Panic of 1857

The Panic of 1857 was not the first financial crisis in American history, but it was the first to spread rapidly throughout the country. News of the financial crisis that occurred just 20 years prior  could only travel as fast as the postal service. After Samuel F.B. Morse invented the telegraph in 1844, news of the panic spread rapidly, creating a confidence crisis for investors throughout the United States and Europe.

What Caused the Panic of 1857?

In the last months of 1857, many people concluded that the failure of Ohio Life and Trust Company on August 24, 1857, had set in motion a series of events that created the Panic of 1857.

“The stoppage of the Ohio Life and Trust Company and the failure of the Mechanics’ Banking Association,” The New York Times editorialized, “must always be looked upon as the origin of the panic; just as the first outbreak of the cholera is traced to a small village in British India.”¹

Like many before and after, The New York Times used metaphors of disease to frame the panic as contagious plague.

American scholar James Sloan Gibbon believed the panic was a more psychological experience — a plague of the mind. The failure of Ohio Life “struck the public mind like a cannon shot,” Gibbons remembered. “Old houses, of accumulated capital, which had withstood the violence of all former panics, were prostrated in a day; and when they believed themselves to be perfectly safe against misfortune.”²

In an article for Hunt’s Merchants’ Magazine, Michigan lawyer Ezra Seaman observed how crisis “soon extended [from Ohio Life] to other banking companies.” Banks began to liquidate their investments, he wrote, selling off their once prized railroad stocks and bonds, an experience that “caused a rapid and unprecedented decline in the stocks and securities, and particularly in the bonds and stocks of railroads owing large debts.”³

For observers of the crisis, such as Ezra and Gibbons, the failure of Ohio Life was the direct cause of the Panic of 1857.

The Crimean War

Historians such as James Huston have revealed additional causes of the panic. In his 1988 book The Panic of the 1857 and the Coming of the Civil War, Huston argued that the crisis was not only caused by the failure of Ohio Life, it was also a consequence of the ending of the Crimean War in 1856.

Between 1854 and 1856,  the Crimean War interrupted Russian grain exports to Europe and increased the demand for wheat from the American West. This increase in demand, in turn, increased wheat prices and facilitated the inflow of migration to the West. While this was not the sole cause of land speculation in the American West, the demand for American grain (along with the California gold rush) played an important part.

When the Crimean War ended, Europeans stopped buying as much wheat from American farmers, which decreased prices and profits.

England purchased 1.02 million barrels of flour and 8.56 million bushels of wheat in the fiscal year ending on June 30, 1857. By June 30, 1858, flour exports dropped to 893,000 barrels, while wheat dropped to 5.12 million bushels, and by June 1859, only 984,000 bushels of wheat and 166,000 barrels of flour were purchased — a hard blow on one of the most important sectors of the American economy during this period.⁴

Video: Historian Eric Foner discusses role of the Crimean War on the Panic of 1857

Diminishing demand for wheat was further exacerbated by the failure of the New York branch of Ohio Life, Huston writes, marking the beginning of the Panic of 1857. Ohio Life’s branch manager in New York, Edwin C. Ludlow, made too many risky loans and embezzled money, which led the president of the bank, Charles Stetson, to suspend specie (gold and silver) payments to depositors on August 24, triggering a minor stock market crash.

Ohio Life’s stock declined from $101 on August 27, 1857, just days after the suspension, to $5 on September 2 — a full 95 percent drop. Railroads such as the LaCross-Milwaukee declined 67 percent between August 27 and October 21. In the same period, the Illinois Central Railroad dropped 22 percent, Galena-Chicago by 18 percent, Chicago-Rock by 17 percent, and the Reading Railroad by 12 percent.⁵ Historian James McPherson writes that the failure of Ohio Life set off a confidence crisis in the banking system.⁶

Suspension of Specie Payments

A full month after the failure of Ohio Life, Philadelphia’s Bank of Pennsylvania suspended specie payment on September 25, 1857, producing further uncertainty in the banking system.

The president of the bank, Thomas Allibone, told reporters that the suspension — while temporary — was caused by the failures of other banks. In an effort to increase confidence in their ability to pay depositors, the Bank of Pennsylvania made an official announcement on the day of suspension:

This bank, having been compelled to temporarily suspend specie payments, the board of directors assure all persons having claims against the bank, whether of circulation, deposit or otherwise that no loss can possibly occur. By order and on behalf of directors.⁷

While the bank itself blamed “other banks” for its suspension of specie payment, the New York Herald blamed the failure of the Bank of Pennsylvania on preferential loans, arguing that its bankers offered up to $300,000 to certain favorite borrowers, while longstanding customers who had proven themselves to be more sensible with money, did not receive loans at all.

“A good portion of the large loans referred to had been swamped in disastrous sugar speculations,” the New York Herald wrote on September 26, “and it was very manifest that the bank was to be a heavy loser.”⁸

In the February 1858 issue of Hunt’s Merchants’ Magazine, the political economist George Tucker explained that there were 506 banks in the United States in 1834 with $26.5 million in specie (gold and silver) in their vaults and $147.5 million in liabilities (deposits and loans).

By 1856 there were 1,253 banks with $60 million in specie and $417 million in liabilities.⁹ While banking houses were increasing their liabilities to specie ratio—a signal of growing risk within the banking system—a significant portion of the loans being offered went toward speculation in land and railroad securities.

Speculation in Land and Railroads

Excessive investment in railroad stocks and bonds since 1847 increased the price of these securities. Expectations that they would continue increasing led speculators to borrow money to purchase railroad securities, which was then used as collateral for additional loans. While this led to the completion of 24,476 miles of rail by July 1, 1857, it increased security prices well beyond their real value. In his 1857 article in Hunt’s Merchants’ Magazine, Ezra C. Seaman wrote:

For many years several of the leading roads made large dividends, their stocks stood high in the market, and the business and income of nearly all the roads increased beyond all expectation, which excited high hope of their productiveness and the value of their stocks in the future.¹⁰

Seaman highlights the centrality of confidence in railroad securities during this period. Railroads performed well for several years before the Panic of 1857, creating greater optimism that railroad securities would continue to pay dividends and increase in market value.

Economic historians Charles W. Calomiris and Larry Schweikart argue that western rail lines that connected the East with the developing West, were the primary source of speculative financing during this period.¹¹

Land speculators were especially eager to purchase land they thought would be used for railroad construction. If they could predict where Americans would settle and where a railroad would be constructed, they could purchase the land cheap and resell it at a much higher price after there was a rail line going through their land, or plans for constructing one.

Land speculation accompanied the expansion of western railroads. The greater the expectation of settlers and commerce in these regions, the greater the investment in land and railroads, which often involved speculative financing.

There was a perceived relationship between the value of land and the number of settlers in any given territory, and expectations of settlement was central. Investors who believed that settlement would continue to rise would be likely to invest, which would increase land prices in these regions.¹²

The expectation that the price of railroad securities would continue to rise, led speculators to take greater risks, borrowing money to invest in these securities on based solely on these optimistic expectations. “In times of prosperity, when credit is good and confidence unshaken,” Ezra Seaman further wrote, “the country will carry a large amount of debt, without embarrassment; but when the amount becomes excessive it tends to undermine and destroy confidence in the ability to pay punctually, and excites apprehension of eventual failure and loss.”¹³ The accumulation of debt to purchase securities increased the level of risk within American markets.

The Impact of the Telegraph on the Panic of 1857

The failure of large banking houses such as Ohio Life and the Bank of Pennsylvania produced bank runs throughout the nation, a process that was further exacerbated by the invention of the telegraph, which allowed the news of banking failures and stock market panic to spread rapidly throughout the United States.

Once the expectations that market prices for land and railroad securities would decline, it created panic in the large markets such as the New York Stock Exchange, where investors sold stocks and bonds in railroads to cut their losses, which decreased their prices further. The panic led creditors demand payment, which forced investors to sell securities, reducing their market prices.

Banks contracted loans, which caused farmers, merchants, and manufacturers, that relied on credit, to either go bankrupt or temporarily cease operations. Between September and October, ten banks reduced loans from $107.8 million $101.9 million, while deposits dropped from $73.3 million to $63.3 million.¹⁴

This became a liquidity crisis, which not only reduced confidence in the banking system, but the confidence in economic growth in the United States. “Confidence is the very soul and spirit of commerce,” the New York Times wrote on December 7, “and when that was destroyed, or badly impaired, business was at once at an end…”¹⁵

The Panic of 1857 Spreads to Europe

Given that nations in Europe such as Britain and France had invested heavily in American land and railroads, it was predictable that the crisis would impact Europe. On November 15, 1857, the London based Reynolds’s Newspaper, reported that the panic had “extended itself to France,” which led the Emperor of the French, Napoleon III, to published a letter to the Minister of France:

Mionsieur le Ministre, —I see with pain that, without either real or apparent cause, the public credit is injured by chimerical fears, and by the propagation of soi-disantremedies for an evil which only exists in the imagination.

—Napoleon.¹⁶

Acknowledging that the panic was a psychological experience, the nephew of Napoleon I revealed his attentiveness to the subtleties of financial markets, and pleaded with the Minister of France to “[g]ive heart to those [who] vainly frighten themselves…””Foreign Intelligence,” Reynolds’s Newspaper, London, England, November 15, 1857, Issue 379.[/note]

Perhaps the greatest foreign impact of the crisis was on Britain, the country which received over half of American exports and held a substantial amount of its debt. Foreign debt increased by $263 million between 1854 and 1857, much of which was held by Britain.¹⁷

While American capitalism was not dependent on foreign investment, historian Jay Sexton argues that it “was an essential lubricant without which the economic engine of the United States might have stalled.”¹⁸ Given that British investors held substantial positions in American securities, the declining market value of these stocks and bonds took a significant toll on foreign investors. The American steamship Baltic, arrived in Liverpool on November 20, 1857, providing news of the “money crisis” in the United States. Relaying the message in Dublin, Ireland, Freeman’s Journal and Daily Commercial Advertiser reported:

The [American] stock market is in a state of quiescence and prices are irregular, and businessmen generally are not inclined to hazard much until they can see clearer what is to be the result of the present financial storm at home and abroad.¹⁹

The interdependent nature of Europe and American economies not only impact the value of foreign investments, but trade as well.

Summary

The Panic of 1857 was a confidence crisis that spread rapidly throughout the United States via the telegraph and eventually reached Europe. The news itself was a source of instability within financial markets, creating uncertainty in economic prospects of American land and railroad securities for investors in the United States and Europe. Most observers attributed the crisis to the failure of Ohio Life Insurance and Trust Company or the end of the Crimean War.

These factors diminished investor confidence in the value of western land and that railroad securities would continue to increase. While speculative financing aided the expansion of the transcontinental railroad and westward migration, it also revealed inherent instability within American capitalism during this period.

Cover Photo: Run on the Seamen’s Savings’ Bank during the Panic of 1857. On October 13, 1857, after the Ohio Life & Trust Co. declared bankruptcy, panic struck the New York Stock Exchange and hundreds of other banks and individual investors were ruined. This wood engraving, , shows a crowd gesturing and shoving. A ragpicker picks up now-worthless stock certificates, and a pickpocket operates unnoticed. Wood engraving, 4.75 × 9.5 in. Unknown author – The 1857-10-31 issue of Harper’s Weekly (vol. I, p. 692). This copy came from the Library of Congress, Prints & Photographs Division, LC-USZ62-5358 (b&w film copy neg.)

1. “Causes of the Late Panic,” New York Times, December 7, 1857.
2. James Sloan Gibbons, The Banks of New-York, Their Dealers, the Clearing House, and the Panic of 1857: With a Financial Chart (New York: D. Appleton & Co), 344, 346.
3. Ezra C. Seaman, “The Panic and Financial Crisis of 1857,” Hunt’s Merchants’ Magazine and Commercial Review, December 1857, 659.
4. James L. Huston, The Panic of the 1857 and the Coming of the Civil War (Baton Rouge: Louisiana State University Press, 1987), 31.
5. Huston, The Panic of the 1857, 15.
6. McPherson, Battle Cry of Freedom, 190.
7. “The Financial Crisis,” New York Herald, New York, NY, September 26, 1857.
8. “The Financial Crisis,” New York Herald, New York, NY, September 26, 1857.
9. George Tucker, “Banks or no Banks,” Hunt’s Merchant Magazine, February 1858.
10. Seaman, “The Panic and Financial Crisis of 1857,” 655-666.
11. Charles W. Calomiris and Larry Schweikart, “The Panic of 1857: Origins, Transmission, and Containment.The Journal of Economic History51, no. 4 (1991): 807-834.
12. Calomiris and Schweikart, “The Panic of 1857,” 810.
13. Seaman, “The Panic and Financial Crisis of 1857,” 661.
14. Huston, The Panic of 1857, 19.
15. “Causes of the Late Panic,” New York Times, December 7, 1857.
16. “Foreign Intelligence,” Reynolds’s Newspaper, London, England, November 15, 1857, Issue 379.
17. Seaman, “The Panic and Financial Crisis of 1857,” 665.
18. Jay Sexton, Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837-1873 (New York: Oxford University Press, 2005), 9.
19. “The American Money Crisis,” Freeman’s Journal and Daily Commercial Advertiser. Dublin, Ireland, November 20, 1857.