Panic of 1857

thumb|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. 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 delayed until the onset of the American Civil War in 1861. The sinking of 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.

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.

Background

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.

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". 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.

Failure of Ohio Life Insurance and Trust Company

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.

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". The banks connected to Ohio Life 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 and caused the financial panic to become more public.

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".

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". The company announced that its workers would receive a "reduction in pay of ten percent". 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:

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." 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. 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.

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. The government was forced to suspend the Bank Charter Act 1844 again on November 12.