Seven Events That Made America America (9 page)

Events in Kansas only seemed to confirm that the decision was not only legally flawed but practically unenforceable. Bribery, cajoling, and threats from Congress all failed to convince free-soil Kansans to go along with the Lecompton slave constitution and statehood for Kansas that would have come with it. Trickery was tried, too, with a constitutional vote between a “Constitution with slavery” and a “Constitution without slavery,” concealing the fact that the latter would only affect the introduction of
new
slaves into the state. When a legitimate vote was held (and with the pro-slave voters abstaining), the votes totaled as follows: 138 for the constitution with slavery, 24 for the constitution without (but with existing slavery), and 10,226 against either. Heedless of the wishes of the citizens, President Buchanan sent the pro-slave Lecompton constitution to Congress with his blessing, while warning of “disasters” if it was rejected.

If
Dred Scott
moved the nation closer to war by unwittingly contributing to the demise of the national Democratic Party, it also greatly accelerated the impetus toward war by sending the nation into a major panic. At the time, observers thought the Panic of 1857 was unrelated to the Supreme Court’s ruling, and indeed the view that the two were unconnected remained common until recently, as historians blamed the Panic of 1857 on the failure of the Ohio Life Insurance and Trust Co. or the impact on the wheat market of the Crimean War. In fact, it was the
Dred Scott
decision that triggered the runs that precipitated the failures of the New York banks and even Ohio Life. Economists Charles Calomiris and Gary Gorton have conducted extensive research into why, and under what conditions, depositors engage in panic behavior. In the antebellum period, the most important factor in depositor behavior was the realization that an adverse shock had occurred, even if the depositors didn’t fully understand the cause of it.
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Anything that spread bad news about bank assets, including future stock prices, could send the markets into a spin and cause increased commercial failures.

How, exactly, did the
Dred Scott
decision ignite the Panic? An investigation begins with the bankruptcy of securities brokers who financed dealings in bond markets, mainly railroad bonds. Railroads were
the
hot stock of the 1850s, the equivalent of dot-com stocks in the 1990s, but within railroad securities, three types existed. First, there was a series of older eastern railroads. A second group consisted of roads that ran along shorter, established routes that served local distribution. Finally, a third group was built westward to connect western markets with the East Coast.
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It was in these new lines, “with their aggressive land-purchasing policies and far-reaching plans for transcontinental expansion,” that the “principal speculative opportunities for railroad investors of the 1850s” lay.
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From 1853 to 1854 especially, investment in western railroads soared.
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Foreign investment in American roads was heavy, reaching $44 million in railroad bonds and another $8 million in stocks out of a total of $550 million.
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(It should be noted that slave prices rose rapidly as well, increasing 30 percent from 1850 to 1856.)
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Income from those roads depended on a steady flow of western settlers, which in turn relied on high levels of confidence in the prospects of the territories. And in early 1857, confidence was high.

The
Cincinnati Enquirer
noted a “railroad fever” related to the completion of the Southern Illinois Railroad through Ohio, particularly the link from Cincinnati to St. Louis.
⁴⁴
Historian Allan Nevins described “a fever of speculation in Kansas lands was raging, men selling homes, giving up well paid positions, and even borrowing money at ten percent to purchase farms.”
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Newspapers of towns situated on the main travel routes reported “a veritable torrent of humanity,” with some speculators expecting Kansas lands to “increase by seventy thousand people” in 1857 alone.
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By April, a thousand settlers per day were arriving in the Kansas Territory.

Obviously, the railroads were the immediate beneficiaries of such traffic. Railroads lowered rates, indicating expectations of continued increases in the volume of business, as well as sound business strategy in encouraging still more immigration. Rate reductions of up to 25 percent were advertised, while builders and entrepreneurs laid ambitious plans for new construction. The
Leavenworth Herald
, for example, reported on May 8, 1857, plans to connect that town with the Hannibal and St. Joseph Railroad. Major politicians and businessmen leaped into these ventures, occasionally for purely speculative gains. Town lots could pass through “two dozen hands within sixty days” as speculators beamed at the relentless flow of settlers to their lands. By the time Governor Robert Walker arrived in May, he found the best Kansas lands, “especially along projected railroad routes,” had already been snapped up by the speculators.
⁴⁷

Then something happened. A sharp change in expectations occurred. What was it? By late summer, optimism was shattered, the price of western lands plummeted, and railroad securities took a nosedive. Yet not all railroad securities dropped, and many remained flat—but not the trunk-line western roads that served the territories. From July to early September, securities in the trunk lines, Kansas land warrants, and stock in the Ohio Life company dropped sharply (with Ohio Life suspending all gold and silver payments on August 24). During the crash of these particular stocks and bonds, something unusual had become apparent: none of the other railroad stocks were dropping. But by October, a banking crisis had struck the major financial centers, and banks in Philadelphia, Washington, and Baltimore suspended specie payments, followed by the banks in New York. Even when all securities took a tumble in October, though, they soon recovered, but not the trunk lines that ran from the western territories.
⁴⁸
Several railroads defaulted, including the Illinois Central, the Erie & Pittsburgh, the Reading, and the Fort Wayne & Chicago, and some went bankrupt altogether, such as the Delaware, the Lackawanna & Western, and the Fond du Lac.

The first clue that a dramatic change had occurred could be found in the land prices. Between 1856 and early 1857, lands were purchased for $1.83 an acre, or approximately $0.83 more than settlers who had military warrants had paid for the land.
⁴⁹
Then the land market collapsed: between 1858 and 1860, 45 out of 102 mortgages in Osage County met with foreclosure, 81 of 246 in Anderson County, and 54 of 366 in Lyon. Ultimately, observers predicted two-thirds of all mortgages would end in foreclosure in Kansas.
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At the same time, virtually no land values were falling in the South or East. At the same time that land prices crumbled, immigration westward declined. For six of the major east-west arteries that traversed Ohio, the number of passengers fell from 581,000 in 1857-58 to 367,000 the following year, and the number of westbound passengers arriving in Chicago from the East—a measure of net migration—collapsed, going from 108,000 in 1856 to one-tenth of that in 1860.
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Records kept by the Western Railroad showed its passengers dropped from 63,246 in 1856 to 41,674 in 1860.
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In other words, the asset declines that preceded the panic lay in a particular class of investments in the West, and were not reflective of overall market conditions. Those asset declines occurred rapidly in mid-1857, then accelerated from August through September. Were these declines the result of falling wheat prices due to the declining international demand for grain after the Crimean War?
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The war ended in 1856 and prices would have reflected that much earlier (as indeed they did: wheat prices tumbled in October 1856, but rebounded by July 1857). And British prices in wheat barely changed at all during this time—but had adjusted to the end of the Crimean War in 1856. Something much deeper was at work in the western American territories.

With the announcement of the
Dred Scott
decision on March 6-7, the prospects for free-soil western lands rapidly deteriorated, and with them, the hopes and dreams of thousands of potential settlers. Reaction to the
Dred Scott
decision, in part, came with the defeat of pro-slavers in the St. Louis mayoral election a month later. This was followed by the continued deterioration of the situation in Kansas, where, by July, the prospects for bloody violence were all too likely.
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In June, for example, the anti-slavery community at Lawrence began setting up a separate municipal government without newly appointed territorial governor Robert Walker’s consent, whereupon he marched dragoons into town and asked President James Buchanan for federal troops.

Free-soilers had sat out the June constitutional convention, and thus a new ballot was scheduled for October 1857, but when the results of the June election appeared, they only provoked more outrage. In one county, which contained only six houses, some 1,600 votes were cast for the pro-slave constitution, all on a single long sheet of paper (and obviously copied directly from the
Cincinnati Directory
).
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More than 1,200 votes came from McGee County, which only had 20 registered voters on its rolls. By May 1856, when John Brown hacked up his victims at Pottawatomie, various rifle companies, volunteers, local militia, and other armed groups traversed the Kansas Territory routinely, and gunplay was frequent. After
Dred Scott
, it seemed like “Bleeding Kansas” would not only continue, but spread to every other open territory in the West. Against this backdrop, interest rates had risen in New York beginning in June 1857, although New York bank stocks remained firm until September.

Another interpretation of the Panic assigned its cause to the failure of the Ohio Life, an Ohio bank thought to have large mortgage holdings, on August 24. In fact, Ohio Life also had a strong connection to the railroads—its assets consisted mainly of securities and loans to a number of lines, particularly the Cincinnati, Hamilton, and Dayton Railroad, whose dividends were payable at Ohio Life. To facilitate these payments, the company opened an office in New York City and named Edward Ludlow as the director there. Ludlow engaged in massive lending, not on mortgages, but on railroads. He loaned out an amount equal to the company’s capital, or $2 million, to various railroads including a single loan to the Cleveland and Pittsburgh Railroad of $500,000.
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Of its total $4.8 million in assets, the bank invested $3 million in railroads, and the Cleveland & Pittsburgh stock had sunk from $0.39 in July to just half that in August, then dropped to only $0.15 after Ohio Life suspended. If western railroad stocks were troubled, then it could be expected that any banks holding western railroad securities would be the hardest hit, and that’s exactly what occurred.

In other words, there is a smoking gun tying the
Dred Scott
Supreme Court decision to the ongoing events in Kansas and a further expectation about that kind of civil war and lawlessness spreading throughout the territories based on the Court’s verdict. The next link was economic, whereby investors either put money into projects or pulled it out based on expectations about business climate. Those expectations were made abundantly plain with the collapse of the western trunk-line railroad securities. Three destabilizing elements now combined to turn a region-specific shock (the railroad stocks) into a national financial crisis.
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First, as railroad investment in western and midwestern roads plummeted, New York note holders rushed to convert their bank debt into gold and silver (specie), putting a drain on New York banks, which addressed it by selling bonds. As one contemporary put it, the “causes which alarm one bank alarm the whole. Upon any shock to confidence, they [will] all call [in their outstanding loans] at once.”
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This depressed bond prices further. Second, outside of the city, banks used correspondents to send a flood of their notes to New York banks for conversion into specie, further depleting the city banks’ reserves. Finally, when bankers started to grow concerned about the value of the securities, they refused to roll over the debt of the brokers, forcing still more bond sales as brokers scrambled to get liquid. Suddenly, the New York City banks that seemed unaffected by events in Kansas or by the declaration of the Supreme Court found themselves facing bankruptcy. The connection between the decline of the securities/note prices with bank suspensions in New York seems well supported.
⁵⁹

On September 25, the Bank of Pennsylvania failed and other banks in that state suspended, which only placed more pressure on New York City banks, and was followed by the failure of the respected firm of E. W. Clark, Dodge, and Company. Then, on October 13, a massive run struck the banks, which paid out between $4 and $5 million before suspending. New York bank superintendent James Cook lamented, “The banks went down in a storm they could not postpone or resist.”
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Deposits among New York banks had plummeted by $10 million in just under two weeks. But the damage done by Taney’s Court did not end there, as fear soon rippled through the banking systems of other states. Ohio saw its reserves reduced by half; a mad scramble for specie hit Baltimore and Philadelphia. Outraged citizens and terrified merchants met in major cities—often the business communities demanded their own banks suspend while they still had gold and silver in their vaults, as occurred in citizen meetings in Virginia, Georgia, and Tennessee.
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Financial distress soon had its very real effects on manufacturing. Within a month of most of the large suspensions, more than two-thirds of New York’s shipbuilders were laid off. In Providence, Rhode Island, of the almost 1,500 employees who made jewelry, only one-fifth of them still had jobs by October.
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Newspapers begged depositors to fight “FEAR” and “unreasoning panic.”
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Mercantile activity was curtailed, swelling jobless-ness in most major cities and leading the editor of the Louisville
Courier
to prophesy “terrible suffering for the poor.”
⁶⁴
New York’s unemployed numbered between 30,000 and 100,000, and Mayor Fernando Wood promised relief FDR-style through public works, with payment to come in the form of “cornmeal, potatoes, and flour.”
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Mass demonstrations by the unemployed struck Philadelphia, St. Louis, Chicago, Louisville, and Newark. But the Panic’s effects were just beginning in some sectors, such as Pennsylvania’s iron industry and coal fields, where the furnaces went cold in October and didn’t reopen until April 1858. Production fell from 883,000 tons in 1856 to 705,000 tons in 1858.
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