Panic of 1857
The Panic of 1857 left the town of Keokuk, Iowa, with building lots that once sold for $1,000 and now could not be sold for $10. Thousands of properties there slipped into tax delinquency, because owners could no longer pay what they owed.
That collapse was one small corner of a financial crisis that struck the United States and then reached far beyond it. It was the first American panic to spread rapidly across the whole country, and the first to be called worldwide.
This documentary asks how a prosperous stretch of years could end so abruptly. Why did a Supreme Court ruling about slavery shake the price of railroad stock? What did a telegraph line have to do with failing banks on two continents? Why did one region of the country barely feel the blow, while another took a heavy hit? And what did the President of the United States say he could do about it?
California's gold rush filled the early 1850s with money. The large amount of gold mined there greatly expanded the money supply, and the United States enjoyed great prosperity.
By the mid-1850s the amount of gold coming out of the ground had begun to decline. Western bankers and investors grew wary, and eastern banks tightened their lending in the eastern states. Some eastern banks even refused to accept paper currencies issued by western banks.
Railroads were the other engine of the boom. Large numbers of people were migrating west, especially to Kansas, and that influx made railroad companies profitable. Banks responded by handing those companies large loans.
Many of the new companies never got past the paper stage. They never owned the physical assets needed to run a real railroad. Speculative entrants kept crowding into the field, and a stock market bubble in railroad shares swelled larger.
Because the years just before 1857 had been so prosperous, many banks, merchants, and farmers had seized the chance to take risks with their investments. In March 1857, a Supreme Court decision gave all of them a new reason for unease.
In March 1857, the Supreme Court decided Dred Scott v. Sandford. Dred Scott, an enslaved man, had sued for his freedom. Chief Justice Roger Taney ruled that Scott was not a citizen because he was black, and so had no right to sue in court.
Taney went further. He called the Missouri Compromise unconstitutional and said the federal government could not prohibit slavery in US territories. Western territories north of the Missouri Compromise line were now open to the expansion of slavery, which carried drastic financial and political consequences.
The markets noticed within days. A later account recorded that "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March." The same account concluded that "political news about future territories called the tune in the land and railroad securities markets".
For railroads already riding a speculative bubble, the ruling added uncertainty about where the lines would run and who would settle along them. Soon after the decision, "the political struggle between 'free soil' and slavery in the territories" began.
In July 1857, railroad stock values reached their peak. On the 11th of August 1857, N. H. Wolfe and Company, the oldest flour and grain company in New York City, failed. Investor confidence was shaken, and a slow selling-off began that continued into late August.
The morning of the 24th of August 1857 brought a harder blow. The president of Ohio Life Insurance and Trust Company announced that its New York branch had suspended payments. The company was based in Ohio, with a second main office in New York City.
Ohio Life held large mortgages and served as the liaison to other Ohio investment banks. It went bankrupt because of fraud by its own management. That threatened to topple other Ohio banks, or worse, to trigger a run on the banks.
The New York Daily Times reported that the suspended New York City and Cincinnati branches carried liabilities, "it is said", of $7,000,000. The banks connected to Ohio Life were reimbursed, and they avoided suspending convertibility by credibly insuring one another against runs.
Still, the failure drew public attention to the state of the railroad industry and the land markets. The panic, beginning in September 1857, became more visible. A ship sank that month, and New York City banks had been waiting on its much-needed shipment of gold. Soon businesses began to fail, and hundreds of thousands of workers would be laid off.
Samuel F. Morse invented the telegraph in 1844, and by 1857 it had changed how quickly bad news could travel. That is why the Panic of 1857 became the first financial crisis to spread rapidly throughout the United States.
The world economy was also more interconnected by the 1850s. This made the panic the first worldwide economic crisis.
In Britain, the trouble had a second source. The Bank Charter Act 1844 required gold and silver reserves to back up the money in circulation. The Palmerston government circumvented those requirements, and when news of the workaround surfaced, it set off panic.
News of the American crisis also caused runs on banks in Glasgow, Liverpool, and London. The Borough Bank of Liverpool closed its doors on the 27th of October 1857. The Western Bank of Scotland failed on the 9th of November, and the City of Glasgow Bank followed two days later.
On the 12th of November, the government was forced to suspend the Bank Charter Act 1844 again. The bullion in the Bank of England began to rise soon after. Unlike during the Panic of 1847, though, the suspension was required this time for British currency to remain legal and convertible. The fiduciary issue was temporarily increased by £2 million, and it was used between the 18th of November and the 23rd of December 1857.
By early 1858, "commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory". Merchants around the country saw sales and profits fall. The railroads "had created an interdependent national economy", and the western downturn now threatened a wider crisis.
Banks had financed railroads and land purchases, so they felt every drop in railroad securities. The Illinois Central; Erie; Pittsburgh, Fort Wayne and Chicago; and Reading lines were all forced to shut down. The Delaware, Lackawanna and Western Railroad and the Fond du Lac Railroad declared bankruptcy.
The Boston and Worcester Railroad Company sent its employees a memo in late October 1857. Receipts from passengers and freight had fallen by over twenty thousand dollars compared with the same month a year earlier, with "very little prospect of any improvement during the coming winter". Workers would take a "reduction in pay of ten percent".
Farmers were hit from another direction. In 1855, grain had skyrocketed to $2.19 a bushel, and many farmers bought more land to grow more crops. By 1858, grain had fallen to $0.80 a bushel. Revenue shrank, farmers defaulted on their mortgages, and banks foreclosed on recently purchased land.
Keokuk, Iowa, shows the scale. By 1858 the town owed $900,000, mostly on railroad bonds, while the value of its taxable property dropped by $5.5 million. Land sales declined dramatically, and westward expansion essentially halted until the panic ended.
President James Buchanan looked at the wreckage by 1859, when the panic began to level off, and named a culprit. He announced that the paper-money system seemed to be the root cause. He then withdrew all bank notes under twenty dollars from use.
Buchanan argued that this would shrink the paper money supply. That would give the supply of specie, meaning gold and silver coin, time to grow, and it would reduce inflation. He urged state banks to follow the example of the federal government and its Independent Treasury system, which let Washington keep up with specie payments.
In his State of the Union message of the 7th of December 1857, Buchanan took credit for that system. He said the government had not suspended payments, as it was compelled to do after the bank failures of 1837. He added that its coin disbursements "pass into circulation and materially assist in restoring a sound currency."
His strategy was summed up as "reform not relief". He held that "the government sympathized but could do nothing to alleviate the suffering individuals."
To prevent future panics, Buchanan asked Congress to pass a law forfeiting a bank's charter immediately if it suspended specie payments. He wanted state banks to hold one dollar in specie for every three issued as paper. He also discouraged using federal or state bonds as security on bank notes, to avoid future inflation.
The largely agrarian southern economy had few railroads, and it suffered little from the panic. The northern economy took a significant hit and recovered slowly. The Great Lakes region was affected most, and its troubles were "quickly passed to those enterprises in the East that depended upon western sales".
After approximately a year, much of the economy in the North and the entire South had recovered. Even so, banks in the United States did not fully recover until after the Civil War. The downturn itself did not last long, but a proper recovery was delayed until the Civil War began in 1861.
By 1859, tensions between North and South over slavery were growing. Many in the South read the panic as proof that the North needed the South to keep its economy stable. Southern threats of secession were temporarily quelled. Southerners believed the panic had made the North "more amenable to southern demands" and would help keep slavery alive in the United States.
The panic also left a spiritual mark. According to Kathryn Teresa Long, a religious revival of 1857-1858 led by Jeremiah Lanphier began among New York City businessmen in the early months of the panic.
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Common questions
What caused the Panic of 1857?
The Panic of 1857 was caused by a declining international economy and over-expansion of the domestic economy in the United States. Speculation in railroads and western land, the failure of Ohio Life Insurance and Trust Company, and a gold shipment delayed by a ship sinking all contributed.
Why was the Panic of 1857 the first worldwide economic crisis?
The world economy was more interconnected by the 1850s, and the telegraph, invented by Samuel F. Morse in 1844, let news spread quickly. News of the American crisis caused runs on banks in Glasgow, Liverpool, and London.
What role did the Ohio Life Insurance and Trust Company play in the Panic of 1857?
On the 24th of August 1857, Ohio Life announced that its New York branch had suspended payments. The company went bankrupt because of fraud by its management, and its failure brought public attention to the railroad industry and land markets.
How did the Dred Scott decision affect the Panic of 1857?
The Dred Scott decision of March 1857 opened western territories north of the Missouri Compromise line to the expansion of slavery. Prices of Kansas land warrants and western railroad securities declined slightly soon after, adding uncertainty to an already speculative railroad market.
How did President Buchanan respond to the Panic of 1857?
Buchanan adopted a strategy of "reform not relief" and blamed the paper-money system. He withdrew bank notes under twenty dollars and asked Congress to forfeit the charter of any bank that suspended specie payments.
Which parts of the United States suffered most in the Panic of 1857?
The Great Lakes region was affected most, and the northern economy took a significant hit. The largely agrarian southern economy, which had few railroads, suffered little.
How did the Panic of 1857 affect Britain?
News of the American crisis caused runs on banks in Glasgow, Liverpool, and London, and the Borough Bank of Liverpool closed on the 27th of October 1857. The government suspended the Bank Charter Act 1844 on the 12th of November, and the fiduciary issue was temporarily raised by £2 million.
All sources
31 references cited across the entry
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