On August 24, 1857, the Ohio Life Insurance and Trust Company failed in the wake of fraudulent activities by its management. It was the proverbial straw that broke the camel’s back, plunging the United States fully into what came to be known as the Panic of 1857. Ohio Life was a bank based in Ohio with another main office in New York City, having large mortgage holdings and acting as liaison to other Ohio investment banks. Its failure put those other Ohio banks at risk and even threatened a general run on the banks along the lines of the 1857 run on the Seamen’s Savings Bank, pictured at left.
Even before the Ohio Life failure, the international economy had been declining along with the European market for American goods, while the U.S. economy was in a period of overexpansion. Part of this overexpansion was due to a railroad industry boom sparked by large westward migrations of people, especially to Kansas. The railroad was receiving large loans from banks, but then the value of western land fell, and by 1857 the drop in migration caused railroad securities to lose their value. Farmers in the west began foreclosing on their mortgaged lands. When commercial credit also vanished, western merchants–already in debt–had to cut back on purchasing new inventory, and sales and profits decreased nationwide. Worse, the many banks that had helped finance the railroads during the expansion period were at risk once several major railroad lines were forced to shut down and in some cases to declare bankruptcy. It was the failure of Ohio Life, however, that brought public attention to the perilous state of the railroad industry and the land markets, thereby fueling a wider panic.
The sense of financial uncertainty was also fueled by the March 1857 Supreme Court ruling in Dred Scott v. Sandford, in which it was held that neither Africans brought into the U.S. as slaves nor their descendants (whether or not they were slaves) were protected by the U.S. Constitution; they could never be U.S. citizens and were without the right to sue in court. Moreover, the Court held that Congress had no authority to prohibit slavery in federal territories, thus effectively nullifying the 1820 Missouri Compromise, which had prohibited slavery in the unorganized territory of the Great Plains, while permitting it in Missouri and the Arkansas Territory. Uncertainty over whether the entire West would become slave territory led almost immediately to a slight decline in prices of Kansas land warrants, which in turn hurt western railroad securities–i.e. those railroads running east and west, where the Dred Scott impact would be most keenly felt.
The Panic was relatively short lived, having mostly calmed by 1859 so that the economy had begun to stabilize. When the dust settled, it seemed the southern economy had actually suffered very little, while the north was hurt more and took longer to recover. The Great Lakes region was the hardest hit by the Panic, along with those businesses in the East that needed strong western sales. All the while, tensions continued to grow between the north and the south over the issue of slavery, but in the short term the Panic actually stilled southern threats of secession to a certain extent inasmuch as the crisis fostered the idea among southerners that the north needed them to maintain economic stability. A full and final recovery from the Panic would not come until the 1860s, by which point, of course, the nation had descended into civil war…