they owed.

But New Yorkers then, as now, couldn’t abandon this hub of capitalism and opportunity. Even as the fire smoldered (it took two weeks to quench), shop owners and manufacturers began looking for other places to operate temporarily, while drawing plans for bigger, more modern buildings. The Delmonico brothers, who opened America’s first French restaurant, watched the blaze reduce much of their life’s work to ash. Two months later, they reopened at a temporary location while building a big, new facility with marble columns from Pompeii. Lower Manhattan, a year after its destruction, was almost completely rebuilt, with, Mr. Hone wrote, “more splendor than before.”

The Great Fire of 1835, like future catastrophes, transformed lower Manhattan. In this case, New York’s business community was galvanized to make long-postponed improvements. Narrow, crooked streets that had impeded traffic were straightened and widened. The first zoning regulations eliminated shared walls in some areas, and foot-thick granite replaced brick-and-wood facades. A new water system was hurried along. The fire department reorganized. Far from driving people out, the fire and resulting rebuilding helped push the value of Manhattan real estate to $233 million from $143 million in one year.

By 1836, many New Yorkers were “in good spirits,” wrote C. Foster in his “Account of the Conflagration.” “Smiling faces and cheerful countenances meet us at every corner, and demonstrate that there is an elasticity in the character of our people which always enables them to rise above the most overwhelming evils.”

By JON E. HILSENRATH

More than a year after the Sept. 11 terror attacks, much of the economic news from New York City and state officials seems grim. Unemployment has risen sharply, budget deficits are widening, tourists are spending less and Wall Street has lost its swagger.

But New York’s recovery is not nearly as weak as it first appears. Of the 100,000 jobs that left lower Manhattan immediately after the attacks, nearly 80% remain somewhere in the city. Housing prices in the city and surrounding suburbs have risen 22% from a year ago, the largest increase in the nation. And despite fears that companies would flee New York in droves, occupancy rates have held up, even in landmark buildings like the Empire State Building, which is still 90% occupied.

“This indicates confidence in the city’s future,” says Rae Rosen, an economist at the Federal Reserve Bank of New York.

New York’s grit actually isn’t that unique. A growing body of research shows cities have an unusual ability to bounce back from war and terrorism. Columbia University professors Donald Davis and David Weinstein say their research shows that local economies tend to recover quickly from even the most violent shocks. For example, city populations in Japan tended to return to prewar sizes even after Allied bombing devastated their landscapes during World War II. In most cases, local industries were just as resilient as populations. Hiroshima, one of the two cities hit by atomic bombs, was a center for machinery making before World War II. By 1969, Hiroshima’s share of machinery-industry output had recovered to twice its prewar size.

This resilience is partly due to geography. Cities with natural gifts—like deep ports or access to rivers—retain and take advantage of those gifts after war. Cities also tend to attract deep concentrations of people with specific know-how and talents, and they develop a local infrastructure to nurture that know-how. “To use an analogy, if a forest is destroyed by fire, it is only a matter of time before the same types of plants and animals will return,” says Mr. Weinstein.

That is an important finding for New York, because of its implications for the financial industry, the lifeblood of the local economy. Some big financial firms have shifted operations outside of New York. But Mr. Davis says he sees little evidence that New York’s long-term place as the country’s financial hub is at risk.

This is not to say New York doesn’t face serious challenges. The shock of last year’s terror attack has been exacerbated by the worst bear market since the Great Depression and by accounting scandals that have tarnished Wall Street’s reputation. The city’s budget is another glaring problem. The loss of business in lower Manhattan knocked out more than $1 billion in annual tax revenue. That could lead to higher taxes or reduced services, making New York a less desirable place to live and work.

Moreover, because insurers fear that New York remains a prime target of future terrorist actions, rates for worker’s compensation and property insurance are soaring, adding to the costs of living and doing business in the city.

But judging from how the city handled last year’s terrorist attack, these longer-run problems seem much less likely to knock New York City off its pedestal today than they did a year ago.