Panic of 1857 facts for kids
The Panic of 1857 was a big financial crisis in the United States. It happened because the world economy was slowing down. Also, America's own economy had grown too fast.
Thanks to the invention of the telegraph by Samuel F. Morse in 1844, news traveled much faster. This meant the Panic of 1857 was the first financial crisis to spread quickly across the country. The world was also more connected by the 1850s. This made the Panic of 1857 the first economic crisis that affected the whole world.
The financial trouble started in September 1857. It didn't last too long, but things didn't fully get better until the American Civil War began in 1861. A ship called SS Central America sank in September 1857. This made the panic worse. New York banks were waiting for a very important shipment of gold from that ship.
After a bank called Ohio Life Insurance and Trust Company failed, the panic spread fast. Many businesses started to close. The railroad industry also faced big money problems. Hundreds of thousands of workers lost their jobs.
The years before 1857 were very good for the economy. Many banks, businesses, and farmers took big risks with their money. As soon as prices started to fall, they quickly felt the effects of the panic. American banks did not fully recover until after the Civil War.
Contents
What Caused the Panic?
The early 1850s were a time of great wealth in the United States. This was helped by all the gold found during the California Gold Rush. This gold greatly increased the amount of money available. By the mid-1850s, less gold was being found. This made bankers and investors in the West worried.
Banks in the East became careful about lending money. Some even refused to accept paper money from western banks.
How Did the Dred Scott Decision Affect Things?
The US Supreme Court made an important decision in March 1857. It was about a slave named Dred Scott. He sued for his freedom. The Chief Justice, Roger Taney, ruled that Scott was not a citizen. He said Scott, as a Black person, could not sue in court.
Taney also said that the Missouri Compromise was against the Constitution. This law had stopped slavery in some US territories. The decision meant that western territories north of the Missouri Compromise line could now have slavery. This had big financial and political effects.
Prices for land in Kansas and railroad stocks dropped slightly after this decision. This showed that political news about future territories could change the value of land and railroad investments.
Before 1857, the railroad business was booming. Many people were moving west, especially to Kansas. This large movement of people made railroads very profitable. Banks started giving railroad companies huge loans.
However, many of these companies were just "paper railroads." They didn't actually own tracks or trains. They were just ideas on paper. Prices of railroad stocks began to rise too much, like a stock market bubble. More and more people invested, making the bubble worse. The Dred Scott decision added to the uncertainty for railroads.
Stock Market Decline
In July 1857, railroad stock values were at their highest. On August 11, 1857, a very old flour and grain company in New York City, N. H. Wolfe and Company, failed. This made investors lose confidence. It started a slow selling-off of stocks that continued into late August.
Failure of Ohio Life Insurance and Trust Company
On August 24, 1857, the president of Ohio Life Insurance and Trust Company announced bad news. Their New York office had stopped making payments. This company was an Ohio-based bank with a main office in New York City. It had many mortgage loans. It also connected to other Ohio investment banks.
Ohio Life went bankrupt because of dishonest actions by its leaders. This threatened to cause other Ohio banks to fail. Even worse, it could cause a "bank run." A bank run is when many people try to take their money out of a bank at the same time.
The failure of Ohio Life showed how shaky the railroad industry and land markets were. It made the financial panic much more public.
Long-Term Effects
By the spring of 1858, it was hard to get business loans. This forced businesses in the West, who were already in debt, to stop buying new goods. Less buying in the West meant businesses across the country saw fewer sales and profits.
Railroads had created a national economy where everyone depended on each other. Now, money problems in the West threatened the whole country. Many banks had lent money to railroads and for land purchases. So, they felt the pressure as railroad stock values fell.
Several major railroad lines had to shut down because of the financial trouble. These included the Illinois Central Railroad, Erie Railroad, and Reading Railroad. Other lines, like the Delaware, Lackawanna and Western Railroad, went bankrupt.
The Boston and Worcester Railroad Company also faced big money problems. In October 1857, their workers were told that money from passengers and freight had dropped a lot. The company announced a 10% pay cut for its workers.
Besides falling railroad values, farmers in the West also started to miss payments on their mortgaged lands. This put even more pressure on banks.
Grain prices dropped a lot. Farmers lost money. This caused banks to take back lands that farmers had recently bought. In 1855, grain prices were very high, at $2.19 a bushel. Farmers bought more land to grow more crops and make more money. By 1858, grain prices fell sharply to $0.80 a bushel.
Many towns in the Midwestern United States felt the panic. For example, the town of Keokuk, Iowa, faced big money troubles:
- Keokuk owed $900,000, mostly for railroad bonds.
- The value of its taxable property dropped by $5.5 million.
- Land lots that cost $1,000 before the crash could not be sold for $10.
- Property owners could not pay their taxes. Thousands of properties became tax delinquent.
Because prices dropped so much, land sales almost stopped. Moving west largely halted until the Panic ended. Both businesses and farmers suffered for the investment risks they had taken when prices were high.
What Was Done to Fix It?
By 1859, the Panic started to calm down. The economy began to get stable again. President James Buchanan said that the paper-money system seemed to be the main cause of the Panic. He decided to stop using all bank notes worth less than twenty dollars.
He wanted to decrease the amount of paper money. This would allow the supply of gold and silver coins (called "specie") to increase. It would also help reduce inflation. Buchanan wanted state banks to follow the federal government's example. The Independent Treasury system allowed the federal government to keep paying with gold and silver. This helped ease some of the financial stress from bank closures.
In his speech on December 7, 1857, Buchanan said that the government had not stopped paying with gold and silver. He said this was thanks to the independent treasury. He believed this helped bring back a healthy money system.
Buchanan said the government would not give direct "relief" to suffering people. Instead, it would focus on "reform." To avoid future panics, he asked US Congress to pass a law. This law would immediately close any bank that stopped paying with gold and silver. He also asked state banks to keep one dollar in gold or silver for every three dollars issued as paper money. He discouraged using government bonds as security for bank notes to avoid future inflation.
Results of the Panic
The Panic of 1857 affected different parts of the country differently. The southern economy was mostly based on farming and had few railroads. So, it didn't suffer much. But the northern economy was hit hard and recovered slowly.
The Great Lakes region was affected the most. Its problems quickly spread to businesses in the East that relied on sales in the West. After about a year, much of the North and all of the South had recovered.
By the end of the Panic in 1859, tensions between the North and South over slavery in the United States were growing. The Panic of 1857 made people in the South believe that the North needed the South to keep its economy stable. Southern threats to leave the Union were temporarily quieted. Southerners thought the Panic made the North more willing to meet their demands. They hoped this would help keep slavery alive.
A religious revival also started in New York City among businessmen during the early months of the Panic. This was led by Jeremiah Lanphier.
Crisis in the United Kingdom
News of the crisis in America caused people to rush to banks in Glasgow, Liverpool, and London. The Borough Bank of Liverpool closed on October 27, 1857. The Western Bank of Scotland failed on November 9. The City of Glasgow Bank failed two days later.
The British government had to temporarily stop the rules of the Bank Charter Act 1844 on November 12. This law usually required gold and silver to back up money. The amount of money that could be issued without gold backing was temporarily increased. This was used between November 18 and December 23, 1857.
See also
- Black Friday (1869)
- Financial crisis
- Panic of 1873
- Panic of 1893
