The Panic of 1857
The catalyst for the Panic of 1857 was the failure on August 24, 1857 of the New York branch of the Ohio Life Insurance and Trust Company. It was soon reported that the entire capital of the Trust's home office had been embezzled. What followed was one of the most severe economic catastrophes in U.S. history.
New York bankers almost immediately put severe restrictions on even the most routine transactions. In turn, many people interpreted these restrictions as a sign of impending financial collapse and reacted with panic. Individual holders of stock and of commercial paper rushed to their brokers and eagerly made deals that "a week before they would have shunned as a ruinous sacrifice." As Harper's Weekly described the scene on the New York Stock Exchange, ". . . prominent stocks fell eight or ten per cent in a day, and fortunes were made and lost between ten o'clock in the morning and four of the afternoon."
The Report of the Clearinghouse Committee, produced in the years following the The Panic of 1857, found that "A financial panic has been likened to a malignant epidemic, which kills more by terror than by real disease." Yet behind the reaction of New York's bankers to the closing of a trust company lay a confluence of national and international events which heightened concern.
The British withdrew capital from
Grain prices fell.
Russia undersold U.S. cotton on the open market
Manufactured goods lay in surplus.
Railroads overbuilt and some then defaulted on debts.
Land schemes and projects, dependent on new rail routes, failed.
To compound the problem, the SS Central America, a sailing vessel transporting millions of dollars in gold from the new San Francisco Mint to create a reserve for eastern banks, was sunk in mid-September. As banking institutions of the day dealt in specie (gold and silver coins instead of paper money) the loss of some thirty thousand pounds of gold reverberated through the financial community. Howell Cobb, Secretary of Treasury, encouraged not only the placement of vast amounts of such government gold on the market, but also redemption of government bonds at a premium. At his suggestion President James Buchanan proposed to Congress that the Treasury be authorized to sell revenue bonds for the first time since the Mexican American War.(1847)
Although bankers showed the first signs of concern, depositors soon followed. On October 3 1857, there was a marked increase of withdrawals in New York, and over the the next two weeks withdrawals nearly quadrupled. Reports of financial instability, perhaps exaggerated, were quickly carried between cities by the new telecommunications medium, the telegraph.
As the public's faith in soundness of financial institutions continued to plummet the nation's banks did, in fact, begin to collapse. Although the East coast was hardest hit, with bank closures in New York, Philadelphia, Baltimore and elsewhere, bank failures also reached across the Missouri River in cities like Omaha. The climax came in mid-October, when banking was suspended in New York and throughout New England.
The term panic refers to the worst moments of a financial crisis. What follows is frequently a recession (a period of reduced economic activity) or a depression (a more serious and prolonged period of low economic activity, marked especially by rising unemployment). The contraction of the economy which followed the Panic of 1857 was profound and had parallels in Europe, South America, South Africa, and the Far East causing it to be held as the first worldwide economic crisis. In the U.S., the setback caused significant job loss; a major slowdown in capital investment, commerce, land development, the formation of unions, and the rate of immigration. The effects of the "revulsion," as it was referred to at the time, lasted a full eighteen months and reverberated until the onset of the Civil War.