Panic of 1857

The Event: Economic downturn that ended a period of prosperity following the end of the Mexican War and the discovery of gold in California
Date: Began on August 24, 1857
Place: New York, New York
Significance: The Panic of 1857 was linked to the absence of a central banking system in the United States. Many banks independently suspended payments, despite having enough specie to meet demand, perhaps frightening others into following their examples: A core of principles and safeguards could thus have prevented or mitigated the panic. Its effects set the stage for bank reform and the eventual passage of the National Banking Act in 1863.
The Panic of 1857 began in August of that year, but the complex events that gave rise to the crisis originated much earlier. Alarms were sounded following the close of the Crimean War in 1856, when Russia’s dependence on American crops ended with the return of Russian soldiers to their farms. In the agricultural regions of the United States, the boom period of the 1850’s, based on the discovery of gold in California and in Australia in 1851, had fueled enormous land speculation and railroad commitments. The decrease in Russian demand for grain exports was damaging to agricultural land speculators. Moreover, certain instabilities in the financial structure of Great Britain, America’s strongest economically, were ominous. By 1856, the credit structure of the United States was seriously overextended and in need of credit reduction.

The Panic Begins

On the morning of August 24, 1857, the New York branch of the Ohio Life Insurance and Trust Company announced that the bank had failed and closed its doors. News spread quickly that the entirety of the bank’s assets had been embezzled by its cashier, and Wall Street immediately suffered a decline in stocks. Within hours of Ohio Life’s failure, other New York banks closed, sending public distrust and loss of confidence soaring.
In September, 1857, the steamer Central America, loaded with $2 million in Californian gold and headed for New York to renew the dwindling specie (gold coin) reserves of the eastern U.S. banks, sank during a hurricane off the coast of North Carolina. The shipment had been needed to maintain the ratio between deposits and specie in the banks. The toll of human lives and the catastrophic loss of largely uninsured gold further undermined public confidence in the banking system, and many Americans feared the government’s paper currency was worthless.

Recovery

The panic itself was relatively brief, and by December 14, two months after total suspension, the New York banks resumed specie payments, aided by a massive influx of gold from California and abroad. By the end of the year, banks in Boston, New England, and New Orleans, and very soon those in Philadelphia and Baltimore, also resumed paying specie in full.
The economic recession had lasting effects on merchants and property owners. Hundreds of thousands of men in New York, Chicago, and other large cities were unemployed throughout the winter. Protests were made in the cities hardest hit, most of which adopted relief measures. Within a year, more than five thousand businesses had failed.
Many sections of the country were ravaged by the Panic of 1857: Only California was unscathed. The severity of the panic in the Midwest precipitated a prolonged period of misery with few signs of recuperation. While the East and the larger cities in the West were recovering, midwestern farmers struggled with crop failure and severe drought that resulted in shortages of grain for humans and animals. Thousands of farmers whose farms had been mortgaged to the railroads, now bankrupt, saw no immediate relief for their dismal plight. The South, too, despite its economic reliance on cotton, suffered a paralysis of trade.
The inequities in conditions across the United States exacerbated sectional differences and political tensions. Issues surrounding states’ rights, particularly the question of state banknotes and a need for a sound banking system, remained bitterly divisive through the beginning of the U.S. Civil War.