Financial crisis of 1857 summary

All crises actually start during the good times and there was much economic prosperity in the United States in 1850s. The railroad industry was strongly growing due to vast migrations of people to the west, especially in Kansas. With the large number of people moving, the railroads soon became a profitable industry and the banks didn't plan to miss such an opportunity.

They provided railroad companies with large loans, taking caution aside because it seemed like an unlimited expansion. However, by late summer of 1857, the value of western land fell and migration drastically slowed down. As a result railroad securities fell in value.

Simultaneously, the European market for goods from western America began to decline, making bankers and foreign investors very anxious. Eastern banks became extremely cautious with their loans to the west and some even refused to accept western currencies.

Soon the commercial credit had dried up, forcing already debt-ridden merchants to curtail new purchases of inventory. Limited purchasing in the west meant decreases in sales and profits for the western merchants.

The railroad speculation and grain price fall
Economic downturn in the west parts of United States threatened the east, and so the foundations for the national economic crisis were set. Since many banks had financed the railroads and land being purchased, they began to feel the pressures of the falling railroad securities. In addition to the decreasing value of railroad securities, farmers began to foreclose on their mortgaged lands in the west, which put more financial pressure on banks. Grain prices in 1855 had skyrocketed to $2.19 a bushel, so farmers had begun to purchase more land to increase their crop supply, counting on the continuation of the price growth, which would then increase their profits. The grain price decreased significantly and farmers of 1857 experienced huge losses in revenue. By 1858, grain prices dropped severely to $0.80 a bushel, causing thousands of foreclosures.

The immediate event that started the panic was the failure of the New York branch of the Ohio Life Insurance and Trust Company, which was at the time a major financial market force that collapsed following massive embezzlement.

Stock market panic
On August 24, 1857, the news of the collapse spread quickly, in part because of the telegraph invention which became common. It was soon reported that the entire capital of the Trust's home office had been embezzled. New York bankers put severe restrictions on even the most routine transactions. In turn, many people interpreted these restrictions as a sign of impending financial collapse and panicked. Investors began to withdraw money from Wall Street in massive numbers.

British investors were among the first that reacted to the new situation, so when they started to pull out their significant funds out of the stock market, American investors started to question further the current market state. The Ohio Life Insurance and Trust Company had large mortgage holdings and was the liaison to other Ohio investment banks. Ohio Life failed due to fraudulent activities by the company's management and its failure damaged the public confidence in banks, increasing the chances for bank runs.

SS Central America accident
To make the matters worse, the SS Central America, a steamship transporting millions of dollars in gold from the new San Francisco Mint to create a reserve for eastern banks, was caught up in a hurricane and sunk in mid-September. The vessel had aboard 581 persons, many carrying great personal wealth and more than $1 million in commercial gold. She also bore a secret shipment of 15 tons of federal gold, valued at $20 per ounce, intended for the eastern banks.

Public confidence in the government's ability to back its paper currency with specie sunk with the ship. As the public's faith in soundness of financial institutions continued to plummet, the national banks began to collapse. The East Coast was hit the hardest with bank closures in New York, Philadelphia, Baltimore, bank failures also reached across the Missouri River to cities such as Omaha. The peak came on October 14 with the Suspension Day, when banking was suspended in New York and throughout New England. A bank holiday was declared in a vain effort to avert runs on those institutions. But holiday only proved as a non effective weapon in crisis management.

Next: Financial crisis of 1857 aftermath