Causes
In the early 1850s, there was much economic prosperity in the United States. However, in the beginning of 1857, the European market for goods from western America 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 currencies. Prior to 1857, the railroad industry was booming due to large migrations of people to the west, especially in Kansas. With the large influx of people, the railroads became a profitable industry and the banks seized the opportunity and began to provide railroad companies with large loans. However, by late summer, the value of western land fell and migration drastically slowed causing railroad securities to fall in value. By the spring, "commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory." As a result of limited purchasing in the west, merchants around the country began to see decreases in sales and profits. The railroads "had created an interdependent national economy, and now an economic downturn in the West threatened … economic crisis." Since many banks had financed the railroads and land purchases, they began to feel the pressures of the falling value of railroad securities. The Illinois Central; Erie; Pittsburgh, Fort Wayne and Chicago; and Reading Railroad lines were all forced to shut down owing to the financial downturn. The Delaware, Lackawanna and Western and the Fond du Lac Railroad Companies were forced to declare bankruptcy. The Boston and Worcester Railroad Company also experienced heavy financial difficulties. The employees were informed, in a memo written in late October 1857, "the receipts from Passengers and Freight have fallen off during last month (as compared with the corresponding month of last year), over TWENTY THOUSAND DOLLARS, with very little prospect of any improvement during the coming winter." The company also announced that their workers would receive a "reduction in … pay of TEN PERCENT." In addition to the decreasing value of railroad securities, farmers began to default on their payments on their mortgaged lands in the west, which put more financial pressure on banks.
The tipping point that really set the Panic of 1857 in motion was the failure of Ohio Life Insurance and Trust Company on August 24. Ohio Life was an Ohio based bank with a second main office in New York City. The 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 threatened to precipitate the failure of other Ohio banks or even worse, create a run on the banks. According to an article printed in the New York Daily Times, Ohio Life Insurance and Trust Company’s "New York City and Cincinnati suspended; with liabilities, it is said, of $7,000,000." Luckily, the banks connected to Ohio Life Insurance and Trust Company were reimbursed and "avoided suspending convertibility by credibly coinsuring one another against runs." The failure of Ohio Life brought attention to the financial state of the railroad industry and land markets, thereby causing the financial panic to become a more public issue.
The prices of grain also decreased significantly and farmers of 1857 experienced a loss in revenue causing them to foreclose on recently purchased lands. Grain prices in 1855 had skyrocketed to $2.19 a bushel so farmers had begun to purchase land to increase their crop supply, which in turn would increase their profits. However, by 1858, grain prices dropped severely to $0.80 a bushel. Many Midwest towns felt the pressures of the Panic. For example, the town of Keokuk, Iowa experienced financial strife due to the economic downturns of 1857.
A huge municipal debt magnified Keokuk’s problems. By 1858 the town owed $900,000, mostly on railroad bonds, while the value of its taxable property dropped by $5.5 million. Lots that brought $1,000 before the crash now could not be sold for $10. Hard-hit property owners were unable to pay their taxes, and thousands of properties slipped into tax delinquency.
As a result of such price decreases, land sales declined dramatically and westward expansion essentially halted until the Panic ended. Merchants and farmers both began to suffer for the investment risks they had taken when prices were high.
The final event that led to the Panic of 1857 was the Supreme Court ruling in Dred Scott v. Sandford in March 1857. After Scott sued for his freedom, Chief Justice Roger Taney ruled that Dred 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 Dred Scott ruling, "the political struggle between 'free soil' and slavery in the territories" began. The western territories were now opened to the possibility that of 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." Shortly after the Dred Scott ruling, the Panic of 1857 began to escalate to its peak.
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