Since navigation was primarily by water, there were limitations on the settlement of western New York. One could navigate up the Hudson and Mohawk Rivers to Central New York, but then had to pass overland to reach the west. Likewise one could come up the St. Lawrence River to Lake Ontario but had to move overland from its southern shore, and the way westward to the remaining Great Lakes was also blocked by Niagara Falls. From 1807 there was discussion of a canal, or series of canals, all of which came to naught, until Governor DeWitt Clinton put all his weight into the proposal, and in 1817 the first portion of a canal was begun, to connect the Hudson River with Lake Erie (and thence to the rest of the Great Lakes). The easy part was built first, a series of bypasses of rapids on the Mohawk River.

Though there was opposition, and the canal was derisively called "Clinton's Ditch" or worse, "Clinton's Folly," the canal was finally completed in 1825. Officially the event was celebrated by cannon shots along the length, and by Governor Clinton ceremonially pouring Lake Erie water into the New York Harbor in the "Wedding of the Waters." The Erie Canal proved to be a stroke of genius, as settlers now poured from New England, Eastern New York and Europe into the central and western part of the state. Others went on to Ohio and Michigan. The Canal was the first serious route for settlement west of the Appalachian Mountains, which had previously been a geographic barrier. Now upstate farms and industries could easily ship their products to the large and growing market of New York City and beyond. Had the Welland Canal, which bypassed Niagara Falls to connect Lakes Ontario and Erie, been built first, instead of in 1833, the history of North America could have been far different, with Montreal, Quebec becoming the main eastern port, instead of New York City.

The Erie Canal, though no longer so important a trade route (it is supplanted by railroads and highways) still defines the central commerce belt of New York State. The port city of Buffalo, Lockport, where the canal crossed a great limestone ridge, mill-town Rochester on the Genessee, and many smaller cities owe their growth, perhaps even their existence, to the Erie. Connecting canals were also built to Lake Ontario and the larger Finger Lakes.