When the new Queen Victoria called in February, she met the Queen Elizabeth 2 on her last voyage—thirty years to the day after her first visit. They passed each other just before sunset on either side of Fort Denison, once known as Pinchgut, a tiny rocky isle in the middle of the waterway from which indigenous people once fished. Pinchgut became a prison when the British founded Sydney as a remote penal colony in the late eighteenth century, and then a naval fortress against the threat of a sea attack by France or the United States in the nineteenth century. Today, the island houses a museum.

The liners crossed in view of the harbor party that was warming people up for the Sydney Gay & Lesbian Mardi Gras the following weekend. The gathering was at the water's edge by Mrs. Macquarie's Chair, a seat carved into the sandstone of a tiny promontory by convicts so that the wife of one of the colony's earliest governors could enjoy the view. It had been more than two hundred years since Sydney's beginning as a prison settlement and exactly thirty since the parade was started as a protest march by several hundred people, some of whom were savagely beaten by police. Now Sydney's Mardi Gras is the world's biggest gay and lesbian celebration. The Sydney pleasure principle had triumphed again.

But this principle is frequently under threat. Once it was from the penitentiary culture of a global imperium. Now it's from the greed of global capitalism. The city's administrators have so far managed to save the harbor for the free enjoyment of the millions who live here, but this freedom is in peril. Developers have been trying to get their hands on the bushland around the North Head at the harbor entrance, and this year saw the narrow defeat of a proposal to build at Rose Bay a mega-marina for the mega-boats of the mega-rich. The marina would have forced out the little boats of the weekend sailors and fishermen, blocked the sea view of the people living along the shore, and closed off access for ordinary visitors. It won't be the last battle: Local government is increasingly susceptible—as local governments invariably are—to the money the developers are offering, and Sydney now means big money.

Rose Bay is on the way from Circular Quay to the harbor's South Head, a little farther than Rushcutters Bay, where the Cruising Yacht Club's maxi yachts are moored alongside more modest craft. The yachts set out every December 26 on the fast and sometimes dangerous ocean race from Sydney to Hobart, in Tasmania, more than six hundred miles south. It is the harbor's greatest moment: the summer morning when the surface of the water is swept by a huge flock of white sails—sails not just of the carbon-fiber maxi yachts with the logos of European banks and Japanese electronics, but of the small boats of the ordinary Australians who race in the wake of the high-tech corporate marvels and keep up the egalitarian strain of Sydney sailing. You almost expect to see the Opera House tacking for a leadership position as the fleet—without a working ship in its number—passes through the Heads.