Lessons from the Panic of 1857
June 11, 2025
by William P. Meyers

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James Buchanan, the last pro-slavery President of the United States, had been elected in 1856 and took office in March 1857. It does not appear that politics played a significant part in the Panic of 1857.

Wait a second. What lessons could the Panic of 1857 have for today? That was the steampunk era, when the big innovations were steam engines, railroads, and telegraph (the telephone had not been invented. We live in a new era, with the internet, computers, software, and AI dominating the economic picture.

What has not changed? Well, human nature. And some aspects of finance: there were banks in 1857, and a stock market, and a bond market. And real estate. And mortgages. Sure, the modern versions are more sophisticated, with programmed trading of stocks and bonds, with AI owned by big time financial firms going up against tens of millions of small investors buying and selling on the smartphone apps. Despite that, the Panic of 1857 offers important lessons to us.

The single most important lesson is that financial panics happen. Sometimes they usher in long depressions, as after the Panic of 1873 and the Great Depression that started after the panic of 1929. The most recent panic, of 2008, is now far enough behind us that some young investors have never consciously experienced a panic (though they would have experienced a pandemic).

As 1857 began the American economy seemed to be doing pretty well. The Crimean War (1853-1856) had increased demand for American grain, because Russian grain had been cut off. There was also demand for American cotton, grown in the southern states. So farmers (including slave plantation owners) were prospering. The industrial revolution had begun, the main evidence being the railroads that were being built at a rapid pace. The nation was lit at night mainly by candles and whale oil, but that was about to change with the discovery of oil in the state of Pennsylvania.

During times of prosperity there is a dangerous feedback loop that many financial speculators fall into. Lets say an investment is gaining in value by 10% per year. $100 gets you $110. But if you borrow $100, at say 4% interest, and add that to $100 in cash, in one year the $200 will get you $216. So as long as the investing goes well, the feedback loop gives positive reinforcement to borrowing as much money as you can.

In 1857 many investors could put down 10% in cash and borrow 90% for an investment, be it real estate or stocks or bonds. The banks were happy to lend, that was how they made their money.

There had only been 2 financial panics in U.S. history. So the possibility of one did not enter most investors minds. Bad investments were known, but each investor thought they were smart enough to avoid those. So money flowed freely into building new railroads, cotton meals, iron and steal plants, and the factories churning out the many inventions of that era.

It was a bubble waiting to burst. A manager at the New York City branch of the Ohio Life Insurance and Trust Company had embezzled about $2 million (an astonishing amount in those days). In addition, with the Crimean War over, the international demand for American grain had fallen, so prices in the U.S. were low. Farmers in the Midwest responded by shipping less grain by railroad. The railroads were overextended because they were building new track as fast as they could, racing against each other to reach as many destinations as possible. Some railroads had borrowed large sums from Ohio Life and could not make payments. This led to a $5 million loss on loans. Combined with the embezzlement, Ohio Life was forced into bankruptcy.

Businesses fail on a regular basis even during times of prosperity. Usually one business failure will not set off a panic. But the New York banks suddenly worried that their loans to railroads, and the loans to their clients who invested in railroads, might not be such sound investments.

Farming has an annual cycle. Farmers borrow in the spring, then pay back their loans when they sell their grain in the fall. In 1857 some grain could not be sold at all, and all grain sold at prices lower than in 1856. So farmers mainly could not pay back their loans. The processors who turned grain into flour were also hurt. N.H. Wolfe declared bankruptcy. The price of railroad stock fell.

Now suppose you had $100 in 1856 and borrowed $900 (on margin) to buy $1,000 worth of a railroad stock. Only in 1857 the stock falls by half. You now have $500 worth of railroad stock, but $900 in debt. And your lender would like you to repay the debt. Suddenly tens of thousands of speculators were in trouble. Their style of living was in trouble. Their new mansions, with mortgages that were going to be paid off with railroad stock gains, were in trouble. Even European banks that lent money to railroad speculators were in trouble. The new telegraph system helped the panic move around quickly.

Another contributor to the panic was the money system of the era. The U.S. government did issue hard money (gold and silver coins) and paper money. But the most common form of money was the bank note. These were notes issued by individual banks, which could be redeemed for U.S. money, or even gold, but usually at some discount. Mostly they were used to repay loans the bank had made. In theory the banks held reserves to cover the notes they issued, but some issued too much. If a bank issued notes and then the people they lent them to went bankrupt, the bank could fail. If for any reason a particular bank failed, its notes lost all value. That is why bank notes usually traded at a discount to their nominal, stated value.

The American sailing industry was also, suddenly, in trouble. Wooden ships, powered by sail, made in New England, were very fast and competitive. But the steam age and iron ships had been gaining ground for a couple of decades. Some were built in the U.S., but it was in England that the major advancements were made. After 1857 the transition to modern, iron-hulled, steam-propelled ships was rapid. The American shipbuilding industry went into serious decline. It would not revive until World War I.

The Panic of 1857 did turn into a recession, but it was short-lived, and did not turn into a depression. Two parts of the economy held up: gold mining in California and cotton production in the southern states. Then it turned out that at least some of the railroad companies were not in as much trouble as it had appeared in early 1858.

One more history lesson before turning to the current situation.

In 2001 Enron went from being a major company, with $101 billion in revenue the prior year, to being in bankruptcy at the end of the year. In different circumstances the collapse of Enron would have caused a general panic and a recession. Instead, because of the dot-com (internet) stock bubble, the real damage to the economy would wait until the bubble popped in 2003.

So where are we today? Economies, national and international, are extremely complex. Bankruptcies of relatively large companies occur every year. There are typically two things to look out for: assets that are way overvalued, and excessive lending. When there is a combination of the two, lenders can lose so much money that a downward spiral follows.

Is there a lending problem? Look no further than the U.S. government. During a saner period the U.S. used to borrow substantial sums of money only during emergencies, like recessions and wars. Starting around 1980, and gradually at first, that practice began to shift. Presidents and Congresses simply can't be bothered to balance budgets anymore. Just the interest on the national debt, which is approaching $37 trillion, is estimated to $952 billion ($0.95 trillion) in 2025. We are not in a recession, but Donald Trump's proposal is to cut taxes more than spending is cut, resulting in even higher annual deficits. For the most part, because interest paid on U.S. bonds is low (usually not more than 5% per year), people (and companies and nations) do not use borrowed money to buy them. The amount of interest the government will need to pay, if people lose confidence, could balloon, meaning taxes would need to be increased at the same time that spending is cut drastically, which would certainly cause a depression.

Moving to the private sector, the stock market is not at bubble levels, but a few stocks are (notably Tesla). Any one large company failing unexpectedly would probably not tank the whole sector if the problem is specific to the company (like falsified accounting, or revenue declining). If one company's failure implies a more systemic failure, however, that could lead to a panic. In 2008 the failures of local real estate markets caused investors to realize that almost all real estate had become overpriced and that many mortgages would default. In 2003 suddenly investors realized that adding .com to the name of a company did not mean it was the next IBM, Intel, or Apple.

Stagflation, the bane of the 1970s, is also possible. It would likely result from Trump keeping tariffs too high.

But my guess is the end will come when the crypto bubble bursts. Here I will used Bitcoin as a stand in for all crypto coins. Bitcoin were worth around $2 when first issued in , and around $450 at the beginning of 2015. As of the date of this essay they trade for $108,893 apiece. Clearly the dynamic of the dangerous feedback loop discussed above has been at work. The best known example is the company Strategy, formerly Microstrategy, which once was mainly a data mining software company. In 2020 it began purchasing bitcoins. By borrowing money it became the largest corporate holder of bitcoins in 2024. It continues to trade on the stock market. Its success had led other large investors to also buy bitcoin (though whether they are borrowing to make their purchases, or selling other assets for them, I don't know.) Of course there are a lot of individuals out there who own bitcoin, some of them far wealthier for their early bitcoin purchases than they could have become any other way.

But bitcoin is not being used much for transactions. Sure, it is used by criminals who don't realize the FBI can now trace their transfers to cover drug smuggling and other crimes. But most people buy bitcoin and hold. Dollars are traded for it, but it is not traded for dollars or for actual items of commerce (with some exceptions).

What happens if the economy tanks and some people (say, laid off tech workers) start selling their bitcoin to pay their rent or mortgages. With enough sales the price of bitcoin, in dollars, will drop. If a company like Strategy suddenly finds it has to sell a lot of bitcoin (because its lenders and stockholders demand it), then the bitcoin price could drop quickly and dramatically. Other crypto coin prices would likely also drop, and we would have the Crypto Panic (of 2025, or 2025, or who knows when). If the crypto panic causes investors to sell their AI stocks, and dominoes like housing prices begin to fall again, and inflation stays high so the Federal Reserve keeps interest rates relatively high . . . we will have a Crash.

The U.S. has recovered from all previous panics and crashes. But now, due to global warming, we are in the Slow Motion Apocalypse. Maybe the AIpocalypse. All previous bets are off.

Nothing is guaranteed, but minimizing borrowing (and spending) and maximizing assets has always worked better during panics than the alternative.