Panic of 1857
The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Because of the interconnectedness of the world economy by the 1850s, the financial crisis that began in late 1857 was the first worldwide economic crisis. In Britain, the Palmerston government circumvented the requirements of the Bank Charter Act 1844, which required gold and silver reserves to back up the amount of money in circulation. Surfacing news of this circumvention set off the Panic in Britain.
Beginning in September 1857, the financial downturn did not last long; however, a proper recovery was not seen until the American Civil War, in 1861. The sinking of SS Central America contributed to the panic of 1857, as New York banks were awaiting a much-needed shipment of gold. American banks did not recover until after the civil war. After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread as businesses began to fail, the railroad industry experienced financial declines, and hundreds of workers were laid off.
Since the years immediately preceding the Panic of 1857 were prosperous, many banks, merchants, and farmers had seized the opportunity to take risks with their investments and as soon as market prices began to fall, they quickly began to experience the effects of financial panic.
In the early 1850s, there was much economic prosperity in the United States, to a major extent stimulated by the large amount of gold discovered and mined in the California Gold Rush, which greatly expanded the money supply. By the mid 1850s, the amount of gold mined began to decline, causing western bankers and investors to become wary. Eastern banks became cautious with their loans to the west, and some even refused to accept western bank-issued paper currencies.
The Supreme Court ruling in Dred Scott v. Sandford was handed down in March 1857. After Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was black and therefore did not have the right to sue in court. The ruling also made the Missouri Compromise unconstitutional by saying the federal government could not prohibit slavery, and since it controlled the territories, could not ban slavery in them. It was clear that the decision would have a significant impact on the further development of the western territories. Soon after the ruling, "the political struggle between 'free soil' and slavery in the territories" began. The western territories north of the Missouri Compromise line were now opened to the possibility that slavery might expand into them, and it was quickly evident that this would have drastic financial and political effects. "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March." This fluctuation in railroad securities proved "that political news about future territories called the tune in the land and railroad securities markets".
Before 1857, the railroad industry was booming due to large migrations of people to the west, especially in Kansas. With the large influx of people, the railroads became a profitable industry and the banks seized the opportunity and began to provide railroad companies with large loans. Many of these companies never made it past the stage of a paper railroad and never owned physical assets necessary to run one. Prices of railroad stocks as a whole began to experience a stock bubble, and railroad stocks saw increasingly speculative entries into the fray, making the bubble worse. In the meantime, the aforementioned Dred Scott decision lent uncertainty to railroads in general.
Stock market declineEdit
In July 1857, railroad stocks saw their peak values. On August 11, 1857, N. H. Wolfe and Company, the oldest flour and grain company in New York City, failed. The failure shook investor confidence and began a slow selloff in the market which continued into late August.
Failure of Ohio Life Insurance and Trust CompanyEdit
On the morning of August 24, 1857, the president of Ohio Life Insurance and Trust Company announced that its New York branch had suspended payments. Ohio Life was an Ohio-based bank with a second main office in New York City. The company had large mortgage holdings and was the liaison to other Ohio investment banks. Ohio Life failed due to fraudulent activities by the company's management, and its failure threatened to precipitate the failure of other Ohio banks or even worse, to create a run on the banks. According to an article printed in the New York Daily Times, Ohio Life Insurance and Trust Company's "New York City and Cincinnati [branches were] suspended; with liabilities, it is said, of $7,000,000". Luckily, the banks connected to Ohio Life Insurance and Trust Company were reimbursed and "avoided suspending convertibility by credibly coinsuring one another against runs". The failure of Ohio Life brought attention to the financial state of the railroad industry and land markets, thereby causing the financial panic to become a more public issue.
By the spring of 1858, "commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory"; as a result of limited purchasing in the west, merchants around the country began to see decreases in sales and profits. The railroads "had created an interdependent national economy, and now an economic downturn in the West threatened ... [an] economic crisis". Since many banks had financed the railroads and land purchases, they began to feel the pressures of the falling value of railroad securities. The Illinois Central; Erie; Pittsburgh, Fort Wayne and Chicago; and Reading Railroad lines were all forced to shut down owing to the financial downturn. The Delaware, Lackawanna and Western Railroad and the Fond du Lac Railroad companies were forced to declare bankruptcy. The Boston and Worcester Railroad Company also experienced heavy financial difficulties. The employees were informed, in a memo written in late October 1857, "the receipts from Passengers and Freight have fallen off during [the] last month (as compared with the corresponding month of last year), over twenty thousand dollars, with very little prospect of any improvement during the coming winter." The company also announced that their workers would receive a "reduction in ... pay of ten percent". In addition to the decreasing value of railroad securities, farmers began to default on payments on their mortgaged lands in the west, which put more financial pressure on banks.
The prices of grain also decreased significantly, and farmers experienced a loss in revenue, causing banks to foreclose on recently purchased lands. Grain prices in 1855 had skyrocketed to $2.19 a bushel, and farmers began to purchase land to increase their crop supply, which in turn would increase their profits. However, by 1858, grain prices dropped severely to $0.80 a bushel. Many Midwest towns felt the pressures of the Panic. For example, the town of Keokuk, Iowa experienced financial strife due to the economic downturns of 1857.
A huge municipal debt magnified Keokuk's problems. By 1858 the town owed $900,000, mostly on railroad bonds, while the value of its taxable property dropped by $5.5 million. Lots that brought $1,000 before the crash now could not be sold for $10. Hard-hit property owners were unable to pay their taxes, and thousands of properties slipped into tax delinquency.
As a result of such price decreases, land sales declined dramatically and westward expansion essentially halted until the Panic ended. Merchants and farmers both began to suffer for the investment risks they had taken when prices were high.
By 1859, the Panic began to level off and the economy had begun to stabilize. President James Buchanan, after announcing that the paper-money system seemed to be the root cause of the Panic, decided to withdraw the usage of all bank notes under twenty dollars. He also "advised the State banks to break away from the banks [and urged] them to follow the example of the Federal Government". He felt this would decrease the paper money supply, in order to allow the specie supply time to increase and reduce inflation rates. President Buchanan wanted the state banks to follow the federal government, specifically, the Independent Treasury system. This system allowed the federal government to keep up with specie payments, which helped alleviate some of the financial stress that the bank suspensions had brought on.
In his December 7, 1857 State of the Union message, Buchanan said:
Thanks to the independent treasury, the government has not suspended [specie] payments, as it was compelled to do by the failure of the banks in 1837. It will continue to discharge its liabilities to the people in gold and silver. Its disbursements in coin pass into circulation and materially assist in restoring a sound currency.
He also revealed this new strategy of "reform not relief", expressing his feeling that "the government sympathized but could do nothing to alleviate the suffering individuals". To avoid further financial panics, Buchanan encouraged the United States Congress to pass a law to provide immediate forfeit of a bank's charter in the event that the bank suspended specie payments. Additionally, he asked state banks to keep one dollar in specie for every three issued as paper, and discouraged the use of federal or state bonds as security on bank notes to avoid future inflation.
The results of the Panic of 1857 were that the largely agrarian southern economy, which also had few railroads, suffered little, whereas the northern economy took a significant hit and made a slow recovery. The area affected the most by the Panic was the Great Lakes region, and the troubles of that region 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 from the Panic.
Near the end of the Panic, in 1859, tensions between the North and South regarding the issue of slavery in the United States were increasing. The Panic of 1857 was encouraging to those in the South who believed the North needed the South to keep a stabilized economy, and southern threats of secession were temporarily quelled. Southerners believed the Panic of 1857 made the North "more amenable to southern demands" and would help to keep slavery alive in the United States.
As noted by Kathryn Teresa Long in her book The Revival of 1857–58: Interpreting an American Religious Awakening (Oxford University Press, 1998 online edition), the religious Revival of 1857–1858 began among New York City businessmen in the early months of the Panic.
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|Wikimedia Commons has media related to Panic of 1857.|
- Riddiough, Timothy J. and Thompson, Howard E. "Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857" (April 18, 2012). HKIMR Working Paper No.10/2012 doi:10.2139/ssrn.2042316
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- Visit to Dred Scott, 1857, Library of Congress