The western blizzard - Real estate cycle 1838 - 1857

"No nation has ever before been embarrassed from too large a surplus in the Treasury."
President Buchanan, in his inaugural address, March 1857, going on to suggest the nation ought to extinguish its debt, strengthen the armed forces, expand its boundaries and build a rail line to the Pacific.

"O Posterity, Posterity, you can't think how bothered, bedeviled, careworn, and weary were your enlightened ancestors in their counting-rooms and offices and bank parlors during theses bright days of September, A.D.1857."
Diary entry of George Templeton Strong, September 1857, lamenting the panic gripping the nation.

"The gold rush and the boom in railroad shares ended in a spectacular bust known as the Blizzard of 1857", wrote Ron Insana in his book Trendwatching, page 116. "The gold rush and railroad mania created a nearly insatiable appetite for shares in both those endeavors. Of course, investment houses and the firms themselves were more than willing to accommodate the demand. Banks also got in on the act, following the path of miners into the Western states. The banks…issued a steady supply of notes, reflecting the ever-increasing supply of gold. The printing of paper money, which was not controlled by a national central bank at that time, caused inflation, which created the appearance of even more prosperity. As is often the case, excessive credit finances uneconomic ventures that, in turn, go bust when credit conditions tighten or economic conditions deteriorate. A case in point is the failure of the Ohio Insurance and Trust Company in 1857, whose collapse touched off a panic in American financial markets that ended the speculative interest in gold and rail shares."

Sounding like a broken record ? Let's dig a little deeper. From the previous peak of 1837, it had taken five long years for the economy to bottom out. And even then things did not really seem to get underway fully again until roughly the end of the Mexican war in 1848. In Chicago, Hoyt writes, page 41, in discussing previous speculation in the canal and the lots the canal company had put up for sale, that "the buyers of canal lots, unable to meet their payments in 1837, had their time of payment extended by special act of the legislature…as this was of little avail by the time land values had declined drastically, the legislature again came to their relief in 1841, first by deducting one-third from the price they had agreed to pay in 1836, and, second, by allowing them to apply all the money they had paid in toward the full payment of one lot or one portion of a lot, so they received a clear title to at least one piece of land in return of what they had spent." One small step on the road to recovery. We return to the Chicago story later in the chapter.

The followers of Jackson, who still had the White House with Van Buren, continued their banking changes, and succeeded in divorcing federal government and banking entirely with a bill, passed in 1840, that established an independent treasury system. The 1837 panic, turning as it did into full-scale depression after the land price decline, focussed much attention on the banks, banking and speculation in general. Many Americans were blaming the banks and sometimes the land speculators too, for all their recent misfortune. One ardent Jacksonian and hard money politician, Senator Thomas Hart Benton, expressed ruefully: "I did not join in putting down the bank of the United States to put up a wilderness of local banks. I did not join in putting down the paper currency of a national bank, to put up a national paper currency of a thousand local banks. I did not strike Caesar to make Antony master of Rome." Yet that is precisely what happened.

President Van Buren came out in favour of an idea to price according to value, rather than by size, and give preference to those making actual improvements. Eventually Congress settled on an act granting right of pre-emption, passed only after intense and heated debate and loads of amendments in 1841. Now, any individual could legally venture forth upon public, surveyed but unclaimed land and stake a claim to the exclusion of all others. The limit to the claim was still 160 acres payable at $1.25 per acre, you just had to be a US citizen, (or have filed a declaration to become one), either the head of a family, a widow, or if single, over the age of twenty-one. This was a solid government attempt to get lands into the hands of genuine settlers, though ingenious speculators found ways around it, as we shall see.

As regards the banking system, we saw how the destruction of the Second Bank of the United States (BUS) had removed any influence a sort of central bank might have had, if indeed there was much, over the state banks. Once the BUS was eliminated, the federal government then passed its Deposit Act of 1836, which increased the number of banks it authorised to receive and hold the funds the federal government paid out and collected in its operations, to make this more generally widespread amongst the state banks, and also to indeed attempt to somehow regulate these state banks to ensure their stability. (The deposit bank system.) Now, in 1840, the US had something else, an independent treasury for the management of its revenue.

To address the perceived banking problems, other ideas were also put forward; a federal bank prohibited from issuing notes or discounting paper with branches in each state; properly regulated local banks, or indeed setting up another new national bank. All of this was just a part of the ongoing war of ideas about banks that forms a major part of US history. (It all takes place within the context of an economic system that allows the capitalisation of government granted licenses and privileges into tradable commodities, as otherwise such arguments would not arise.) Importantly, once the independent treasury came into being, the regulation of the banks, if there was to be any, was left to the then 26 states.

With the extent of the downturn, there was no state not prepared to at least attempt some sort of banking reforms, to avoid a repeat of the panic. Some states thought forbidding the issue of small denomination notes might help, thereby forcing the use of gold and silver for small value coins which ought not depreciate, as could paper money. Perhaps internal control of a bank's reserve (specie to note) ratio might help, backing up the ratio with legislation to compel the banker to maintain a certain level of specie to support the notes so issued. Some states went so far as to control the banks through state (public) ownership. There were even suggestions to do away with all banks completely, the suggesters, distraught by what they saw as an utterly corrupt system, taking a fervent, almost religious stand. Some states, like New York, went for 'free-banking'.

Perhaps most of all, the ruling sentiment in the Jacksonians of the time generally believed that the banking establishment represented a power base that was threatening their free and democratic society; especially in the exclusive and monopolistic contracts, or charters, the states had been granting them. The outcome of Jacksonian sentiment manifested in two ways: first, proposals to give States the ability to change the charters awarded banks at any time they saw fit and was deemed in the public interest, and second, in the concept of 'free banking'; a situation where anyone could open a bank provided the banking requirements, as laid down by state statute, were met. No longer were banks to have a privileged status enforced by special state charter. Banks were after all, the most important corporate institutions in the newly developing nation. In fact by the peak year of 1856, Wall Street played host to some 360 rail stocks, 75 insurance stocks, but 985 bank stocks.

"A flood of legislation", wrote McGrane, The Panic of 1837, page 121: "was enacted… to remedy many of the abuses of the preceding years. These laws generally called for the appointment of bank commissioners by the governor of the state, with power to investigate the books of the institution, limitations of circulation, investments, and liabilities; penalties for failure to pay in specie, restrictions of officers, directors, or stockholders becoming indebted to the bank, or borrowing from it on the pledge of their stock." But ingenious bank directors found ways around the laws just like the land speculators.

A review of interest rates and stock prices for the early 1840's is instructive at this point. Rail stocks underwent a substantial re-weighting in 1843; prices as per the Smith and Cole index more than doubled off the low point in January of that year. Smith and Cole themselves highlighted the reappearance of cheap money in 1843, the return of public confidence after the banks resumed their contractual obligations to back note issues with specie, and "possibly other factors" such as the growing realization of the highly promising outlook for railroads in general, as reasons for the rise in price of the rail stocks. The chart of interest rates confirms the low price of money in 1843, as offered by New York banking establishments at least anyway.

James Roger Sharp, The Jacksonians versus the Banks, page 28, noted: "By 1843, the number of banks had declined to a low of 691, and in the same year the amount of notes in circulation had dropped almost two-thirds, from the 1837 high to 58 million dollars. The boom figures were not reached again until the decade of the 1850's…the period after 1837 was characterised by an increasing interest in the liquidity of banks. It was recognized that the older mercantilist ideas of a capital-circulation ratio or a bond backed circulation were not adequate to insure a banks solvency and liquidity. Thus, in the years after the depression, banking became more and more based upon specie, with some states requiring each bank to maintain a certain ratio between specie on hand and notes in circulation."

Now that is indeed ironic given the events of January 24th 1848; the California gold strike. On this day, James Marshall was inspecting a millrace that he had just constructed on the American River, not far from Sacramento. A millrace carries water from a stream to the top of a waterwheel and Marshall had just "turned the water into his new apparatus the night before to clear the debris. Now something, 'about the size and shape of a pea glinted in the water.' 'It made my heart thump', he remembered later, 'for I was certain it was gold.' 'Boys' he said to his workmen, 'by God, I believe I have found a gold mine.' " (John Steele Gordon, page 84.) He had indeed. And within a very short time the event was transforming the whole country.

Marshall's find was not exactly in US territory at the time, as it turned out. But in one of those fateful quirks of history, the area included in the find (as well as the areas now recognized as Nevada, Utah, New Mexico, Wyoming and Colorado) was given over to the US for $15 million plus claims of US citizens against that country, as part of the Mexican war treaty of February 2nd 1848, fought ostensibly over the territory of Texas. And in those days, California being very much isolated from the rest of the US, news of the strike took several months to work its way East. When it got there however, the result, said John Steele Gordon, was mass hysteria. (Actually, after some web sluething, I discovered that a brief report of Marshall's find was published in a San Francisco newspaper about two months later in March. Perhaps unbelievably, the report apparently went un-noticed. It was not until a Mormon elder, Sam Brannan, went walking through the streets of San Fran with a bottle full of the yellow stuff, shouting "Gold ! Gold from the American River !" in an effort to get customers for his supply store, that people sat up and took notice. The rest is, as they say, history. As for Marshall, for reasons that do not seem clear, he was never able to secure legal recognition for his own claims on the goldfields, and then watched his saw-mill fail for want of workers, who were of course all panning for gold themselves. Marshall died poor, tending a small garden in a homesteaders cabin, in 1885.)

The story goes that a chap named Francisco Lopez also discovered gold in the roots of an onion he had dug up for lunch, which set off a local rush to the site at San Feliciano near Los Angeles, though news of this particular discovery was ignored elsewhere. (Quoted by The next year, 1849, the 'forty-niners', some 80,000 people, travelled to California from all parts of the country, indeed the world, expanding greatly the network of trails and tracks across the country.

Now take note of the times here. Gold ruled. The financial system, particularly in England, was backed by it. The Bank of England had been on a gold standard for some decades, since 1821, and bought gold from anyone at the rate of £3 17/10 per ounce. The US government did not issue bank notes, that was in the hands of the states, however it did issue gold coins, $20.66 to the ounce. (This had been started under a Jacksonian initiative to have the US federal government mint its own low denomination coins from the small amounts of gold coming out of the North Carolina and Georgia mines - another idea to have the public using coin instead of often depreciating notes.) The gold rush kick-started a major spurt of activity, investment and of course the inevitable speculation. President Polk took time out during his congressional message of December 5th 1848 to speak of the gold strike, showing off a twenty-pound gold nugget to authenticate things. Said Billington, (The Westward Movement in the United States, page 66): "The whole nation went suddenly, deliriously mad."

"The influx of gold," wrote John Steele Gordon, (The great Game, page 86) "spurred a major economic boom as it expanded the money supply and greatly increased the backing of the dollar. Foreign investors, who had shunned American securities in the 1840's, now flocked back into American railroad and government bonds…Railroad mileage increased by nearly 150 percent as the railroads rushed westward to the Mississippi, the jumping off point for wagons trains to California. Pig iron production in turn soared from only 63 000 tons in 1850 to 883 000 tons in 1856. Coal production more than doubled as well…This swelling economic activity was, of course, reflected on Wall Street. Mining shares, many of them of highly dubious value, traded briskly on the curb, and a Mining Exchange was soon established to handle the business in a more formal manner."

One enterprising gold enthusiast , Count Agoston Haraszthy, did find his fortune in gold, though not quite digging for it underground. The Count had been forced to flee Hungary after being caught in an uprising of workers against the monarchy. Arriving in America, he wound up in politics on the Republican side. So good were his services he managed to have himself appointed Director of the newly established Federal Mint, which opened in San Francisco in 1854. Within the year, the Count was approached by federal investigators searching for a few unaccounted for gold bars, missing from the mint, and worth around $140,000. "Easily explained," said the Count. "In the process of the mint smelting the gold, slivers did sometimes inadvertently escape through the flue of the furnace, only to disappear into the air." (Thomas, page 63.) The Count, with his new found wealth, went on to buy a bit of real estate in Sonoma valley, planted a few grape vines and fathered the California wine industry.

And as if to prove the adage there is more money in selling shovels to the miners, than digging for the gold, the story is told of Levi Strauss in 1850 making his now famous heavyweight trousers - called 'genes' in France - out of twilled cotton cloth. Stauss's original idea was the manufacture of tents for the miners, but upon discovering little or no market for the tents, turned his efforts to men's pants instead.

Suddenly, the US economy was back in full swing. And it was big; helped along as it was by some rapidly developing new technologies; plank roads, railroads, and the telegraph.

Plank roads.

Insana (Trendwatching, page 56), describes the plank roads best, so let's quote a few words of what he writes about this early invention: "Plank roads are, as they sound, roads made of wooden planks, instead of gravel or dirt, which were popular in the early days of this country. A Russian innovation, plank roads were used more aggressively in Canada and then copied here in the United States." The planks were put down by Plank-road-companies, who issued securities to the public, promising returns or dividends of anywhere from 10 to 40 percent per annum, according to the literature of the day, says Insana. "Very few… ever even paid 10 percent. And yet, between 1847 and 1857, some 1388 plank road companies incorporated in the 17 states, (of which) 340 alone were incorporated in New York. In New York, those companies built 3000 miles of plank roads. And at least 1,000 plank roads were chartered nationwide." They went public by the hundreds, as one could well imagine, developing into a full-blown fever apparently. "The effort was helped by aggressive pamphleteering on the part of self-styled plank road promoters, who made dubious claims about a number of attributes of their projects. They claimed that plank roads had unusual durability, ten to fifteen years, as opposed to their real shelf lives, if you will, which was closer to four. They overestimated rates of return on invested capital and over-hyped the roads' utilitarian values, often leaving out such niggling concerns as the fact that horses riding over the planks would sometimes slip through the planking and break their legs, a rather substantial deterrent to use among horse owners who either rode them or used them to pull wagons or carriages."

So much for the plank roads, a little known but important contributor to the speculative fever of the times.

The Railroads.

"I've heard of the call of the wild, the call of the law, the call of the church. There is also the call of the railroads."
Reed Richardson, The Locomotive Engineer, page 102.

Now here was a truly revolutionary invention. It must have indeed been an incredible sight for a mid 19th century local to see for the first time a rather large, so called iron horse, steam into town. The Railroads changed everything. Even time itself.

Insana again, page 58: " The great railroad boom in the United States took a while to reach a crescendo. In fact, a railroad boom in Great Britain was fully under way just as the U.S. boom began. It started rather inauspiciously in the summer of 1831. The Mohawk and Hudson Railroad began its Albany and Schenectady service in an unexpectedly smoky manner… the passengers on the first rocky ride were deluged with smoke and ash from the engine up front because there were no windows to let in fresh air. Despite its discomfort, the journey successfully promoted the railroad and led to many more trips before the transcontinental railroad was completed in 1869. The Mohawk and Hudson was listed on the New York Stock Exchange that year. Many railroads would follow until a full-blown mania in railroad securities took hold."

Railroads - 'the rails' - looked decidedly like they were going to change the way business was done, and the way humanity had lived for centuries previously. And so they did. Remember General Jackson ? To get to his own inauguration in Washington, in 1928, the overland travel took him 30 days from his home state of Tennessee. Yet within the life of this 1857 cycle, the journey time would come down to just three days. Travelling purely for social reasons became an option. (In fact in Scotland, rail travel had become so popular on the people's free day, Sunday, that the church tried to ban it because the flock had stopped going to church.)

What brought the railroads into such focus in America was the huge, indeed vast give-away of the public domain that went with their development. Much American history for the remainder of the 19th century is about how the country chose to distribute the enormous wealth the rails created. More on that next cycle.

The telegraph.

The telegraph was the other great invention and transforming event of the time. It certainly put an end to Wall-Streeters outpacing the news to other stock exchanges. It was Samuel Morse that took all the existing bits and pieces and assembled them into a workable apparatus. Adding to it the code he designed was the smart bit. In 1844, after he successfully demonstrated his project to the government, who was after all footing the bill, the clear benefits for the country were seen. "That same year, 1844, Morse and partners formed the Magnetic Telegraph Company to run a line between New York and Philadelphia. By 1846 the company was profitable and paying dividends. Within ten years, twenty-three thousand miles of telegraph wires tied together most major American cities, and by 1861, a telegraph line stretched all the way to San Francisco. Like the railroads, at first telegraph companies were strictly local affairs. But beginning in the 1850's, one company, Western Union, began buying up small, independent telegraph companies and assembled a nationwide system that would dominate American communications until the telephone and coming of the Bell system at the end of the century." (John Steele Gordon, The Great Game, page 80.) Actually Alexander Bell offered to sell Western Union the patent for his new device - the telephone - but Western Union turned him down. Western Union did however offer a sweetener; "we'll stay out of the phone business, if you stay away from the telegraph".)

Railroad companies were quick to notice that telegraph lines could be run along the ready-made rights-of-way that they already held. In addition, it became possible for the railroads to develop a system of telegraph signals allowing trains to run at much higher speeds than had been possible before, with no adverse safety risks. And the new telegraph medium found many users from the ever-increasing stock market business, with brokers quick to put the telegraph to use.


To see how all these inventions combined to further the speculative fever of the day, we can study the development of the city of Chicago. Hoyt reports that by 1845, after a lot of haggling, construction of the canal did finally get under way again, and was completed two years later. This helped further accentuate Chicago's already good location as the meeting place for wagon-hauled and lake travelling commerce and trade. Importantly, the use of the canal helped re-establish the business confidence of the merchants. The flow of goods and services continued to increase, so too the people passing over and through, and not to forget the farmers trading their wheat and hauling the vast timber supplies out of the forests of Michigan. Despite all the movement though, Chicago still "hadn't a paved street or a foot of bricked sidewalk…there was no sewerage (system) whatever and the water and the surface drainage was the only way to get rid of the sewerage…the mud is described as having been simply horrible".

The first telegraph line, from Chicago to Milwaukee, arrived January 15, 1848; the first gaslights were lit soon after in September 1850. Very soon the city was at the centre of four intersecting telegraph lines that meant wheat buyers and sellers could now effectively communicate with world markets. In the same year, new plank roads were built, connecting closer outlying areas to the central districts, which were then heavily used by the wagon trains. Some of these plank roads did actually pay a dividend to investors. Combined, the canal, plank roads and telegraph connections created a strong incentive for the railroads companies to invest in the city, "whose importance in making Chicago a great wholesale and manufacturing centre and in causing a tremendous rise in its land values far transcended any other single factor." Hoyt explains further; "The railroads finally became an interlocking network of lines covering the entire United States, but in the beginning they were conceived of as merely connecting links between waterways, and hence a city with a large existing canal and lake commerce provided a magnet that was sure to draw them to it…Each state was planning its own railroad system with little regard for its junction with the railroad systems of other states, and hundreds of private companies were planning small lines between neighbouring towns…there was at first no conception of a great western railroad system with its centre at Chicago. The influence of astute eastern capitalists, however, who foresaw the possibilities of Chicago in 1851, compelled the Rock Island to make Chicago its terminus. What had not even been dreamed of before 1848 had become an accomplished fact six years later. Chicago, without a single mile of railroad in January 1848, was the railroad centre of the west in 1854."

The next year, Chicago boasted the largest rail system in the world. By 1856/57, Chicago was the focus of ten trunk lines with connections to all parts of the country, running 58 passenger trains, and 38 freight trains in and out daily, with revenue from these lines at $18.5 million for the year, up from just $170,000 in 1851. Chicago to New York was now just a 36 hour trip.

The development couldn't happen without the banks. In fact an almost entirely new financial system was created to service the frenetic expansion. Hoyt again, page 59: "In 1851, a new banking law was passed authorizing the organization of banks in Illinois which were allowed to issue their own notes against bonds deposited with the state auditor. A feature of this law, which after became of great significance, was the requirement allowing notes to be issued to the full amount of the bonds only in the case of those obligations that regularly paid 6 per cent interest per annum. This induced the banks to invest largely in the bonds of the southern states, whose 6 percent bonds were not above par. The effect of this new law, under which nine banks were organized in Chicago by January, 1854, was greatly to increase the ease of borrowing money and, beginning in 1852, this was a pronounced factor in real estate speculation." Fortuitous timing, given the low interest rates of 1852, something we will come to shortly.

Land could be bought on easy instalments. Requirements for rail terminals, timber yards, hotels, grain sites, and everything else an expanding population requires added to the demand, and rising values. Prices were now quoted per foot, rather than by size of lot. Land just a couple of miles out, offered at $200 an acre in 1845, was commanding up to $150 a foot ($20000 an acre) in 1856. No longer were riders on horseback shouting out the latest land news; prospective buyers were now being taken to suburban real estate and auction sites in omnibuses. Hoyt measured the land value of the then city limits of Chicago as being $126 million in this year, an eighty fold increase in just 14 years, from a value of $1.4 million at the 1842 bottom. The railroads just kept opening up more and more landed possibilities. No limits could be seen on the horizon…


Easy credit policies from the banks around the whole of the country were once again in evidence after 1851. We have seen that the new gold discoveries were giving quite a lift to the economy, and providing the banks with all the more specie with which to back the increasing issue of notes. And there were plenty of notes. Galbraith reports (page 89, Money, Whence it Came, Where it Went) about 7000 different bank notes were in circulation at this time, being the issue of some 1600 different or defunct state banks. And "since paper and printing were cheap and the right of note issue was defended as a human right, individuals had gone into business on their own behalf." Some 5000 counterfeit issues were also estimated to be in circulation. (Counterfeiting of US coin had become quite an extensive business, particularly in Beaver County western Pennsylvania apparently, for whatever reasons. Stampp, page 39, America in 1857.) A 'Bank Note Reporter' or 'Counterfeit Detector' had become an essential part of running a business, in order to at least distinguish "the wholesome notes from the less good, the orphaned and the bad."

Banking procedures in general had also evolved a little it seems. Quoting directly from Rothbard, A History of Money and Banking in the United States, page 113, he noted that now: "The expansion of bank notes and deposits was directly tied to the amount of state government securities that the bank had invested in and posted as bond with the state. In effect, then, state government bonds became the reserve base upon which banks were allowed to pyramid a multiple expansion of bank notes and deposits. Not only did this system provide… for fractional reserve banking, but the pyramid was tied rigidly to the amount of government bonds purchased by the banks. This provision deliberately tied banks and bank credit expansion to the public debt; it meant that the more public debt that the bank purchased, the more they could create and lend out new money. Banks, in short, were encouraged to monetise the public debt, state governments were thereby encouraged to go into debt, and hence, government and bank inflation were intimately linked."

This is not too dissimilar to today, except it is done by banks under more central control, though they cannot issue their own notes as part of the process.

Despite however the 'flood of legislation' and State banking laws to 'remedy many of the abuses of past years', the laws were often ignored or flouted, or more 'creative' procedures invented by the bankers to get around them. The story goes that the banking commissioner in Michigan was always watched very carefully so that if need be, gold or silver could be transported from one bank to another, depending on the commissioners schedule of visits; visits required by him under Michigan state banking laws to confirm each banks specie holdings. It was not unheard of for the said bags of gold and silver to pass the commissioner on the road or, if having arrived late at the necessary bank being inspected, being handed in around the back whilst the inspection was under way. (Lightner, History of Business Depressions, page 144.)

The corruption:

If there is one thing that truly stands out upon reading US economic and banking history it would have to be the extent of political corruption. It could only be described as utterly rampant. Today's African dictator has nothing on a few of yesterday's US politicians; much of the corruption, though by no means all of it connected to real estate, railroads, and banking.

"Most of the financial corruption resulted from the temptations dangled before politicians by land speculators, railroad promoters, government contractors, and seekers after bank charters or street railway franchises", wrote Kenneth M Stampp on page 28 of America in 1857. "Often the politicians were themselves investors in western lands, town properties, railroad projects, or banking enterprises, and the distinction between the public good and private interests could easily become blurred in their minds…in New Jersey, during the legislatures winter session, wine seemed to be the lubricant used effectively by the banking and railroad lobbyists to expedite passage of bills beneficial to their clients. According to one reporter, the flow increased in proportion to the importance of the interests at stake. During a dinner for legislatures at the Trenton House, agents for the Camden and Amboy Railroad saw that wine was served copiously. Later, when the legislature reassembled, there were not a few dizzy-headed members among them, and…bills were carelessly rushed through on their final passage."

Stampp gives some additional examples (on page 29) of the prevailing political corruption: "In Wisconsin, two Milwaukee Democrats, Byron Kilbourne and Moses Strong, obtained from the legislature a two-million-acre share of a federal land grant for their La Crosse and Milwaukee Railroad. After the line went bankrupt, a joint committee reported wholesale bribery of legislatures, other influential politicians, and newspaper editors. Republican Governor Coles Bashford had accepted a bribe of $50,000 for signing the bill and soon thereafter moved to Arizona." And further: "When an interest payment on Ohio's bonded debt was about to fall due, the Republican state treasurer, William H Gibson, revealed that his Democratic predecessor and brother-in-law, John G Breslin, had embezzled $550,000 in state funds. Because Gibson had kept the theft secret for six months, Governor Salmon P Chase forced him to resign. Breslin, after being indicted by a grand jury, fled to Canada."

A good deal more corruption resulted from the Federal Lands Acts as well. In 1850, the federal government passed its Swamp Land Act, granting to each state any 'swamp or overflowed' land inside their borders. This meant that any forty-acre tract either at harvest or planting that was underwater and traversable only by boat, could be sold and the proceeds put towards reclamation and drainage if the new owner promised to drain the land. Needless to say, later investigations found plenty of irrigation work that had been carried out in California on so called 'swamp' land. Henry Miller, a German immigrant arrived in San Francisco the same year as the Federal Lands Acts was passed. Arriving with just six dollars in his pocket, he ended up amassing 14 million acres of land to his name by the time he died. Realizing that water would end up far more valuable in California than gold, Miller bought land along the rivers of California's central valleys, then irrigated his land using ditches, giving his cattle better grass on which to feed. The fact that landowners and homesteaders further away from the river would lose their water did not worry him one bit - he would just buy their land at lower prices. The story goes that one day Miller saw some land that he coveted. Hitching a row boat to the back end of one of his wagons, Miller had a team of horses pull him - and his boat - across the much desired land. Shortly thereafter, the government received a map of the lands from Miller, together with a sworn statement that he had rowed across the land in a boat. The land became his. (Peter Barnes, The Great American Land Grab.) The things we do.

How much has changed ?

The newspapers of 1857 were full of talk of an increase in crime and lawlessness. July 4 saw the 1857 street riots in New York of the Dead Rabbit and Bowery Boys gangs, amongst others, battling it out from behind barricades with rocks, pistols and brickbats. The Germans of the city were also upset and joined in owing to the law the police were now enforcing, closing the beer halls on Sundays.

A San Francisco editor (Evening Bulletin, Jan 2) deplored the frightful divorce rate in that young state, indicating a 'terrible amount of family difficulties and domestic quarrels'. And with the continuing, and up to 1857, growing immigration, especially from Irish Catholics, (in the decade 1850 to 1860, 2.5 million people emigrated to the US), talk was of a papal plot to subvert the country to Catholicism. It had to be stopped. A protestant crusade was begun, complete with a variety of secret societies, the largest of which was the 'Order of the Star Spangled Banner'. Since the members of this order were sworn to secrecy, and refused to talk about their activities, they were labelled 'know nothings'. Their 1856 presidential candidate gained 22% of the votes cast.

With the bad weather came an increase in colds, pneumonia and other respitory ailments of course, for which there was no shortage of possible remedies. You could try Holloways's Pills and Ointment (to disinfect the blood and the secretions), Dr Shallenberger's Fever and Ague Antidote (for an immediate cure), Dr Duponco's French Golden Periodical Pills, or even Helmbold's Highly Concentrated Compound Fluid Extract, guaranteed to cure all diseases of the bladder, kidneys, urinary and sexual organs.

It was noted also, that "among the vicissitudes of life that often found their way into the news were the dramatic turns of the weather, a major concern of farmers and planters, sometimes the rest of the population as well." (Stampp page 33.)

The year 1857 also saw the introduction of a new fashion, the hoop skirt. "After women overcame their initial prejudice, the new style vied with many of the more noted methods for improving the exterior contour of the female form." (Stampp page 34.) Continuing a common theme, fashion attempts to outdo itself in the extravagances leading into the speculative peak years.

Into the peak:

Have another look at the chart showing rates of discount in New York City over the years 1841 to 1862. You may notice a sharp drop in interest rates in 1852. Kindleberger (page 63) lays the blame upon the glut of gold that occurred in this year. Deposits at the New York City banks (data not depicted here) clearly surged after 1849, and peaked in 1853. (Smith and Cole, Chart 41, page 122.) The credit base of the US was being enlarged. Lightner, History of Business Depressions, page 145, reported: "Bank management had been conservative and wise in the ten years, 1843 - 1853, notably in the eastern cities. Few new banks were established, loans were extended with caution, and the issue of notes was kept within reasonable limits. The $100,000,000 worth of gold sent to the mints from California mines furnished a sufficient specie basis for bank currency. Credit agencies kept pace with the normal business development of the country. But in 1853 a speculative mania took possession of the financial world…"

Stampp, (page 218) writing of 1857 said: "Nearly the whole West swarms with speculators… who neither intend to cultivate the soil nor settle there, but who expect to realize fortunes without labour out of the bona fide settlers. Land speculation, observed a Wisconsin editor, had become a mania. 'Merchants have shut up their shops, lawyers have left the bar, farmers have laid down the shovel and the hoe, manufacturers have abandoned their business to turn land agents and real estate dealers.' In Minnesota, complained a territorial politician, people were 'so engrossed in speculating', that they had no time for politics. In May, when the Minnesota railroad land grants were put up for sale, 'the cormorants were gathered there from all quarters…all engaged in a general scramble for the spoils.' Lots on the best street in Omaha, which had sold for $500 in the spring of 1856, went for $5000 a year later. In a Kansas land sale, reported a correspondent, five-eighths of the land went to eastern speculators. Like his predecessors, governor Walker was an active participant in the business."

Lightner, History of Business Depressions, in talking of the 1857 year, wrote: "The previous year, 1856, 3,642 miles of railway had been constructed. At that time America had seven-ninths of the railroad trackage of the world. Development was far beyond the needs of the time. People apparently invested purely in their imagination of the future. The number of banks had increased rapidly..."

By 1857, noted John Steel Gordon, "the mood on the street was exuberant. The dark days of the late thirties and early forties were forgotten or unknown by new traders, who now flocked to wall Street to make their fortunes." And of the old speculators, Sobel (Panic on Wall Street page 89) noted only Jacob Little was still around from previous bull markets, and even he "was a little less active than he had been earlier."

Now it's a peculiar thing, whatever it is - that something - that causes speculative fever to give way to at first, a sense of foreboding, then outright panic. Sauve qui peut. Hoyt said this: "While the volume of building in Chicago, the earnings of Chicago railroads, and the grain and lumber receipts had all reached new peaks in 1856 and 1857, the prices of the main staple commodities had been falling from May, 1855, to December, 1856, wheat dropping from $2 to $1 a bushel. In the summer of 1857 a financial stringency had developed in New York which was blamed by eastern interests on the over speculation in western lands and too rapid railroad building. The suspension of specie payments by New York banks forced a private bank in Chicago to close on August 11, 1857, and with their eastern bills protested two more private banks in Chicago closed on September 30, 1857. Many railroads had been built in advance of traffic and during October, 1857, fifteen railroads with obligations of $181 700 000, including the Illinois Central with $24 000 000 in debts, the Michigan Southern with $18 000 000, and the Michigan Central with $14 000 000 were forced to make assignments for the benefit of creditors. The prices of railway shares broke sharply on the New York Stock Exchange during 1857, Galena stock falling from 119 on December 15, 1856, to 54 on October 12, 1857, and during the same period New York central shares fell from 93 to 53, Erie from 61 to 8, and Michigan Southern from 88 to 9."

John Steel Gordon, quoting the New York Herald of June 27, from the pen of James Gordon Bennett, said: "Government spoilation, public defaulters, paper bubbles of all descriptions, a general scramble for western lands and town and city sites, millions of dollars, made or borrowed, expended in fine houses and gaudy furniture; hundreds of thousands in silly rivalries of fashionable parvenus, in silks, laces, diamonds and every variety of costly frippery are only a few among the many crying evils of the day… But the supposed evils of greed were one thing, the reality of the economic data was quite another. California gold production had levelled off, and the Crimean War and poor harvests in Europe, which had stimulated American exports, were over. In June the Herald noted 'Our wharves are crowded with ships, most of them without employment; and those that have found something to do have accepted it at rates ruinously low. A Boston paper revealed at the same time that the New England textile industry was suffering - six thousand cotton looms were idle for lack of demand. Making matters worse, money tended to flow out of New York banks in the summer and early fall, as western farmers drew down their local deposits to pay for the harvest and pay down their loans. Thus August was in any event a month when money was tight in New York, and by the middle of the month the Herald noted 'the supply of weak, sickly stock securities pressing for sale is very great, and there are no buyers, no demand from any source."

(It might be noted that the New York Herald Editor, James Bennett, was a long time critic of Wall Street, believing that America's prosperity was better off in the hands of workers and farmers than New York bankers and stock market speculators. Despite this however, Bennett was by June of 1857 in league with one Leonard Jerome, a known Wall Street bear, who also did not mind seeing stock prices fall as he was busy shorting a number of rail stocks. Hence the bearish tone of the quote above from Bennett's paper. (Sobel, page 96.) Such a practice was not unheard of and became quite common as the 19th century wore on - an art form that Jesse Livermore went on to perfect in the first three decades of the 20th century.)

On August 11, the oldest flour company in New York, and a conservatively run business, N. H. Wolfe & Co announced its failure, shaking the confidence of Wall Street. On August 19, Edwin C Litchfield, the president of Michigan Central Railroad resigned "in order", he wrote, "to spend more time on personal matters." Now even in 1857, such a statement was quickly taken as meaning the company is in big trouble. The Michigan Central was soon in receivership. (One of Leonard Jerome's shorts.) On August 24, the New York branch of the Ohio Life Insurance and Trust Company, a bank despite what its name otherwise seemed to indicate, informed the public of some internal disorders.

This bank, the Ohio Life Insurance and Trust Company, was a Cincinnatti operation, but its New York branch was one of the most, if not the most, respected banks in New York: a bank that did not issue its own notes, merely accepting deposits. These deposits the bank then used to make advances to business and other commercial interests, often in the West, always secured. The Ohio's activities reached into all areas of U.S. commerce. Bray Hammond, Banks and Politics, page 710 reports: "No bank was favoured with more deposits, nor was there any which was abler to loan on adequate security than the New York branch of the Trust Company of Ohio."

It was on the 24th that the President, Charles Stetson, announced to the market that the bank would suspend payment. (A chart of the share price, if the bank happened to be listed, and of course if one could ever be found, would be most interesting to study, for obvious reasons…) Apparently, 'certain parties' had failed to repay their loans, though the president did not specify exactly who this was, but did reassure anxious shareholders and depositors that the company's assets and capital was nevertheless 'sound and reliable'. Four days later, the stock price was down 85%, so the market had probably made its own judgement. Meanwhile, depositors queued outside the doors of the bank's office, waiting to get back their deposits. The bank did not re-open. The question now was: Could all the other banks continue to collect their loan repayments, or indeed, given their quite probable low reserves of gold and silver, continue to meet the demands of depositors wanting their money back - in coin - not paper? (Which of course isn't there, at least not all at the same time.) A further weakness of banks is highlighted here; taking in deposits payable on demand, against assets which can never be realized instantaneously. Our economy, built as it is on sand, works only with the confidence of the players. Exuberance can quickly turn to fear, fear to panic.


Confidence was undermined further by two (not uncommon) disasters, which occurred in September. The first on September 5th involved a collision of trains, a passenger train with a wood train, just outside of Philadelphia. The other, on the 12th, with the sinking of the steamer Central America, bound for New York, in a hurricane off Cape Hatteras, along with the four hundred passengers and $1.6 million in California gold. It was the loss of the gold cargo that upset the market, uninsured according to Kindleberger, Mania's, Panics and Crashes, page 94. (One day in the future, we ought to study all these dates further, since the worst days of the 1857 panic, according to emotions in the papers at least anyway, seemed to come 30 degrees later, Oct 6 to 11 - the 10th probably the bottom of the panic, leading to depression. September the 11th of this year 1857 also saw the Mountain Meadows massacre, 144 years to the day to the events of 2001. But that's another story.) Here is demonstrated the effect of the crowd, and its emotional psychology. If the trend in markets is up, bad news is mostly ignored, in anticipation of better news to follow. In a down-trend the reverse is true: bad news is seized upon by the public mind and any good news will be overlooked. And if a situation has developed whereby the speculation is totally out of hand, especially in land value, an event like the sinking can suddenly take on a significance that in the ordinary course of business might otherwise have been ignored.

To stem the panic, and to raise the level of specie holdings at the banks, the government, through the Secretary of the Treasury, arranged for the minting of $4 million in gold coin, though to little appreciable affect it seems.

On September 25th (30 degrees from the failure of the Trust Company of Ohio) another leading financial institution, the Bank of Pennsylvania, in Philadelphia, closed its doors. And so, the panic. Papers reported 'the wildest excitement' just about in the whole city, as queues of depositors formed at other banks in the city, wanting their money, now ! A nation wide specie suspension followed in early October, which of course breaks the obligation of banks to redeem their notes with deposit holders, but did as a result give some banks time to sort out their financial condition and end the panic, in a financial sense at least. It did not however shorten the eventual economic downturn. "The West suffered from the drastic decline in land values and commodity prices and from a shortage of credit. For a time the Illinois Central tried to help those who were buying its land on credit by postponing instalment payments or accepting payment in produce, but eventually both farmers and railroad were caught up in the general ruin of panic and recession…in rural Wisconsin money was so scarce that many of the small transactions of daily life were carried on by barter." (Stampp, page 225.) The situation was aggravated still further through activities like the Milwaukee and Mississippi and other Wisconsin rail lines who, with the promise of high dividends, had persuaded thousands of farmers living along the right-of-way to buy railroad stock with personal notes secured by mortgages on their farms. "The railroads then sold the mortgages to eastern bankers to obtain a portion of the funds required for construction and the purchase of rolling stock." (Stampp again, page 225.) The expansion of credit, now in reverse.

Back in Chicago, Hoyt reported that the effects of the 1857 panic were felt in 1858 when the earnings of the railroad companies fell, as did the amount of lumber being moved, and now a lot of men were out of work. Hoyt also reported however, a curious thing: "Most of the holders of real estate held firmly during 1858 to the peak prices of 1856. Those who were able to hold, would not sell." This is a common phenomenon as the cycle turns down; people hold on and hope. It was just a matter of time though for those who had bought too late in the cycle. "The depreciation in the price of corner lots was great in the winter of 1857, but it was much greater in 1858 and 1859, as payments matured which could not be met. A large portion of the real estate in the city had been bought on canal time; they had depended upon a continual advance in quoted values to meet those payments and found they could not sell even at a ruinous sacrifice." The greater fool theory of investing.

There was the occasional warning or perceptive comment as the speculation in railroad securities and land really went over the top, but of course at the peak no one is listening. "This was an age", fretted a Philadelphia editor, "in which men sought to grow rich without labour, and speculation was their favourite means…" (Philadelphia North American, June 20 1857.) "Western land speculators", another feared, "held more land than could be settled in 20 years. Many of them were men of modest means, who had borrowed at high interest rates and would be ruined if declining commodity prices should cause land values to fall." (Philadelphia Public Ledger, April 14 1857, quoted also in Stampp, page 219.)

The causal link.

From the late 1840's, particularly after the business downturn of 1847 or so, and with the discovery of California gold thereafter, New York banks increased in number from 24 to 60. The writing of a cheque or bill involves two sides, the paying bank and the receiving bank, or even if at the same bank, 2 sides to the transaction. To settle between the banks, runners (or porters) were used to move these negotiable instruments amongst themselves, and carry out the financial business of their clients. With the number of banks increasing, this activity, or at least the way it was currently being done, was becoming unmanageable. Perhaps the difficulties could be overcome using some other method of inter-bank exchange. Eventually a 'clearing-house' was established, which began operations on the 1st of October 1853. (A birth date it might be noted.)

Clearing-house procedures are of interest to us because details of its operations are available to study, as are the statements banks had to issue, to comply with clearing-house regulations. Clearing-house records reveal the rise and fall of New York banking credit, i.e. banks loans, deposits and specie on hand.

J S Gibbons, in his work The Banks of New York, Their Dealers, The Clearing House, and The Panic of 1857, gives clearing house figures for 1854 to 1858, and it is from these statistics, and the book itself, that the following analysis is drawn. If Gibbons' work can be believed, and there is no reason to doubt it though a second source would be useful to confirm his clearing-house figures, we can say that the 1857 October panic was a direct result of banks curtailing credit operations after the August collapse of the Ohio. But we are slightly ahead of ourselves. In the clearing-house figures, one may notice a seasonality of loan contraction each year around August. Loans reached their highest point of expansion in the first week of August for 1853 and 1854, the third week of August in 1855, and once again in the first week of August for 1856. This was not co-incidental, and there was believed to be good reason for it (though this may not have been so obvious to market participants at the time): it was the by-product of an agricultural economy, which America still was at this time. Ron Insana, Trendwatching, page 167, noted it this way: "…the harvest period was one of notable volatility both in market terms and in terms of liquidity or money available in the nation's banks. As the harvest neared, farmers routinely pulled their money out of big-city banks to finance the labour needed to harvest crops. That put a drain on available cash in the nation's money centers. Stock prices typically fell from August to October, owing to the lack of available funds. But stock prices bottomed in October when farmers, flush with cash from the sale of their crops, re-deposited the proceeds in the New York banks." Insana goes on to point out that some market experts believe this to be the principal reason why the stock market has had a historic tendency to crash and bottom out in the month of October. The August loan contraction would then proceed mostly in an orderly fashion till about mid November. Smith and Cole also noted this seasonal loan contraction, page 127. (Sometimes there was another small decline in late March / early April.) Rail statistics bear out this phenomenon. Rail employment tended to rise sharply in the autumn when the carrying of agricultural produce reached its peak. Employment then declined into the winter months. (See for example Walter Licht, Working for the Railroad.) So rail companies would have added to the currency requirements at this time in order to pay workers, a fact which could only have gotten more pronounced over coming decades.

In the four years of data here, the largest decline prior to October 1857 took place 36 months prior, in October of 1854. For the year 1857, credit contraction began August 8, continuing in the normal seasonal manner for the next two weeks. There were a couple of reports of company failures and one larger misuse of funds in a leading rail company in these weeks, but it was not considered too much out of the ordinary.

The Ohio bank failure of the 24th August was not of itself considered immediate cause for concern, the main branch in Cincinnati was after all reported (by telegraph) to be open for business as usual. However shortly thereafter it was discovered that practically the entire capital base of the bank had been embezzled - some 2 million dollars. Most New York banks were creditors of the Ohio. Suddenly New York merchants found their banks a little less accommodating in their credit. The next week's clearing-house report confirms the course of banking policy to have changed substantially. Credit was contracting. "The most violent (bank) action was between September 5th and September 19th, when the loans were reduced $3,443,944 in the face of an increase in deposits of nearly six hundred thousand dollars… There can be no escape from these figures. They show beyond (doubt), that the banks, not the depositors, took the lead in forcing liquidation." (Gibbons, page 354.) A credit squeeze initiated by the banks, to restore their balance sheets. Up to the 26th September, depositors had not been alarmed. Only after October 3rd, for some reason, was the trust of depositors reversed. Clearing house data suggests the panic was a direct result of the marked contraction of credit by the banks after the 24th August. Note though, the possibility for panic could not have been set up without the substantial lift in bank credit in the four years prior to 1857. Said Gibbons, page 346: "Such is the outline of the most extraordinary, violent, and destructive financial panic ever experienced in this country."

Until the next one, 17 years later in 1873.

The scams.

It remained only for the scams, cons and frauds to come to light. And more than a few persons, at more than a few companies it seems, were discovered with their hands deep in the till. Fraud was found at the Ohio bank, as you would expect, embezzlement by the cashier, (to sustain his stock market operations apparently, says Kindleberger, I, page 71) in addition to the banks souring investments in highly speculative railroad bonds.

In another case in New York, Robert Schuyler (a grandson of Alexander Hamilton's nephew) president of both the Harlem, and New Haven railroads, was found to have secretly printed twenty thousand shares of New Haven stock and sold it, quietly, on market. By the time of the discovery, Schulyer was already well and truly on his way to the nearest border - Canada - with proceeds of about $2 million. He was never caught.

An assailant of Schulyer and secretary of the Harlem Railroad, Alexander Kyle Jr., admitted to having forged some five thousand shares of Harlem stock and swapped them for securities in the New Haven line, which were also forgeries. Kyle Jr. had had a hand in picking an apartment for Schulyer's mistress, though the discovery of this was nothing as to when the New York social set found out Schulyer had been leading a double life and fathered a second family under the assumed name of Spicer. (Sobel page 90.) Not to be outdone, the Board of Directors of Parker Vein Coal Company were found to have issued five times as much stock as had been authorized and gone on to sell it, pocketing the proceeds. A teller at the Ocean bank paid himself out some $50,000 of the banks funds, a teller at the National grabbed $70,000. The bookkeeper of the Union Bank stole $200,000 and promptly fled with the loot after it was discovered he had been forging balances for months.

The Bank of Sandstone, it was later discovered, never had any specie, and never had any assets to cover its liabilities at the time of it being reported upon by the commissioners of Michigan State. The Exchange Bank of Shiawasee was found by the same commissioners to have a mere seven coppers and small amount of paper in its vaults, whilst it had bills in circulation of $22,267. The Jackson County Bank was discovered to have many large and full boxes in its own vaults, but whilst the tops of each showed silver dollars, they covered little else but nails and glass. (Lightner, History of Business Depressions, chapter XIV.)

That Blizzard.

The winter of 1856/57 had already been noted for its more brutal cold than usual, though also for a general lack of snow. On Jan 16th through 19th 1857, the east coast was struck by a 'monster blizzard' that would be long remembered for its intensity and howling winds. The weekend of the 17th and 18th was particularly extreme; record winds and temperatures as low as 20 degrees below zero (Fahrenheit) recorded in some parts. Interestingly, warmer weather followed, with a further change in conditions to severe cold following on Jan 23, known as cold Friday, and then even colder Jan 24th, with a low of -55 recorded in northern New England. (Typical extremes on Gann dates.) A great description of events is on the web at

Robert Sobel, in his book Panic on Wall Street: A History of America's Financial Disasters, lists the Western blizzard of 1857 as one of the 12 most harrowing moments in American financial history from 1792 to 1962. In one review of the book, it was noted that Sobel chose these particular (12) cases, among a dozen or so others, to demonstrate the complexity and array of settings that have led to financial panics, and to show that we can only make the vaguest generalizations about panic as a phenomenon. Well I hope you can see through such an argument. There does not have to be land and real estate speculation to bring on a panic of course; however if real estate is involved, the collapse will be worse, more prolonged, and harder to get out of than otherwise would be the case. (With a downturn rythym of about every 18 to 20 years it would seem) There is an order amidst the chaos of boom and bust, and liberal credit is ALWAYS at the heart of it. But economic collapse requires something else as well. Feb 21 1854 had also seen great storms hit the east coast, "The most tremendous snow storm ever known here commenced last night," said the Feb 22 issue of the New York Daily Times. But no panic followed; the economic sandcastle had not yet been built high enough to enable that 'un-looked for' event to shatter public confidence.

Some after effects of the downturn:

The downturn was yet another development that gave the 'South' further reason for despising the North (slavery was the big issue) and helped deepen the divide that brought on the US civil war (1861). The downturn in the South ended up not as severe as in the north, owing to the fact this time that cotton exports held up relatively well. To the South, the wealth of the country was in farming, not in reckless 'land and stock jobbing'. Southerners now genuinely believed their economic welfare really was at the mercy of northern bankers and their reckless speculations. Funny how war has often followed an economic downturn…

As might be expected, the newspapers of the day expounded all sorts of reasons for the decline in economic activity (see below) and a new-found era of self-criticism dawned. "The puzzling question repeatedly asked was how a country with a rapidly growing population, rich in fertile soils and natural resources, producing food in abundance, busily engaged in manufacturing and commerce, could get itself into such a predicament." (Stampp page 231.) Indeed. "It seems indeed very strange," wrote another bewildered observer, "that in the very midst of apparent health and strength…the whole country…should suddenly come to a dead stop and be unable to move a step forward - and that we should suddenly wake up from our dreams of wealth and happiness, and find ourselves poor and bankrupt." (Nashville Republican Banner, October 18, 1857, quoted by Stampp page 231.)

The answer of course is 'your standing on it', but this would have to wait another two cycles, and the writings of Henry George, (which shook the US to its foundations), to prove it.

Some relevant items out of books, that I found of further interest:

The Stock Market Barometer, William Peter Harrison, quoting Charles Dow: "The panic in Europe in 1847 exerted but little influence in this country (USA), although there was a serious loss in specie, and the Mexican war had some effect in checking enterprise. These effects, however, were neutralized somewhat by large exports of bread-stuffs and later by the discovery of gold in 1848-9...There was a panic of the first magnitude in 1857, following the failure of the Ohio Life Insurance and Trust Company in August. This panic came unexpectedly, although prices had been falling for some months. There had been very large railroad building, and the proportion of specie held by banks was very low in proportion to their loans and deposits. One of the features of this period was the great number of failures. The banks generally suspended payments in October."

Summarizing Charles Kindleberger, Mania's, Panics and Crashes, about 1857:
Probably the first truly worldwide felt (panic and) downturn. Gold discoveries in California 1849 and in Australia 1851 vastly increase the credit / money base of the US and some parts of Europe, especially Britain, feeding the existing railroad and banking booms, the banks in particular lending vast sums to further finance trade and industry. Speculation runs rampant; US, railroads and public lands, UK, railroads and wheat, on the Continent in railroads and heavy industry. Speculative peak, US and England end of 1856, Panic August 1857 in the US, October 1857 in the UK. Speculative peak on the continent, March 1857, panic November. The collapse was made worse following the ending of the Crimean war and subsequent collapse of wheat prices. War financing had fed the huge expansion of credit in the first place. At the peak, UK banks had lifted interest rates to 12-15%. In the downturn, few banks could be found to honour or accept any bills of exchange whatsoever.

Alfred Chandler, Land Title Origins (page 491) made an important observation of his era: "With each recurring land boom there has been a new crop of speculators, with similar endings in each succeeding panic - occurring about every twenty years. But land values on the crest of every land boom are always higher than they were on the crest of the preceding boom - and that is the backlog which keeps the fires of land speculation for ever going." Chandler noted further (on page 499): "Huge sales of land from the public domain to speculators, on credit, just previous to 1857, brought on another financial crisis, as similar speculation had brought on previous panics and years of depression…There followed in the same pattern the panics of 1819 and 1837, and this one, which began with the failure of the Ohio life and Trust Company. Millions of dollars of its depositors and policy-holders money had been loaned by it to holders of idle land, and to promoters, to build railroads through unproductive regions and to attract buyers of land."

And some quotes:

Ebullience at the top:
"Cincinnati presented to the world a picture of progress heretofore unknown to the history of cities. Its solidity and continued prosperity had become matters of special wonder."
Cincinnati Enquirer, June 3 1857 (quoted also in Stampp, page 213.)

Then the fear:
"It is a gloomy moment in history. Not for many years - not in the lifetime of most men who read this paper - has their been so much grave and deep apprehension; never has the future seemed so incalculable as at this time. In our own country there is universal commercial prostration and panic, and thousands of our poorest fellow citizens are turned out against the approaching winter without employment, and without the prospect of it. In France the political cauldron seethes and bubbles with uncertainty; Russia hangs, as usual, like a cloud, dark and silent upon the horizon of Europe; while all the energies, resources and infancies of the British Empire are sorely tried, and are yet to be tried more sorely." Harpers Weekly, vol. I, page 642, Oct 10 1857

"All the panics previously experienced are as nothing compared with that of today. If there is a much lower depth for some stocks, they will go completely out of sight."
New York Herald, Oct 3 1857

"Several of the clergy preached hard times sermons yesterday enjoining patience under adversity. The parsons might well have preached to the winds. Money is the thing that is wanted - money ! money ! money! - not homilies from the book of job."
Newark Daily Advertiser, Oct 7 1857.

"The financial condition of our country is unprecedented. Business of all kinds is more completely suspended than if a hostile fleet had anchored in our harbor."
New York Evening Post, Oct 9 1857

"Like a star of the night, darting out of the skies and losing itself in the sea, the whole country has suddenly, and while in the enjoyment of unparalleled prosperity, plunged headlong down into universal bankruptcy. Now no one is any longer known to be rich."
New York Evening Post, Oct 14, 1857

Blame the government: "Had we had more statesmen and fewer politicians, the country would not have been reduced to its present distressing and humiliating condition."
Philadelphia Pennsylvanian, Sept 12, 1857

"The Democratic Party is responsible for all these troubles…"
North American and United States Gazette, Philadelphia, Sept 24 1857

Blame anything, except the speculation in government granted licenses and privileges:
"Men speak of overstocking the market, or of over manufacturing, or overimportations, and of extravagance of various kinds."
The Independent, Oct 8 1857

The great men of the exchange, to whom we bowed with a selfish idolatry, are proving to be but wooden images."
Leavenworth City Herald (Kansas) Oct 17 1857

"The cause of our present (distress is) that our dry goods merchants have over imported…"
Letter to the editor, Newark Daily Advertiser, Sept 25 1857

"Our present disorders have been provoked by the extravagance of our women. Crinoline and moiré, gloves and feathers, fans and furbelows, kickshaws and gewgaws, these have ruined us. These have drained us of our western wheat and our Californian gold, to give us in return only hotel flirtations and watering place polkas."
New York Weekly Times, Oct 17 1857

"What caused trade thus to topple over, almost without a struggle ? What hurled to the dust so many stately fabrics of industry, skill and enterprise ? The answer is plain enough - we have been living too fast."
Philadelphia Press, Oct 12 1857.

I listed one of the causes as the telegraph, disseminating the bad news, as it was, 'too quickly'.

And finally:
The I lays it to wine, women, cards and (wait for it) fast horses."
Washington Evening Star, Aug 28 1857 I

This cycle in summation:

"After a brief but sharp contraction in 1854, the prosperity of the 1850's reached its peak in the middle of the decade. Immigration declined after 1854, and by the end of 1856, government land sales, bank loans and discounts, and domestic trade were falling off. During the previous two years the Crimean war, which deprived Western Europe of Russian wheat, had provided an expanded international market for American cereals at a time when production was rising faster than demand at home. When, early in 1856, peace was restored, American farmers lost a large part of their foreign market, and American shippers soon found themselves in a recession. By the spring of 1857, imports had begun to diminish; earnings of the Erie, New York Central, and other railroads were disappointing; and New England textile mills had substantial inventories but few buyers. In July the Mills of Manchester, New Hampshire, suspended operations; others in Lowell and elsewhere soon followed. Meanwhile, a significant change had occurred in the international financial markets. The Bank of France, weakened by the loss of specie during and after the Crimean war, was obliged repeatedly, in a period of economic expansion, to draw specie from the Bank of England. This, in turn, led to substantially increased interest rates in London, which tempted British investors to sell off American securities and put their money in less speculative and often more remunerative domestic securities. The result was a decline in the price of shares on the New York Stock Exchange. The decline of security values weakened the American banking system by reducing the value of assets supporting it. In short, an economic recession had already overtaken the economy before…(that)…'unlooked for incident' (in this case the Ohio failure) brought on a crash." Taken from Stampp, page 221, who is in turn summarising George W Van Vleck, The Panic of 1857.

land sales qtly rects 1857 cycle The charts also tell us a little more. Railroad stocks had clearly peaked well before the panic - some years before in fact, in December of 1852. This tends to suggest the fact that railroad earnings had not been improving for some years prior to 1857, something insiders may have known, but would never have admitted in public. Land sales peaked in 1854 in acreage sold, and in 1855, fourth quarter, if the dollar value of receipts is used as the reference. A repeating pattern. The speculative indices will generally pick up the future economic trend well before this is obvious to the public at large. The chart of quarterly receipts of land sales to the federal government clearly shows the speculative frenzy in land resulting from the low interest rates available after 1852. The expansion of bank credit after 1852 is revealed by the 2 charts tracing the proportion of specie reserves held by (New York) banks.

The panic was once again a buying opportunity, but since emotions practically force us to be in the market the wrong way at the peak - our credit over extended like everyone else's - it can be difficult to take advantage of. One virtually must go through a cycle, be actively engaged in it, before the emotions can be understood. Or unless a study of history is undertaken.

In this cycle, rail stocks ran up 119 months, Jan 1843 to Dec 1852, then down for 58 months to October 1857. Discount rates in New York cycled 15 years exactly - 180 months, low to low, Aug 1843 to August 1858.

The days of most intense emotion would seem to have been around October 5th to 13th.

Further reading:

Barnes, Peter. The Great American Land Grab, The New Republic magazine, 1971. (Available on line at The Progress Report,

Gibbons, J. S. The Banks of New York, Their Dealers, The Clearing House, and The Panic of 1857, Greenwood Press, 1968.

Hammond, Bray. Banks and Politics in America from the revolution to the Civil War, Princeton University Press, 1991 paperback edition

Sobel, Robert. Panic on Wall Street: A History of America's Financial Disasters, Collier Books Edition 1972.

Stamp, Kenneth M. America in 1857; A Nation on the Brink, Oxford University Press, 1990

Thomas, Dana L. Lords of the Land, G.P.Putnam's Sons, New York, 1977

Van Vleck, George W. The Panic of 1857, Columbia University Press, 1943.

Copyright Phil Anderson 2004

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