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Background

The early 1850s saw great economic prosperity in the United States, stimulated by the large amount of gold mined in the California Gold Rush that greatly expanded the money supply. By the mid-1850s, the amount of gold mined began to decline, causing western bankers and investors to become wary. Eastern banks became cautious with their loans in the eastern US, and some even refused to accept paper currencies issued by western banks.[7]

The US Supreme Court decided Dred Scott v. Sandford in March 1857. After the slave Dred Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was black and so did not have the right to sue in court. Taney also called the Missouri Compromise unconstitutional and said that the federal government could not prohibit slavery in US territories. The decision would clearly have a significant impact on the development of the western territories.[8] Soon after the decision, "the political struggle between 'free soil' and slavery in the territories" began.[9] The western territories north of the Missouri Compromise line were now opened to the expansion of slavery, which would obviously have drastic financial and political effects: "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March."[8] This fluctuation in railroad securities proved "that political news about future territories called the tune in the land and railroad securities markets".[8]Beginning in September 1857, the financial downturn did not last long, but a proper recovery was not seen until the onset of the American Civil War in 1861.[4] The sinking of SS Central America contributed to the panic of 1857, as New York banks were awaiting a much-needed shipment of gold. American banks did not recover until after the Civil War.[5] After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread as businesses began to fail, the railroad industry experienced financial declines, and hundreds of workers were laid off.[6]

Because the years immediately preceding the Panic of 1857 were prosperous, many banks, merchants, and farmers had seized the opportunity to take risks with their investments, and, as soon as market prices began to fall, they quickly began to experience the effects of financial panic.[4]

The early 1850s saw great economic prosperity in the United States, stimulated by the large amount of gold mined in the California Gold Rush that greatly expanded the money supply. By the mid-1850s, the amount of gold mined began to decline, causing western bankers and investors to become wary. Eastern banks became cautious with their loans in the eastern US, and some even refused to accept paper currencies issued by western banks.[7]

The US Supreme Court decided Dred Scott v. Sandford in March 1857. After the slave Dred Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was black and so did not have the right to sue in court. Taney also called the Missouri Compromise unconstitutional and said that the federal government could not prohibit slavery in US territories. The decision would clearly have a significant impact on the development of the western territories.[8] Soon after the decision, "the political struggle between 'free soil' and slavery in the territories" began.[9] The western territories north of the Missouri Compromise line were now opened to the expansion of slavery, which would obviously have drastic financial and political effects: "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March."[8] This fluctuation in railroad securities proved "that political news about future territories called the tune in the land and railroad securities markets".[8]

Before 1857, the railroad industry had been booming due to large migrations of people to the west, especially to Kansas. The large influx of people made the railroads a profitable industry, and the banks began to provide railroad companies with larg

The US Supreme Court decided Dred Scott v. Sandford in March 1857. After the slave Dred Scott sued for his freedom, Chief Justice Roger Taney ruled that Scott was not a citizen because he was black and so did not have the right to sue in court. Taney also called the Missouri Compromise unconstitutional and said that the federal government could not prohibit slavery in US territories. The decision would clearly have a significant impact on the development of the western territories.[8] Soon after the decision, "the political struggle between 'free soil' and slavery in the territories" began.[9] The western territories north of the Missouri Compromise line were now opened to the expansion of slavery, which would obviously have drastic financial and political effects: "Kansas land warrants and western railroad securities' prices declined slightly just after the Dred Scott decision in early March."[8] This fluctuation in railroad securities proved "that political news about future territories called the tune in the land and railroad securities markets".[8]

Before 1857, the railroad industry had been booming due to large migrations of people to the west, especially to Kansas. The large influx of people made the railroads a profitable industry, and the banks began to provide railroad companies with large loans. Many of the companies never made it past the stage of a paper railroad and never owned the physical assets necessary to run a real one. Prices of railroad stocks as a whole began to experience a stock bubble, and railroad stocks saw increasingly-speculative entries into the fray, worsening the bubble. In the meantime, the Dred Scott decision lent uncertainty to railroads in general.[citation needed]

In July 1857, railroad stock values peaked.[10][11] On August 11, 1857, N. H. Wolfe and Company, the oldest flour and grain company in New York City, failed, shaking investor confidence and beginning a slow selling-off in the market that continued into late August.[12][page needed]

Failure of Ohio Life Insurance and Trust Company

By the spring of 1858, "commercial credit had dried up, forcing already debt-ridden merchants of

By the spring of 1858, "commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory". The limited purchasing in the West led to merchants around the country seeing decreases in sales and profits.[7] The railroads "had created an interdependent national economy, and now an economic downturn in the West threatened.... [an] economic crisis.[7] Since many banks had financed railroads and land purchases, they began to feel the pressures of the falling value of railroad securities. The Illinois Central​; Erie​; Pittsburgh, Fort Wayne and Chicago​; and Reading Railroad lines were all forced to shut down by the financial downturn. The Delaware, Lackawanna and Western Railroad and the Fond du Lac Railroad were forced to declare bankruptcy.[17][page needed] The Boston and Worcester Railroad Company also experienced heavy financial difficulties. The employees were informed in a memo written in late October 1857 that "the receipts from Passengers and Freight have fallen off during [the] last month (as compared with the corresponding month of last year), over twenty thousand dollars, with very little prospect of any improvement during the coming winter."[18] The company also announced that their workers would receive a "reduction in pay of ten percent".[19] In addition to the decreasing value of railroad securities, farmers began to default on payments on their mortgaged lands in the West, which put even more financial pressure on banks.[17][page needed]

The prices of grain also decreased significantly, and farmers experienced a loss in revenue, causing banks to foreclose on recently-purchased lands. Grain prices in 1855 had skyrocketed to $2.19 a bushel, and farmers began to purchase land to increase their crop supply, which, in turn, would increase their profits. Howev

The prices of grain also decreased significantly, and farmers experienced a loss in revenue, causing banks to foreclose on recently-purchased lands. Grain prices in 1855 had skyrocketed to $2.19 a bushel, and farmers began to purchase land to increase their crop supply, which, in turn, would increase their profits. However, by 1858, grain prices dropped severely to $0.80 a bushel.[20] Many Midwestern towns felt the pressures of the Panic. For example, the town of Keokuk, Iowa, experienced financial strife from the economic downturns of the Panic:

A huge municipal debt magnified Keokuk's problems. By 1858 the town owed $900,000, mostly on railroad bonds, while the value of its taxable property dropped by $5.5 million. Lots that brought $1,000 before the crash now could not be sold for $10. Hard-hit property owners were unable to pay their taxes, and thousands of properties slipped into tax delinquency.[20]

As a result of such a decrease of prices, land sales declined dramatically and westward expansion essentially halted until the Panic ended. Both merchants and farmers began to suffer for the investment risks that they had taken when the prices were high.[7]

By 1859, the Panic began to level off, and the economy had begun to stabilize. President James Buchanan announced that the paper-money system seemed to be the root cause of the Panic and then decided to withdraw the usage of all bank notes under twenty dollars. He also "advised the State banks to break away from the banks [and urged] them to follow the example of the Federal Government."[21] He felt that would decrease the paper money supply to allow the specie supply time to increase and to reduce inflation rates. Buchanan wanted the state banks to follow the federal government, specifically the Independent Treasury system, which allowed the federal government to keep up with specie payments. That helped to alleviate some of the financial stress that had been brought on by the bank suspensions.[17]

In his State of the Union message December 7, 1857, Buchanan said: