The major financial catalyst for the panic of 1857 was the August 24, 1857, failure of the New York branch of the Ohio Life Insurance and Trust Company. It was soon reported that the entire capital of the Trust’s home office had been embezzled. What followed was one of the most severe economic crises in U.S. history.

The history of the panic is clearly divisible into…two periods: the former, when the banks took the initiative…and the latter, in which the depositors seized it… The Banks of New York, Their Dealers, the Clearing-House, and the Panic of 1857 External, by J. S. Gibbons. New York: Published by D. Appleton & Co., 1858. p. 361 Making of America: BooksExternal

The War of Wealth. Cin’ti; N.Y.: Strobridge & Co Lith, c1895. Posters: Performing Arts Posters. Prints & Photographs Division

This poster for the stage production The War of Wealth depicts what might have been any number of nineteenth century-financial crises. During that time, the U.S. experienced panics in the years 1819, 1837, 1857, 1873, and 1893.

Almost immediately, New York bankers put severe restrictions on even the most routine transactions. In turn, many people interpreted these restrictions as a sign of impending financial collapse and panicked. Individual holders of stock and of commercial paper rushed to their brokers and eagerly made deals that “a week before they would have shunned as a ruinous sacrifice.” As the September 12, 1857, Harper’s Weekly described the scene on the New York Stock Exchange, “…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 Report of the Clearinghouse Committee, produced in the years following the panic of 1857, found that “A financial panic has been likened to a malignant epidemic, which kills more by terror than by real disease.” Yet behind the reaction of New York’s bankers to the closing of a trust company lay a confluence of national and international events that heightened concern:

the British withdrew capital from U.S. banks

grain prices fell

Russia undersold U.S. cotton on the open market

manufactured goods lay in surplus

railroads overbuilt and some defaulted on debts

land schemes and projects dependent on new rail routes failed

To compound the problem, the SS Central America, a wooden-hulled steamship transporting millions of dollars in gold from the new San Francisco Mint to create a reserve for eastern banks, was caught in a hurricane and sunk in mid-September. (The vessel had aboard 581 persons—many carrying great personal wealth—and more than $1 million in commercial gold. She also bore a secret shipment of 15 tons of federal gold, valued at $20 per ounce, intended for the eastern banks.)

As banking institutions of the day dealt in specie (gold and silver coins instead of paper money) the loss of some thirty thousand pounds of gold reverberated through the financial community. Howell Cobb, secretary of the treasury, encouraged not only the placement of vast amounts of such government gold on the market, but also redemption of government bonds at a premium. At his suggestion, President James Buchanan proposed to Congress that the Treasury be authorized to sell revenue bonds for the first time since the Mexican American War.

Although bankers showed the first signs of concern, depositors soon followed. On October 3 there was a marked increase of withdrawals in New York, and over the next two weeks withdrawals nearly quadrupled. Reports of financial instability, perhaps exaggerated, were quickly carried between cities by the new telecommunications medium, the telegraph.

As the public’s faith in soundness of financial institutions continued to plummet, the nation’s banks began to collapse. Although the East Coast was hardest hit—with bank closures in New York, Philadelphia, Baltimore, and elsewhere, bank failures also reached across the Missouri River to cities such as Omaha. The climax came on October 14—Suspension Day, when banking was suspended in New York and throughout New England.

The term panic refers to the worst moments of a financial crisis. What follows is frequently a recession (a period of reduced economic activity) or a depression (a more serious and prolonged period of low economic activity, marked especially by rising unemployment). The contraction of the economy that followed the panic of 1857 was profound and had parallels in Europe, South America, South Africa, and the Far East causing it to be held as the first worldwide economic crisis. In the U.S., the setback caused significant job loss; a major slowdown in capital investment, commerce, land development, and the formation of unions, as well as in the rate of immigration. The effects of the “revulsion,” as it was referred to at the time, lasted a full eighteen months and reverberated until the onset of the Civil War.

Harper’s Weekly for September 12, 1857, took a dim view of dealings on the New York Stock Exchange. They claimed that the greed of speculators underlay the panic and gave examples that included the following:

…Jones believes that we are going to have a “crisis,” a “revulsion,” and “panic.” Or Jones is treasurer of the New Gauge Railway, and having access to the books, knows that it is insolvent. In both these cases Jones directs his broker to sell for his account so many shares of the New Gauge Railway…retaining the right of delivering the stock on any day he pleases prior to the conclusion of the contract. Of course, Jones doesn’t own the stock he sells; he intends to buy it at a reduced price at the time he delivers. Now, if Jones has been right in his prognostications — if the panic and crisis do come, or if the New Gauge Company does turn out to be insolvent, of course the stock goes down, and Jones buys in for delivery at the reduced price, realizing the difference between that price and the one at which he sold. But if Jones has been wrong — if the crisis don’t come, or is unduly postponed — such things have been known to occur — if the New Gauge concern should prove profitable, and not insolvent, why then the stock might go up, and at the end of the contract Jones might be forced to buy for, say $50, that which he sold at $45 — netting a loss of $5 per share.

In the late 1980s the wreck of the SS Central America was located about 8,000 feet under water. One ton of extraordinary riches surfaced including the world’s largest bar of gold ingot, weighing more than eighty pounds, and thousands of 1857-S Liberty Double Eagle twenty-dollar gold pieces, each of which contained nearly a full ounce of gold.