"Panic of 1857"

"Panic of 1857" brought tough times.

Collapse of branch

of an Ohio-based bank

sent economy tumbling.

Widespread unemployment, long lines of people standing outside of banks and once prosperous families suddenly facing desperation.

For those who lived through the Great Depression, the description sounds familiar. But the scene described does not refer to the 1930s; it refers instead to the year 1857.

The financial worlds of countless people across the country crumbled 130 years ago this month during the "Panic of 1857." The panic caused a number of banks in Kentucky and the nation to close. The construction of the Suspension Bridge was halted. A Covington-Lexington railroad line went into default. And the stage was set for the country's greatest internal conflict - the Civil War.

The Panic of 1857 came after an economic "boom" that had followed a depression in 1837. A number of factors contributed to the panic. Among them were the annexation of the American southwest through the Mexican War (1846-48), the discovery of gold in California in 1849, a sudden surge in railroad construction, and the "Compromise of 1850" - authored in large part by Kentucky statesman Henry Clay - which appeared to solve the slavery problem.

But the euphoria of those two decades proved to be misleading. The financial crisis began on Aug. 24, 1857, when the New York branch of the Cincinnati-based Ohio Life Insurance and Trust Co. Bank collapsed. As outlined in a Covington Journal newspaper story a few days later, the collapse was significant because the bank was considered a primary regulator of currency in the north and west sections of the country.

The currency situation at the time was confusing. Many states printed their own paper money, banks often issued notes with little or no financial backing, and in some areas, foreign money was still accepted for payment of bills. Bonds were on shaky grounds, too.

Many speculators raised money in Europe for construction of railroads that existed only on paper and many other railroads were being built without serious thought to their eventual viability.

In Northern Kentucky, the Covington and Lexington Railroad was part of the rail building boom. Chartered in 1847 and finished in 1854, the railroad encountered a variety of problems, including the lack of proper financing and mismanagement. Consequently, the company was under the constant threat of defaulting on its bond payments; the City of Covington was among the bond holders.

A month after the collapse of the Cincinnati-based bank, a Covington Journal story said that across the nation 50 state-chartered banks and about double that many private banks had suspended operations. The newspaper also pointed out that there were no Northern Kentucky banks on the list.

The Northern Kentucky banks, however, were forced to change their operating procedures. For example, they now refused to loan money or cash bank notes for anyone connected with a Cincinnati brokerage firm.

The writer noted that the Ohio Life and Trust Co. had been considered a model of the banking industry, but it turned out to be one of the worst managed banks in the country; thus, Kentucky bankers wanted nothing to do with their Ohio counterparts.

Despite those precautions, Northern Kentucky businesses were not exempt from the financial crisis. The situation was so bad that on Oct. 3, the Covington Journal newspaper made a plea for people to pay their bills.

"We find it impossible to make collections in Covington. Money is on everybody's tongue, but in nobody's pocket. It would seem that the last dimes have been squeezed out," said the newspaper in an editorial.

"Never since we have been in business have we experienced such tight times and the smallest favor will be gratefully acknowledged. We do not often make such appeals and confidently trust this will not be in vain."

Two weeks later the newspaper carried an account of a man who attempted to cash in $12,000 in bank notes with the intention of picking up his cash later, but when he returned a mob was waiting.

Members of the mob threatened the man and told him that he had better not try to take any money out even though the bank was willing to give it to him. The man left Paducah without his money on the first available steamer. Some residents apparently felt that if word spread that the bank was running low on hard currency, there would be a run on the bank and it would collapse.

In the newspaper that same day, it was reported that a Cincinnati broker was pelted with eggs by a mob as he attempted to cash some notes at a bank in Shelbyville, Ky. Several banks in Louisville suspended operations.

The Covington Journal editorialized that it was now apparently a heinous crime to ask a bank to redeem its promise of payment.

Covington banks were still redeeming bank notes for gold or silver, but not at face value. The exchange rate varied daily, based on national trends and conditions.

A story later that month said 40 Ohio banks had failed, but only seven in Kentucky and apparently none in Northern Kentucky.

The week of Oct. 17 was one of the worst of the financial crisis as railroad companies began suspending operations. The Covington and Lexington Railroad continued to operate but rumors about its future were widespread, and its stock was listed at only 15 cents a share, according to a newspaper story.

Other indicators of the times were advertisements by collection agencies. One is Covington was run by James G. Arnold, S. H. Cambros, and Joel McGlasson. It was located on Fifth Street between Scott and Madison streets.

One advertisement offered a reward for the location and return of an indentured servant. Indentured servants usually were youths who were assigned by contract to work without salary for someone for a specified length of time.

Sometimes families allowed their own children to be indentured to raise money or to help them learn a trade; in other cases, immigrants would indenture themselves in exchange for their passage to America paid.

An advertisement in the Covington Journal in October 1857 sought an 18-year-old farmhand by the name of Frederick Wise, who had run away from a farm in the Fiskburg area of Kenton County. It's hard to say whether it was just an indication of the financial times or a reflection on Wise's abilities, but the reward for him was only one cent.

Not everyone, however, saw the financial crisis as something bad.

A story Oct. 31 said, "The hard times will have the effect of filling up the Army with better material than has been offering for several years past."

The writer added that recruiting stations were shipping new soldiers every few days to the Newport Barracks and that most of the new recruits were people with trades, rather than the unskilled young men and drifters that recruiters usually signed up. The added that most of the recruits also were American-born citizens, rather than immigrants down on their luck.

Construction of the Suspension Bridge continued but a story said the directors were facing a tough decision. The work in the fall of 1857 was confined to the construction of the stone towers at the ends of the bridge. A writer said the directors were faced with the prospect of either issuing more bonds to push for completion of the bridge or putting the project on hold and risking damage to the work already completed.

At the same time, the Covington and Lexington Railroad was involved in a dispute over the payment of interest on bonds issued by Covington for railroad construction. And in Maysville, the city council was involved in a court fight over the city's refusal to levy a tax to pay interest on bonds the city had issued for the construction of a railroad between Maysville and Lexington. The city charged the railroad company with gross mismanagement.

The economic crisis continued into the beginning of 1858. During that year, the Covington and Lexington Railroad defaulted on its interest payments. The Suspension Bridge backers ran out of money and although the state General Assembly authorized the company to issue more stock, no one would buy it. Work on the Suspension Bridge stopped.

The Covington and Lexington Railroad was sold at auction and after much legal haggling, was sold again and renamed the Kentucky Central Railroad. The line later became part of the Louisville and Nashville Railroad system.

Work on the Suspension Bridge did not resume until 1863; the bridge did not open until 1866.

The financial crisis did not turn around until the beginning of the Civil War.

One of the many causes of the Civil War listed today is the false sense of security that some southerners felt as the result of the 1857 panic. The South looked at the massive unemployment in the industrial north and at the financial losses in the north and west, which were estimated at $142 million. The southern slave and cotton economy was not hit hard by the crisis and few banks there failed. Losses were estimated at only $17 million.

This fueled the belief among southerners that in a war the northern economy would fall apart and that there would be riots like those that took place in the financial panic.

The result, however, was just the opposite. The war beefed up the economy in the industrial north, and although there were some draft riots in New York, most of the North supported the war.

In the South, meanwhile, the lack of industry and dependence on cotton were major factors in the fall of the Confederacy.

The study of Northern Kentucky history is an avocation of staff writer Jim Reis, who covers suburban Kenton County for The Kentucky Post.