Panic of 1857

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An illustration of a bank run on Seamen's Savings Bank during the Panic of 1857

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.<ref>Template:Cite web</ref> The world economy was more interconnected by the 1850s, which made the Panic of 1857 the first worldwide economic crisis.<ref>"Preface", Collected Works of Karl Marx and Frederick Engels Volume 28 (International Publishers: New York, 1986) p. XIII.</ref> 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.<ref>Note 238, Collected Works of Karl Marx and Frederick Engels Volume 12 (International Publishers: New York, 1921) p. 669-670.</ref>

Beginning in September 1857, the financial downturn did not last long, but a proper recovery was delayed until the onset of the American Civil War in 1861.<ref name="Business Cycles and Depressions">Template:Cite book</ref> The sinking of Template:SS in September 1857 contributed to the panic, because New York City banks were waiting on its much-needed shipment of gold. 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.<ref name= "A House Divided">Template:Cite web</ref>

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.<ref name="Business Cycles and Depressions"/> American banks did not recover until after the Civil War.<ref>Template:Cite web</ref>

Background

Template:Events leading to American Civil War The early 1850s had 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.<ref name="Justice of Shattered Dreams41">Template:Cite book</ref>

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.<ref name="Justice of Shattered Dreams50">Template:Cite book</ref> Soon after the decision, "the political struggle between 'free soil' and slavery in the territories" began.<ref name="PanicPage816">Template:Cite journal</ref>

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".<ref name="Justice of Shattered Dreams50"/>

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 railroad industry profitable, 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. A railroad industry stock market bubble began, and railroad stocks had increasingly-speculative entries into the fray, worsening the bubble. In the meantime, the Dred Scott decision lent uncertainty to railroads in general.Template:Citation needed

Stock market decline

In July 1857, railroad stock values peaked.<ref>Template:Cite book</ref><ref name="The Panic of 1857-1">Template:Cite journal</ref> 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.<ref name="Sobel98">Template:Cite book</ref>

Failure of Ohio Life Insurance and Trust Company

Template:Further 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.<ref name="Sobel99">Template:Cite book</ref> 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.<ref name="The Panic of 1857-2">Template:Cite journal</ref>

In an article printed in the New York Daily Times, Ohio Life's "New York City and Cincinnati [branches were] suspended; with liabilities, it is said, of $7,000,000".<ref name="Commercial Affairs Article">Template:Cite news</ref> The banks connected to Ohio Life were reimbursed and "avoided suspending convertibility by credibly coinsuring one another against runs".<ref name="PanicPage809">Template:Cite journal</ref> The failure of Ohio Life brought attention to the financial state of the railroad industry and land markets and caused the financial panic to become more public.<ref name="The Panic of 1857-3">Template:Cite journal</ref>

Lasting effects

By early 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".<ref name="Justice of Shattered Dreams41"/> Because many banks had financed railroads and land purchases, they began to feel the pressures of the falling value of railroad securities. The Illinois CentralTemplate:Zwsp; ErieTemplate:Zwsp; Pittsburgh, Fort Wayne and ChicagoTemplate:Zwsp; 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.<ref name="Justice of Shattered Dreams">Template:Cite book</ref>Template:Page needed

The Boston and Worcester Railroad Company experienced heavy financial difficulties. The employees were informed in a memo written in late October 1857 that "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".<ref name="Labor Relations in1857-1">Template:Cite journal</ref> The company announced that its workers would receive a "reduction in pay of ten percent".<ref name="Labor Relations in1857-1"/> In addition to the decreasing value of railroad securities, farmers began to default on payments on their mortgaged lands in the West, which put even more financial pressure on banks.<ref name="Justice of Shattered Dreams" />Template:Page needed

The prices of grain decreased significantly. Farmers experienced a loss in revenue, causing banks to foreclose on recently purchased lands. In 1855, grain prices had skyrocketed to $2.19 a bushel, and farmers began to purchase land to increase their crop supply, which increased their profits. By 1858, grain prices dropped severely to $0.80 a bushel.<ref name="Justice of Shattered Dreams45">Template:Cite book</ref> Many Midwestern towns felt the pressures of the Panic. For example, the town of Keokuk, Iowa, experienced financial strife from the economic downturns of the Panic:

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As a result of such a decrease of prices, land sales declined dramatically and westward expansion essentially halted until the Panic ended. Both merchants and farmers began to suffer for the investment risks that they had taken when the prices were high.<ref name="Justice of Shattered Dreams41"/>

Remedies

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".<ref name="Business Depression and Financial Panics">Template:Cite book</ref>

He said 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.<ref name="Justice of Shattered Dreams" />

In his State of the Union message December 7, 1857, 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.<ref>Template:Cite web</ref>{{#if:|

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He revealed the new strategy of "reform not relief" and expressed his position that "the government sympathized but could do nothing to alleviate the suffering individuals."<ref name="President James Buchanan">Template:Cite book</ref> To avoid further financial panics, Buchanan encouraged the US Congress to pass a law to provide the immediate forfeiture of a bank's charter if a bank suspended specie payments. He asked state banks to keep one dollar in specie for every three issued as paper, and he discouraged the use of federal or state bonds as security on bank notes to avoid future inflation.<ref name="President James Buchanan"/>

Results

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".<ref name="The Panic and the Coming of the Civil War">Template:Cite book</ref> After approximately a year, much of the economy in the North and the entire South had recovered from the Panic.<ref name="Western Grains and the Panic of 1857">Template:Cite journal</ref>

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.<ref name="The Panic and the Coming of the Civil War" />

According to Kathryn Teresa Long, the religious revival of 1857–1858 led by Jeremiah Lanphier began among New York City businessmen in the early months of the Panic.<ref>Template:Cite book</ref>Template:Page needed

Crisis in the United Kingdom

News of the crisis in America caused runs on the banks in Glasgow, Liverpool, and London. The Borough Bank of Liverpool closed its doors on October 27, 1857, and the Western Bank of Scotland failed on November 9 as did the City of Glasgow Bank two days later.<ref name=Read2022>Template:Cite book</ref>Template:Rp The government was forced to suspend the Bank Charter Act 1844 again on November 12.<ref name=Read2022 />Template:Rp

The bullion in the Bank of England started increasing soon after, but unlike the Panic of 1847, the suspension was required this time for the British currency to remain legal and convertible under the Bank Charter Act 1844. The fiduciary issue was temporarily increased to the extent of £2 million and was used between November 18 and December 23, 1857.<ref name=Read2022 />

See also

• Black Friday (1869)—Also referred to as the Gold Panic of 1869
• Financial crisis
• Panic of 1873
• Panic of 1893
• New England Shoemakers Strike of 1860

Bibliography

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• Glasner, David, ed. Business Cycles and Depressions: An Encyclopedia 1997.
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• Klein, Philip Shriver. President James Buchanan (Pennsylvania State University Press, 1962).
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• Long, Kathryn Teresa. The Revival of 1857–58: Interpreting an American Religious Awakening Oxford University Press, 1998 online edition Template:Webarchive
• Rezneck, Samuel. Business Depressions and Financial Panics (Greenwood 1968).
• Ross, Michael A. Justice of Shattered Dreams: Samuel Freeman Miller and the Supreme Court During the Civil War Era . Baton Rouge: Louisiana State University Press, 2003.
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• Template:Cite journal
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• Van Vleck, George W. The Panic of 1857, an Analytical Study (New York: Columbia University Press, 1943)

Contemporary newspaper

• "Commercial Affairs" New York Daily Times, August 28, 1857
• "A New Tariff" New York Daily Times, February 4, 1857

External links

• Template:Cite journal
• Dickinson College. "House Divided." Accessed October 30, 2010
• Visit to Dred Scott, 1857, Library of Congress