Panic of 1857

The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Because of the interconnectedness of the world economy by the 1850s, the financial crisis that began in late 1857 was the first worldwide economic crisis. In Britain, the Palmerston government circumvented the requirements of the Peel Banking Act of 1844, which required gold and silver reserves to back up the amount of money in circulation. Surfacing news of this circumvention set off the Panic in Britain.

Beginning in September 1857, the financial downturn did not last long; however, a proper recovery was not seen until the American Civil War. The sinking of the SS Central America contributed to the panic of 1857, as New York banks were awaiting a much-needed shipment of gold. American banks did not recover until after the civil war. After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread as businesses began to fail, the railroad industry experienced financial declines, and hundreds of workers were laid off.

Since the years immediately preceding the Panic of 1857 were prosperous, many banks, merchants, and farmers had seized the opportunity to take risks with their investments and as soon as market prices began to fall, they quickly began to experience the effects of financial panic.

In the early 1850s, there was much economic prosperity in the United States, to a major extent stimulated by the great amount of gold discovered and mined in the California Gold Rush, which greatly expanded the money supply. By the mid 1850s, the amount of gold mined began to decline, which caused western bankers and investors to become wary. Eastern banks became cautious with their loans to the west and some even refused to accept western bank-issued paper currencies.

The Supreme Court ruling in Dred Scott v. Sandford was handed down in March 1857. After Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was an African American and therefore did not have the right to sue in court. The ruling also made the Missouri Compromise unconstitutional, and it was clear that the decision would have a significant impact on the further development of western territories. Soon after the ruling, "the political struggle between 'free soil' and slavery in the territories" began. The western territories were now opened to the possibility that slavery might expand into them, and it was quickly evident that this would have drastic financial and political effects. "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March." This fluctuation in railroad securities proved "that political news about future territories called the tune in the land and railroad securities markets."

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Wikipedia