The economic collapse suffered last year, repeats the causes of the Panic of 1857 when a major financial institution triggered a nationwide economic melt down.
Fifty-three banks, employing two thousand men in various positions, operated in New York City. They held assets of sixty-six million dollars.
The decade of the 1850’s was a time of rapid economic exspansion. The nation was developing the lands recently acquired as a result of the Mexican-American War. Gold was discovered in California; this encouraged land speculation and railroad construction as people moved west. Railroads and agriculture drove commerce and industry. America became a net exporter of gold bullion,. The banking industry doubled in size between 1850-1857; they provided easy credit terms to their clients. New York City banks held a hundred twenty-two million dollars in outstanding loans.
Railroad construction was driving the economic growth. Financiers became uneasy at the growth of the loans granted to railroad and land speculators. Banks tightened credit policies and the market began to correct itself.
A number of events all converging at the same time created a crisis in the United States. European demand for American grain fell with the end of the Crimean War (1854-1856) as the Russians returned to compete for and win Europe’s need for cereal crops. There were bumper crops and that drove down grain prices wolrdwide. American farmer were unable to repay loans to eastern banks. The decision of British investors to remove their capital from American banks further eroded confidence in the American banks. These events were represented by the bankers as a normal correction of the market. The concerns about the one hundred million dollars in loans held by banks was explained away that the loan balance dropped ten or twelve million dollars in the fall. The failure of a major produce company and reports of dishonest jobbing and reported misuse of funds at a railroad company raised concerns that other companies faced the same problem. The banks again showed little signs of excitement and public concerns receded. The beginning of August 1857 banks began to reduce their loan to debt ratio to bulid up their cash reserves. Investors sold off bond and securities as these suffered a loss in confidence. The stock companies found their acess to foreign credit cutoff.
The catalyst that triggered the economic collapse was the failure of the Ohio Land and Trust Company 24 August 1857. The bank lent five million dollars to finance railroad construction. The manager of the company’s New York branch embezzled millions more. The company could not meet its obligations to eastern bankers and went into bankruptcy. This caused stock holders and financial institutions holding commercial paper hastened to sell off their obligations. This move forced several stock and money dealers to fail. The New York Clearing House reported on 29 August 1857 a four million dollar loss in loans.
New York bankers realized they may not be able to meet their financial obligations and turned to hard credit policies that dried up investment capital. They called in all mature loans and refused promissory notes from merchants, forcing businesses and shops into closing their doors, throwing thousands out of work.
This triggered a run on the banks as depositors scrambled to withdraw their gold from the collapsing financial system. Gold reserves dropped twenty million dollars by mid-September. Bankers and merchants staked their economic lives on the arrival of the steamer Central America carrying $1.6,000,000 dollars in gold. The ship never made port wrecked in a hurricane off North Carolina, taking the gold and 400 passengers and crew down with her.
The stock market crashed and half of the city’s brokerage declared bankruptcy. Credit collapsed and all construction halted. Banks across the nation failed and depositors lost everything in the ensuing months.
Unemployment in Neweast and Midwest rose to dramatic levels; 100,000 people were unemployed in Manhattan and Brooklyn. New York’s loss in the panic was $120,000,000 by December. People demanded that government take action to end the Panic.
The reponse of state and national government was mixed. New York and New England states declared bank holidays in October in a vain effort to halt bank failures. Howell Cobb, Treasury Secretary of Preisent James Buchanan’s adminstration, suggested that Congress authorize the Treasury to sell revenue bonds that had been used to finance the Mexican War. The Tarriff Act of 1857 was amended lowering tarriffs on imported goods twenty percent. New York City expanded public works projects to employ the unemployed.
The American economy began to recover by the end of the year. Five thousand businesses had failed across the nation. Thousands had been financially ruined as a result. Two years would pass before the economic picture improved. The Panic did not strike hard at all segments of society, business and agriculture. The South was less hard hit economically, because of the stability of the cotton market. Many Northerners resented Southerners boast that their economic system was superior to that of the North. The Panic drove another wedge into the unraveling of the nation.
Sources:
- J.S. Gibbon,The Banks of New York, Their Dealers, The Clearing House, and the Panic of 1857, N.Y. D. Appelton, 1864
- James L. Huston, Panic of 1857 and the Coming of the Civil War, Baton Rouge, Louisiana State University Press, 1987
- James M. McPherson, Battle Cry of Freedom: The Civil War Era N.Y. Oxford University Press, 2003
