The Panic of 1857 marked a significant moment in the history of financial crises in America. Unlike previous economic downturns, this panic quickly affected the entire nation. Before this period, news of financial turmoil could only spread as fast as the mail system allowed.

However, the advent of the telegraph in 1844, invented by Samuel F.B. Morse, changed how quickly information, including news about the Panic of 1857, traveled. This swift spread of news played a crucial role in shaping investors' responses in the United States and Europe.

Causes of the Panic of 1857

Late 1857 saw the start of the Panic. The prevailing agreement states that the collapse of Ohio Life and Trust Company on August 24, 1857, was the catalyst. This event was considered the start of the economic crisis, like a disease outbreak, and the New York Times compared the panic to a contagious illness, citing Ohio Life's closure and its effects. They compared it to a remote village epidemic.

James Sloan Gibbon, an American scholar, saw the panic more as a psychological phenomenon, a sort of mental plague. He recalled how the failure of Ohio Life shocked the public and even stable financial institutions. Gibbon's perspective was that the panic was not just an economic event but also a psychological shock.

The Crimean Conflict War

In exploring the roots of the Panic of 1857, we find that the end of the Crimean War of 1856 played a significant role. In his 1988 book, historian James Huston highlights how the conclusion of the Crimean War affected the American economy.

From 1854 to 1856, the Crimean War halted Russian grain exports, leading Europe to turn to American wheat. This shift caused a boom in wheat prices and spurred migration to the American West. The California gold rush, along with this demand for grain, fueled land speculation.

However, European demand for American wheat plummeted with the Crimean War's end, causing a sharp decline in wheat prices and profits. The impact was stark: England's American flour and wheat purchases fell dramatically from 1857 to 1859. This downturn in the agriculture sector was a critical factor in the economic panic 1857.

Adding to the woes was the collapse of the New York branch of Ohio Life. Edwin C. Ludlow, the branch manager, engaged in risky lending and embezzlement, leading to a suspension of gold and silver payments. This event precipitated a minor stock market crash. Ohio Life's stock value nosedived from $101 to just $5 within days.

The 1857 Banking Crisis: Ohio Life and Bank of Pennsylvania's Troubles

In September Panic 1857, the banking sector faced a significant challenge when Philadelphia's Bank of Pennsylvania stopped its specie payments, a move a month after Ohio Life's failure. This decision by the Bank of Pennsylvania caused widespread uncertainty within the financial system.

Thomas Allibone, the bank's president, announced that this temporary measure was due to the collapse of other banks. On the day they stopped specie payments, the bank reassured stakeholders through a public statement.

However, the New York Herald pointed out that the Bank of Pennsylvania's troubles were partly due to its risky lending practices. According to the newspaper, the bank had extended large loans, up to $300,000, to favored clients while ignoring long-standing, financially prudent customers.

Famous political economist George Tucker gave Hunt's Merchants' Magazine insight into the banking industry. In 1834, 506 US banks held $26.5 million in specie and $147.5 million in liabilities. By 1856, there were 1,253 banks, $60 million in coins and bullion, and $417 million in debts. In the period before the Panic 1857 financial crisis, banks made many loans to risky land and railroad investments, which increased the ratio of debt to currency.

Speculative Investments in Railroads and Land

Before 1857, railroad securities were important. Railroad stocks and bonds rose in price from 1847 due to increased investment. Speculators borrowed heavily to buy these securities, often using them as collateral for other loans, expecting price increases.

This conjecture helped build over 24,000 miles of railway by mid-1857, but it artificially inflated the value of these financial assets. Ezra C. Seaman wrote in Hunt's Merchants' Magazine that railroad performance led to optimism about their future profitability and stock values.

Seaman stressed the importance of confidence in railroad securities valuation during this time. Railroads' consistent performance over many years has led to widespread belief in their market value growth. Economic historians Calomiris and Schweikart noted that this speculative financing targeted western rail lines, which connected the East to the expanding West.

The Telegraph's 1857 Panic Contribution

Telegraphy exacerbated the 1857 Panic. This new technology quickly spread banking failure and stock market news across the US. The collapses of Ohio Life and Bank of Pennsylvania caused nationwide bank runs. As fears of devaluation of land and railroad securities grew, investors sold them in major markets like the New York Stock Exchange.

Creditors demanded prompt repayment, which increased securities sales and reduced their market value. During the upheaval, banks cut lending, hurting farmers, merchants, and manufacturers who relied on credit. The drop in loans from $107.8 million to $101.9 million and deposits from $73.3 million to $63.3 million indicated a severe liquidity crisis. This crisis weakened banking confidence and US economic growth.

The Global Spread of the Panic of 1857

The 1857 economic crisis spread quickly to Europe. France and Britain, which invested heavily in American land and rail infrastructure, suffered. Napoleon III was alarmed by London reports that the economic panic had spread to France in November 1857. He acknowledged the psychological aspect of the hysteria, saying unfounded fears were damaging public credit. He wrote to the French Minister to calm the public and reduce unwarranted suffering.

Britain, deeply involved in American trade and investments, suffered significant consequences. The country, a prominent American export market, and debtor, saw its foreign debt rise by $263 million from 1854 to 1857. According to historian Jay Sexton, American capitalism benefited from foreign investment but was not dependent on it. American securities' decline hurt British investors.

With financial crisis updates, the American steamship Baltic arrived in Liverpool on November 20, 1857. The Dublin-based Freeman's Journal has reported on the stagnant American stock market and businesses' financial uncertainty-related caution. The economic panic of 1857 affected foreign investments and trade due to the interdependence of European and American economies.