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The Panic of 1857 was a financial crisis in the United States caused by the declining international economy and over-expansion of the domestic economy.
Because of the invention of the telegraph by Samuel F. Morse in 1844, the Panic of 1857 was the first financial crisis to spread rapidly throughout the United States.
The world economy was more interconnected by the 1850s, which made the Panic of 1857 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, but a proper recovery was not seen until the onset of the American Civil War in 1861. The sinking of SS Central America in September 1857 contributed to the panic, since New York City banks were waiting on a much-needed shipment of gold that was being transported by the ship. After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread with businesses beginning to fail, the railroad industry experiencing financial declines, and hundreds of thousands of workers being laid off.
Because 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. American banks did not recover until after the Civil War.
The early 1850s saw great economic prosperity in the United States, stimulated by the large amount of gold mined in the California Gold Rush that 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 in the eastern US, and some even refused to accept paper currencies issued by western banks.
The US Supreme Court decided Dred Scott v. Sandford in March 1857. After the enslaved man Dred Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was Black, and so did not have the right to sue in court. Taney also called the Missouri Compromise unconstitutional and said that the federal government could not prohibit slavery in US territories. The decision had a significant impact on the development of the western territories. Soon after the decision, 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 expansion of slavery, which would obviously 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.
More information: National Park Service
Before 1857, the railroad industry had been booming due to large migrations of people to the west, especially to Kansas. The large influx of people made the railroads a profitable industry, and the banks began to provide railroad companies with large loans. Many of the companies never made it past the stage of a paper railroad and never owned the physical assets necessary to run a real one. Prices of railroad stocks as a whole began to experience a stock bubble, and railroad stocks saw increasingly-speculative entries into the fray, worsening the bubble. In the meantime, the Dred Scott decision lent uncertainty to railroads in general.
In July 1857, railroad stock values peaked. On August 11, 1857, N. H. Wolfe and Company, the oldest flour and grain company in New York City, failed, shaking investor confidence and beginning a slow selling-off in the market that continued into late August.
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. The company, an Ohio-based bank with a second main office in New York City, had large mortgage holdings and was the liaison to other Ohio investment banks. Ohio Life went bankrupt because of fraudulent activities by the company's management, which threatened to precipitate the failure of other Ohio banks or, even worse, to create a run on the banks.
By the spring of 1858, commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory. The limited purchasing in the West led to merchants around the country seeing 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 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 by the financial downturn. The Delaware, Lackawanna and Western Railroad and the Fond du Lac Railroad were forced to declare bankruptcy.
By 1859, the Panic began to level off, and the economy had begun to stabilize. President James Buchanan announced that the paper-money system seemed to be the root cause of the Panic and then decided to withdraw the usage of all bank notes under twenty dollars. He advised the State banks to break away from the banks and urged them to follow the example of the Federal Government.
He felt that would decrease the paper money supply to allow the specie supply time to increase and to reduce inflation rates. Buchanan wanted the state banks to follow the federal government, specifically the Independent Treasury system, which allowed the federal government to keep up with specie payments. That helped to alleviate some of the financial stress that had been brought on by the bank suspensions.
The result of the Panic of 1857 was that the largely-agrarian southern economy, which had few railroads, suffered little, but 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.
By 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 encouraged 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 that the Panic of 1857 made the North more amenable to southern demands and would help to keep slavery alive in the United States.
More information: Columbia Business School
growing rich at the cost of our nation
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