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.50 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 1860.51 Records kept by the Western Railroad showed its passengers dropped from 63,246 in 1856 to 41,674 in 1860.52
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?53 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.54 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).55 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 $500,000.56 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.57 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.”58
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.”60 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.61
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.62 Newspapers begged depositors to fight “FEAR” and “unreasoning panic.”63 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.”65 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 1858.66
When the worst of the Panic was over and stocks began to rise, as one Wall Street veteran noted, “Wizened bank cashiers, having recovered from their fright, sallied out from their fortresses to take a turn in the street. Merchants, weary with brooding over piles of protested notes, came down to try to repair their losses. . . .”67 It took until January 1859 for most banks to reach their pre-crash levels. Contemporaries disagreed on the causes of the Panic of 1857, and virtually none of the observers of the day pinned the blame on the U.S. Supreme Court. Nathan Appleton, a Massachusetts textile magnate and banker writing in Hunt’s Merchant Magazine, blamed New York City’s banks for contracting loans; James S. Gibbons criticized the so-called country banks for their part in a credit contraction.68 New York’s banking superintendent was stumped, finding it “without apparent reason derived from past experience.”69 Wall Street insider William Fowler attributed the panic to overexpansion of credit due to the new gold finds in 1849, then to the failure of the Ohio Life and Trust.70 Historians subsequently blamed the failure of the Ohio Life Insurance and Trust Co. (Ohio Life) for triggering a bank run, or looked to a long-term decline in railroad investment that began in 1854.71 Still others claimed that a rapid reversal in the profitability of western grains, related to the decline of foreign demand after the Crimean War, was the culprit.72
Most—North, South, merchant, laborer—blamed “the banks.” Nathan Appleton complained that the New York banks had brought about the contraction without “the slightest necessity.”73 In fact, the culprit was the Supreme Court, and most observers had missed the immediate causes and thus had poor remedies often grounded in sectional partisanship.
Historian James Huston, in his analysis of the panic, got the causes wrong but the impact right.74 Immediately, discontent in the North swung large numbers of previously Democratic voters over to the new Republicans. At the same time, political and financial analysts in both sections erroneously concluded that the South had been insulated because of “King Cotton.” Southerners misinterpreted that as evidence that they could sustain an independent economy that sold primarily to Europe, and that in any event the preeminence of cotton was such that the North would never “make war” on King Cotton. In reality, the southern branch banking system had protected it from the worst of the runs—but in a war, that system would be quickly “nationalized” by the Confederate States of America and would become impotent.75
An appreciation for Dred Scott’s true impact on the national economy cannot be understood outside of an analysis of what both sides in the slavery debate saw as the dominant (and, increasingly, only) issue, namely, the definition of property. As Huston explained:Southern slaveholders searched for a sanctuary founded on the absolute guarantee that all members of the Union would view slaves as property and agree that no law at any level of government anywhere within the Union could directly or indirectly harm the value or ownership of that property—the absolute sanctity of property rights in slaves.76
If property rights rested in government, it became vital that government not fall into the “wrong” hands. Assurances of goodwill were no longer enough: “Northerners could not afford to let the South win control over defining property rights in slaves because it meant the possible extension of slavery into the North and the ruination of their society.”77
This reality was contrary to the conclusion of many historians, including the great Allan Nevins who wrote, “it was plain that if the country held together, every step forward would strengthen the free society as against the slave society.”78 Stephen Douglas argued in 1849 that “the cause of freedom has steadily and firmly advanced, while slavery has receded with the same ratio.”79 That was only true if, in fact, the nation could arrive at some definition of a “person” versus property. Even then, however, two factors militated against an inexorable march to freedom: first, slave values themselves—as all economists agree—continued to escalate; and second, the value of slave labor over free labor (certainly in the short term) was obvious. While the slave South may have trailed the North in innovation, patents, and inventions, on the playing field that mattered—direct competition between slaves and free laborers—little question existed in anyone’s mind as to which was more cost-efficient.80 Even Douglas, in 1858, rested his argument about slavery on profitability, in that while Illinois was still a territory, residents “had no scruples about its being right [i.e., about slavery being legal], but they said, ‘we cannot make any money by it. . . . [emphasis his].”81 He repeated this position in 1860: “We in Illinois tried slavery while we were a Territory, and found it was not profitable; and hence we turned philanthropists and abolished it.”82 Douglas thereby twice affirmed that which Lincoln charged him with, namely, not caring about the morality of slavery, only its profitability. Even the superiority of free labor was a moot point if slave values as property were appreciating faster than the differential of their labor earnings compared to free laborers. Such was not the case.
To appreciate the significance of slavery as property in antebellum America, no less than Alabama Fire-Eater William Lowndes Yancey, in 1860, said southern slaves “are worth, according to Virginia prices $2,800,000,000—an amount easy to pronounce, but how difficult to conceive.”83 As early as the 1830s, Thomas R. Dew found that Virginia slaves constituted almost one-third of all asset values in Virginia. By 1859, the pressure on the South to force permanent constitutional definitions of slavery into the halls of government was apparent: in the eleven states of the Confederacy lived 5.4 million whites and 3.5 million slaves, and even when including the border states, one-third of people below the Mason-Dixon line were slaves. As property, these people constituted $3 billion (1860 dollars) in wealth, or approximately 18.75 percent of U.S. wealth. This was more than railroads and manufacturing combined.84 Sliced yet another way, when ranking the wealth of the states based on a per capita (not gross) measurement, an astonishing picture emerges. Traditional measures put New York, Pennsylvania, and Ohio at the top of the list of wealthiest states in 1860, but when adjusted for population, South Carolina, Mississippi, Louisiana, and Georgia are at the top, followed by Connecticut, then Alabam
a, Florida, and Texas, interrupted by Rhode Island, with Virginia, Maryland, and Kentucky rounding out the top twelve. Put another way, except for Connecticut and Rhode Island, the Union’s ten richest states were all slaveholding states.85
It would not be an exaggeration to say that the single most important asset in the American economy in 1860 was a slave. Protecting rights in those slaves became paramount, for economically the only possibility of slavery ending was if or when slaves themselves became worthless. Just the opposite was happening: slave values were increasing on the eve of the Civil War.86 At the same time, the “free soil” movement had swept the North, and it had a well-grounded fear of direct competition with slavery. What changed by the 1850s, though, was that due to the railroad and steamship networks, slavery for the first time came into proximity to, and direct competition with, free labor. Dred Scott meant that free labor and slave labor would be in direct competition with each other not only across borders but even within states—and within northern states.
Outside of the South, small farmers dominated the American scene, with 70 percent of the farms of more than five hundred acres located in the South. For those who did not own slaves, “wealth meant land, buildings, carriages, and tangible objects, not people; for southerners . . . ownership of slaves revealed success at worldly endeavors.”87 More important than the different views of property was the approach to labor, which in the North meant a means of advancing economically, while in the South labor was equated with servility. Until the 1840s, travel between the sections was so difficult that few Northerners ever had to witness the dangers to free soil that slavery presented. (In the Civil War, most of the soldiers on either side had never been far outside their hometowns until they served.) As late as 1830, a coach ride from Cincinnati to New York could cost several days’ wages and the stagecoach itself could be expected to be overturned at least once—one rider on a New York-Cincinnati trip had the misfortune of having his coach overturned nine times!88
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