Panic of 1857: Ohio Life's Fraud and the SS Central America's Lost Gold

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The Panic of 1857 followed a boom fueled by California gold, which let Eastern banks issue large amounts of paper credit until easy surface deposits thinned in the mid-1850s. Investors poured money into paper railroads, companies that sold stock and bonds on land grants before laying any track, while Samuel Morse's telegraph linked the financial centers and removed the old delay in bad news. In March 1857 the Supreme Court's Dred Scott decision struck down the Missouri Compromise, adding political risk to Western land and railroad securities, and in August the oldest flour and grain company in New York City failed.

On August 24, 1857, the Ohio Life Insurance and Trust Company, a clearinghouse for capital between East and West, failed amid fraud by its management, setting off margin calls. In September the SS Central America sank in a hurricane off the Carolinas with more than 400 lives and over 30,000 pounds of California gold meant for New York banks, which then suspended specie payments. Britain suspended the Bank Charter Act of 1844 so the Bank of England could issue more notes, while President James Buchanan refused relief and pressed banks to pay in coin. The South's quick recovery fed cotton is king boasts on the road to the Civil War.

• Ohio Life's executives had embezzled funds to cover disastrous speculative bets.
• New York banks used the New York Clearinghouse to pool gold reserves and issue joint certificates.
• Wheat fell from over $2 a bushel in 1855 to about 80 cents by 1858 as Russian grain returned after the Crimean War.
• Keokuk, Iowa, owed nearly a million dollars on railroad bonds, and lots once appraised at $1,000 could not sell for $10.
• The Boston and Worcester railroad cut its remaining workers' pay by 10%.