In the 1870s and 1880s another business, closely related to logging and mills sprang up. Two brothers, the Hall brothers, built ships for the mills and for other customers. Between 1873 and 1880 they had built more than 30 ships of many descriptions: two- and three-masted schooners, barkentines, steamers, and yachts. Later they built larger four- and five-masted schooners, as the demand for larger ships grew.

Port Townsend became a boom town, because every vessel entering Puget Sound from any foreign port made its first stop there. Ships crews looking for liquor, women, and amusement, as well as supplies and repairs, filled the coffers.

At that time, it was a lot easier to get a ship than it was to get a crew to sail it. Shipboard conditions were terrible: the work was very hard and dangerous, and the seaman's pay was small, no more than $40-50 a month. Often he never saw his first month's pay: it was taken by crimps and skippers before he stepped, or was carried, aboard. Crimps were people who shanghaied (kidnapped) young men and sold them into service on sailing ships. If a seaman deserted, he could be jailed.

The most notorious of Port Townsend's crimps was Max Levy, who along with Ed Sims (later a member of the state legislature), and Oscar Klocker (British vice consul) ran the town's shanghaiing business.

A seaman's boarding house was not a friendly place. Many a crewman left his room as limp as a sack of wheat, and woke up 50 miles out to sea. Any sailor should have learned, although often he didn't, that it wasn't safe to trust anyone on shore. Max Levy's runners were everywhere. One of them, Gunny Gunderson, even drugged and shanghaied his own son.

The Port Townsend waterfront had saloons and boarding houses that made more money than the ships' chandleries, the grocery supply houses and the legitimate hotels. It was often said, somewhat in jest, that every other storefront was a saloon. The "genteel" people who lived on the bluff were afraid to come downtown. The had their own shopping district uptown.

Any respected Port Townsend businessman would tell you that his waterfront activity was regrettable, perhaps, but necessary. Half the ships that came into Puget Sound picked up their crews in Port Townsend. Legend has it that there is a network of "shanghai tunnels" under Port Townsend, through which seamen were taken to their waiting ships, but this is probably not true. It was easy enough to shanghai men without tunnels. The police generally looked the other way.

A visitor wrote: "Having visited Port Townsend...I have found that the natives are treated with no respect. Most of the people are not square dealing. There were six murders in 1853. Most of the people in Port Townsend are garden variety riffraff."

The boom in shipping and trade brought with it the necessity for a customs house to process the goods being brought in from foreign ports. At the same time, however, there were many disputes and much discussion about where the customs house should be located. At one point, President Grover Cleveland expressed his frustration by saying, "The Puget Sound District has caused more discord and annoyance than all the other districts put together." Port Townsend eventually won the dispute and built an elegant customs house, nowadays the home of the United States Post Office.