The Panic of 1857: The First Crisis to Travel by Telegraph

At midday on 24 August 1857 the New York agency of the Ohio Life Insurance and Trust Company closed its counter and admitted it could not pay. Ohio Life was not a famous house on Wall Street. It was, though, the largest financial institution in Ohio, it owed something close to $5 million on notes and deposits, and its paper sat in the reserves of correspondent banks across the Middle West. A contemporary account of the moment the news reached the street recorded that it "struck on the public mind like a cannon shot."

Failures of that size had happened before without becoming national events. What was new in 1857 was how fast everyone found out. Telegraph wire now connected New York to Cincinnati, Chicago, St. Louis and New Orleans, and the announcement that Ohio Life had stopped reached bank parlours a thousand miles inland the same afternoon. Every earlier American panic had spread at the speed of a mail coach or a coastal packet, which gave country bankers days or weeks to arrange themselves before the fear arrived. This one gave them hours.

An Insurance Company That Lent Like a Bank

Chartered in Cincinnati in 1834, Ohio Life sold life insurance and annuities almost as a formality. Its real business was taking deposits and lending them, and by the mid-1850s the lending had concentrated in exactly the assets that were about to become unsalable: western mortgage paper and railroad securities. Its New York agency, the channel through which eastern money reached those loans, was run by a general manager named Edwin C. Ludlow, whose own dealings in railroad stock had been financed with the company's funds.

When the New York office failed, the Cincinnati parent found it was carrying obligations it had never authorised against collateral nobody wanted. The distinction that mattered to depositors was invisible from outside: Ohio Life's difficulty looked like fraud in New York, and fraud in New York implied that nothing on a western balance sheet could be trusted.

That inference was not unreasonable. American banking in 1857 had no central bank, no federal supervision, and no lender of last resort — a structure that dated from Andrew Jackson's destruction of the Second Bank, the subject of the panic of 1837 and Jackson's war on the Bank. Country banks held their reserves as balances with city correspondents, and city banks held theirs in call loans against securities. Nothing in the system converted a fall in the price of railroad stock into anything other than a shortage of cash.

Wheat, Land, and a War That Ended

The panic's underlying cause had been building for eighteen months in the grain fields. Between 1854 and 1856, with Russian exports cut off by the Crimean War, European buyers turned to American wheat and paid well for it. Western farmers borrowed to plant more, western land changed hands at prices that assumed those buyers would stay, and the railroads being built to carry the grain raised bonds on the same assumption.

Peace came in 1856 and the Russian crop returned. European demand fell away, wheat prices sagged, and land values in Illinois, Iowa and Wisconsin stopped rising. Railroads that had sold bonds against projected traffic found the traffic did not arrive. Their securities were the collateral behind a large share of the call loans in New York, and their prices had been drifting down through the spring and summer of 1857 before Ohio Life gave the market a reason to stop drifting and start selling.

Sceptics had noticed. In June 1857 the New York Herald asked what the end of it could be "but another general collapse like that of 1837, only upon a much grander scale," and complained that "the same premonitory symptoms that prevailed in 1835-36 prevail in 1857 in a tenfold degree." Harper's Weekly, describing the exchange on 12 September, reported that "prominent stocks fell eight or ten per cent in a day, and fortunes were made and lost between ten o'clock in the morning and four of the afternoon."

The Ship

Into that market, on 12 September 1857, came news that a hurricane off Cape Hatteras had sunk the SS Central America. She had left Panama on 3 September with 477 passengers and 101 crew, and roughly 15 tons of California gold in her hold, worth more than $1.5 million. About 425 of the 578 people aboard drowned.

The cargo mattered in a specific mechanical way. New York banks settled their imbalances in specie, and the monthly steamers from Panama were the pipeline that replenished city gold from the California fields. A consignment consigned to New York merchants and already counted on had gone to the bottom of the Atlantic. Banks that had been managing a reserve drain week by week now had to manage it without the shipment they had penciled in.

October

Through late September and early October, depositors began converting balances into coin, first in Philadelphia and then in New York. New York banks did what banks without a lender of last resort must do: they called their loans, which forced borrowers to sell securities, which drove prices down further and made the remaining collateral worth less. Contraction meant to protect reserves destroyed the value of the assets the reserves were lent against.

Markets reopened on 13 October to a run that took four to five million dollars out of the city's banks in a day. That evening the members of the New York Clearing House concluded that they could not both pay specie on demand and continue to lend, and by the following morning every bank in the city but one had stopped paying coin. The exception was the Chemical Bank, which kept paying gold across its counter throughout and emerged with a reputation it traded on for a century.

Suspension was not a confession of insolvency. It was the only tool available. Once the banks stopped converting notes and deposits into specie, they could resume lending, and the Clearing House began issuing loan certificates — instruments accepted between member banks in settlement, backed by discounted assets rather than by gold — which let the banks settle with each other without shipping coin. Robert Bruner's study of the episode treats this as the moment the Clearing House started behaving as a central bank in everything but name, forced to decide which of its members were illiquid and which were actually insolvent (Bruner, 2017). Specie payments resumed in the second week of December, less than two months later, helped by gold arriving from California and from Europe.

Charles Calomiris and Larry Schweikart, working through the bank-level data, found that geography explained less about survival than coordination did. Banks that could act together — southern branch systems, the coinsuring banks of Ohio and Indiana — came through with far less damage than unit banks of similar size and similar exposure, because a group that suspends together avoids the run that destroys the one that suspends alone (Calomiris and Schweikart, 1991).

London Gets the Bill

American paper was held in Britain, and British houses had financed the American trade. Liverpool and Glasgow felt it first.

The Liverpool Borough Bank failed on 27 October. On 5 November the Bank of England raised its minimum discount rate from 8 per cent to 9, and four days later to 10 — a level it had not touched since 1847. The Western Bank of Scotland suspended on 9 November, taking with it a note circulation that ordinary Glasgow households used as money.

Rate rises could not solve the Bank's problem, because the constraint was statutory rather than commercial. Under the Bank Charter Act of 1844, the Bank's issue department could not put out notes beyond a fixed fiduciary amount unless it held gold against them, so at precisely the moment when the discount market needed notes the Bank was forbidden to create them. Bank directors met the Chancellor, Sir George Cornewall Lewis, on 10 November, and on 12 November Palmerston signed the letter authorising the Bank to exceed the limit and promising an indemnity — the second suspension of the Act in ten years, after 1847, and a precedent that would be invoked again in the Overend Gurney collapse of 1866.

Hamburg took the worst of it in continental Europe. The city's merchant houses financed trade on bills accepted across the Baltic and the Atlantic, and when acceptances stopped being discounted the whole structure froze. On 8 December the Bank of Austria agreed to help and loaded a train with close to ten million ounces of silver, which arrived on 12 December and was unloaded in public view. Hamburg's banks did not fail.

Within sixteen weeks a bookkeeping fraud in a Cincinnati trust company's New York branch had forced a suspension of specie in the largest American city, a suspension of Britain's monetary constitution, and a silver shipment by rail across central Europe. Kindleberger's reading of 1857 is that it was the first crisis in which the transmission mechanism was demonstrably global rather than merely parallel — the same paper, the same bills, the same houses on both sides of the Atlantic (Kindleberger and Aliber, 2005).

The Winter

Buchanan addressed Congress on 8 December with a message that caught the strangeness of a financial crisis in a year of good harvests. "In the midst of unsurpassed plenty in all the productions of agriculture and in all the elements of national wealth," he told the House and Senate, "we find our manufactures suspended, our public works retarded, our private enterprises of different kinds abandoned, and thousands of useful laborers thrown out of employment and reduced to want."

New York's winter bore that out. Unemployed men marched on City Hall and Wall Street through November demanding public works, and a meeting of some 15,000 in Tompkins Square ended with fences and benches torn up and food wagons seized. Mayor Fernando Wood proposed paying labourers on city projects partly in flour and cornmeal, and called for additional police and troops when the crowds grew.

Recovery was uneven and, for the railroads, slow. The New York and Erie limped on for two more years before entering receivership in August 1859, and other lines — the Michigan Central among them — cut services or stopped work on unfinished track. James Huston's account argues that the panic's durable consequence was political: the collapse hit the industrial North and the grain-growing West while cotton prices held up, which let southern spokesmen argue that their system had proved itself sounder, and hardened the sectional economics that ran into the election of 1860 (Huston, 1987).

What the Panic Left Behind

Nothing in the American institutional structure changed in response. No central bank was created, no reserve requirement was imposed nationally, and the clearing-house loan certificate remained a private arrangement among city banks rather than a public facility — which is why the same device reappeared, in the same form, in the panic of 1873 and again in the panic of 1907. Half a century of repetition passed before Congress built the Federal Reserve on the observation that a country of correspondent banks pyramided on New York call loans will run out of cash at the same moment every time.

Britain drew a different conclusion, or rather declined to draw one. Having suspended the Bank Charter Act twice in ten years, Parliament left it on the statute book unamended, on the reasoning that a rule broken in emergencies still disciplines behaviour in ordinary times. Walter Bagehot spent the next two decades arguing that this was an evasion, and that a central bank which will certainly lend in a crisis ought to say so in advance and charge for it.

The telegraph, the piece of machinery that made 1857 feel unlike its predecessors, was never blamed and never regulated. It had simply removed the interval in which distance used to do the work of a circuit breaker. Traders in Cincinnati learned on the afternoon of 24 August what would once have reached them in the first week of September, and they acted on it that day — which is the whole of what changed, and quite enough.