The Panic of 1857 was a sudden downturn in the economy of the United States that occurred in 1857. A general recession first emerged late in 1856, but the successive failure of banks and businesses that characterized the panic began in mid-1857. While the overall economic downturn was brief, the recovery was unequal, and the lasting impact was more political than economic. The panic began with a loss of confidence in an Ohio bank, but spread as railroads failed, and fears that the US Federal Government would be unable to pay obligations in specie mounted. More than 5,000 American businesses failed within a year, and unemployment was accompanied by protest meetings in urban areas. Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the northern parts of the United States for a year and a half, and the full impact did not dissipate until the American Civil War.

The recession ended a period of prosperity and speculation that had followed the Mexican-American War and the discovery of gold in California in the late 1840s. Gold pouring into the American economy played its part by helping inflate the currency. Changes in worldwide economic trade, caused by the Crimean War between Britain and Russia, had pushed American firms into a precarious worldwide market. (McPherson, p. 189) The immediate event that touched off the panic was the failure on August 24 of the New York City branch of the Ohio Life Insurance and Trust Co., a major financial force that collapsed following widespread embezzlement. In the wake of this event, a series of other setbacks shook the public's confidence, including:

These triggers lowered the value of stocks and bonds held by American banks, further reducing their investment assets.

Investor confidence was further shaken in mid-September when 30,000 pounds (14,000 kg) of gold were lost at sea in a shipment from the San Francisco Mint to eastern banks. The gold and more than 400 lives were lost when the SS Central America sank during the North Carolina Hurricane of 1857. Public confidence in the government's ability to back its paper currency with specie was shaken as well.

Charles Calomiris and Larry Schweikart suggest that "the political struggle between 'free soil' and slavery in the territories", beginning with the Supreme Court's ruling in the 1857 Dred Scott v. Sandford case, may have helped bring about the Panic. The Court's decision threatened to open up all western territories to slavery, prompting the bonds of east-west running railroads to plummet in value, which in turn helped motivate a run on the major New York banks.^[1]

At the suggestion of Howell Cobb, Secretary of the Treasury, President James Buchanan proposed to Congress that the Treasury be authorized to sell revenue bonds for the first time since the Mexican-American War.

In October, a bank holiday was declared in New England and New York in a vain effort to avert runs on those institutions.

The Tariff Act of 1857 reduced the average tariff rate to about 20%. The reduction was written by Southerners in Congress and supported by most economic interests nationwide with the exception of sheep farmers and some iron companies in Pennsyslvania. It had the effect or removing the tariff issue as a major source of North-South contention.^[2]

The South was much less hard-hit than other regions because of the stability of the cotton market.

1. ^ Calmoris and Schweikart p. 816-817
2. ^ Stampp p. 19