Introduction
The panic of 1857 was best captured by the run on banks 1857 following the telegraphed news of the collapse of an esteemed New York bank. Huston (1987) notes that bank runs were psychological, mainly motivated by the lack of faith in American banks. Several external realities contributed to the depression.
Similarly, the fact that many investors’ resources were tied up as loans to farmers in the Western frontiers contributed to the depression. The political divide between North and South created economic rivalry, and the effects of the depression were not uniformly felt. Crucially, the depression deepened socio-political divisions, culminating in the Civil War five years later.
What Caused the Panic?
The American financial system, specifically the banks, suffered from poor perception among members of the public who called for a more transparent banking sector. As a result, when rumors spread that the New York Branch of the Ohio Life Insurance and Trust Company was under liquidity stress, there was a national bank run as panic ensued among people with demand deposits (Huston, 1987). Between August and October of 1857, stock prices plummeted as hundreds of American companies were declared bankrupt. Evidently, the impending financial depression would not be restricted to the banking sector alone.
External Factors Contributing to the Depression
The Crimean War in Europe raged from late 1853 to early 1856, stalling agricultural activity on the European continent. During the war, America supplied Europe with agricultural produce, creating a mini-boom in the economy (Huston, 1987). After the war, the demand and prices for American agricultural produce fell sharply. This caused a huge financial shock as farmers could not pay their debts to merchants, who could not pay the banks. Coupled with this, the three-year period between 1853 and 1856 saw a massive influx of immigrants from Europe. This was especially strenuous when unemployment rose following the depression.
US Political and Economic Climate to 1857
The years leading up to 1857 held great promise for the American people following the acquisition of the Western territories from Mexico after the Mexican War. Expectedly, the dominant political discussion was whether the institution of slavery would be allowed in the new territories (Stampp, 1990). Bitter divisions in Congress culminate in the establishment of the Republican Party by staunch abolitionists to rival the pro-slavery democrats circa 1854 (Huston, 1987). In 1857, Congress put its divisions aside and, ill-advisedly, lowered import tariffs, which led to a loss of specie from banks in light of increasing import volumes. These are the circumstances that the 15th American president, James Buchanan, arrived in when he took the oath of office in 1857.
US Socio-Economic Organization to 1857
America was divided into regions, each relying on a distinct form of economic arrangement. The South was primarily populated by slavers who cultivated tobacco, cotton, and sugarcane (Huston, 1987). The North was the home of most American industries, with wheat and corn farming around the Great Lakes.
Immigrants mostly settled in the North and became a part of its social fabric. Much of the country relied on agriculture for direct exports or as a raw material for industries such as textile manufacturing. The Northeast, specifically New York, served as the financial centre that linked everything together.
Implications of Western Expansion
American citizens initially flocked to the West, where there were ample lands for wheat and corn farming. Similarly, investors from the Northeast poured resources into the railroad industry as the rail line rapidly snaked its way into the West. This caused massive speculation on land and railroad prices in the early 1850s.
Following the Crimean War, Western farmers made tremendous gains from grain exports and became the primary debt holders in the USA (Huston, 1987). Once the war ended, grain export volumes fell by more than 80% halting Western wealth. The railroad meant to ferry produce from the West to the East suffered the most, and many railroad companies collapsed.
The Reaction to the Depression in the Financial Centres
In New York, the citizenry was outraged by the signs of a depression. The panic culminated in people asking for specie from the banks in exchange for the loans and banknotes they held. Banks that tried to meet the unprecedented demand for specie collapsed as most had issued more loans than their deposits could meet (Huston, 1987).
Banks increased their credit rates to restrict borrowing, and this caused further upheaval. It denied Northern manufacturers much-needed liquidity (Economic Research, 2021). Calls for disabled Western farmers to pay their debts to the banks dominated public discourse to no avail.
The Depression in the North
Manufacturing industries in the North were forced to impose wage cuts and layoffs on their workforce. People lost faith in the banknotes held by firms and duly rejected them as legal tender. A case in point is that the Southern Michigan Railroad could not pay its workers their accrued dues (Huston, 1987).
Unionized workers responded by staging walkouts and strikes, causing activity to halt. Unemployment rates rose quickly due to layoffs in the iron, coal, shipbuilding, and textile industries. Social unrest followed as northerners demanded that local governments establish public work programs for the unemployed.
The South Unaffected by the Depression
Relative to the rest of the country, the South fared well following the depression of 1857. Cotton was scarcely affected by the war in Europe, and its price in the global markets remained relatively stable (Huston, 1984). In 1858, the Southern railroad companies paid their investors dividends, whereas railroad companies from other regions foundered (Huston, 1987).
Economists pointed out that the South would likely offer the nation respite from the depression. Moreover, Southern productivity relied on slave labor and not the financial assistance of the Northeast. The South’s newly established formidability and importance were crucial during the Civil War.
Conclusion
The Depression of 1857 set the tone for the American Civil War of 1861 to 1865. Firstly, it galvanized Southern pro-slavery sentiment by highlighting the importance of slave labor to economic prosperity. The depression allowed the South to accumulate wealth relative to the other regions, facilitating Southern preparations for war (Stampp, 1990).
The economic independence of the South augmented the idea of a successful secession. National morale was low, and citizens felt that the banks and the government’s passiveness caused the depression (Huston, 1987). The South strove to take advantage of the prevailing circumstances to secede.
References
Economic Research. (2021). Around the world in 88 crashes – Ep20: The panic of 1857 [Video]. YouTube. Web.
Huston, J. L. (1984). The panic of 1857, Southern economic thought, and the patriarchal defense of slavery. The Historian, 46(2), 163–186. Web.
Huston, J. L. (1987). The panic of 1857 and the coming of the Civil War. Louisiana State University Press
Stampp, K. M. (1990). America in 1857: a nation on the brink. Oxford University Press