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When Buchanan assumed office the era of unrestrained commercial optimism, which had prevailed for a dozen years, began to show signs of coming to an end; and before the new president met his first Congress a financial storm broke out which did not completely clear away during his term. The expansion before 1857 was too great to last; the sense of the unbounded resources of the country and the unqualified rapidity with which they might be utilized had pushed the industrial and financial world into an excessive inflation of credit and a dangerous sinking of capital. By 1857 the amount of indebtedness incurred by railways, manufacturers, and promoters of all kinds to the banks of the country and to each other stood beyond the point where it could be absorbed by the public. 

The railroad mania resulted in the hasty construction of hundreds of miles of track in the thinly settled west, whose earning power was found not to be such as to enable the corporations to meet the obligations incurred by the mortgage bonds so freely and recklessly sold. At the same time, manufacturers incurred debt to extend their plants in anticipation of an ever-increasing internal trade, depending on the railroads; and banks all over the country were loaning freely to them on long terms.

The first signs of alarm appeared when the stock of the new railway systems began to decline in the winter of 1856-1857. In the summer, signs of danger thickened, and by August it was evident to nearly all financiers that, without anyone assignable cause, the public mind was undergoing that indescribable change from optimism to distrust which is the real origin of a panic. Banks all over the country began to contract loans, a process which increased uneasiness; and, on August 24, the suspension of the Ohio Life Insurance and Trust Company, which did a large general banking business in the west and in New York, precipitated the crash. A sharp break in stocks took place, railroad securities dropping rapidly thirty or even fifty percent, in a few weeks. Then came failures on the stock exchanges, followed by mercantile failures in September; and in October some of the leading railroads — the Erie, Reading, Illinois Central, and Michigan Central — went to the wall. The pressure upon the banks, struggling as they were to contract loans, became too severe to be endured, and on September 24 and 25 those of Philadelphia, Baltimore, and most of the western states were suspended.

The New York banks held out a little longer, but their turn came in October after notes of railroads began to go to protest; runs by depositors were soon started, weaker firms were unable to stand, and a general suspension was announced on October 14. This action carried with it the suspension of specie payments in New England, and for a time the country was plunged into the abysses of "general bankruptcy." Among the few banks which weathered the storm were the Chemical Bank of New York, the Indiana State Bank, the Kentucky banks, and four of the New Orleans banks, the results in the last cases being due to the careful legislation of these states in the years preceding the panic.

The effect of the collapse of credit upon the industries of the country was sudden and severe. Prices dropped a fourth to a third "in all domestic fabrics, in meat, provisions and general merchandise," while "speculative real estate" declined one-half in value. Factories closed, throwing tens of thousands out of work, and such industries as the New England shoe manufacture and the Pennsylvania ironworks remained idle for months at a time.

In all, a total of six thousand firms failed, with liabilities estimated at about three hundred millions, with an eventual payment of probably a quarter to a half of the amount. No less than fourteen railroads failed, and the volume of traffic upon all the lines in the north and west diminished sharply.

The farmer was equally depressed with the manufacturer and financier since the reopening of the Russian grain trade after the cessation of the Crimean War added to the effects of the panic in causing a lessening demand for bread-stuffs. The crops were scarcely moved in some localities, and the exports of grain diminished by one-half. In the last months of the year general distrust and depression reigned, and the president, in his first message to Congress, in December 1857, summed up the situation by saying: "Our country, in its monetary interests, is at the present moment in a deplorable condition. In the midst of unsurpassed plenty, . . . in all the elements of national wealth, we find our manufactures suspended, our public works retarded, our private enterprises of different kinds abandoned, and thousands of useful laborers thrown out of employment and reduced to want."

The suspension of the banks did not last long, for, by December 1857, the New York and Boston banks felt able to resume specie payments, the Philadelphia and Baltimore banks followed in February 1858, and by midsummer, the period of prostration was at an end and the process of recovery started. During 1858 and 1859 "hard times" prevailed, marked by liquidation of all sorts and by an almost complete cessation in demand for speculative investments. Land purchases and mortgages declined seriously in value, factories were reluctant to start up, and prices in many commodities remained low. The writers of the day, such as Greeley, in the New York Tribune, represented that prices were "from 25 to 75 percent, lower"; and in some localities, and especially in certain lines, such as land, this was true; but the effects of the panic were not in reality so severe as people thought. Tables of prices, made out from a study of market quotations, do show a decline in 1858 and 1859 in some important commodities, such as wheat and iron; but it should be noticed that even in these the prices remained above the range previous to 1856-1857; and in many other products, such as corn, hides, and wool, there was little effect after the months of suspension were over. The iron industry, undoubtedly, suffered severely; the production of pig iron fell off one-fifth in 1858, and the state of Pennsylvania was considered "prostrate."

While factories were idle and while, by an unfortunate coincidence, crops were poor in the west, there was bitter complaint of lack of employment in the cities, giving rise in New York to workingmen's demonstrations of a semi-revolutionary character, demanding work or bread. These did not, however, lead to any actual conflicts. The pictures drawn by observers were full of the depression which replaced the extravagant enthusiasm of 1857. "The general movement of the country," said one, "is still toward liquidation and there has been therefore no general revival of trade. . . . How far the country can be relied upon for payment in full for past or present indebtedness is a question not easily solved. Those who thought themselves rich with wheat at $2 a bushel will find their assets miserably shrunken with wheat at 75 c. for the same measure." The condition of the west was summed up by Greeley in dark colors. "Railroads partly constructed and there stopped for want of means; blocks of buildings ditto; counties and cities involved by the issue of railroad bonds and practically insolvent; individuals striving to stave off the satisfaction of debts, obligations, judgments, executions — such is the all but universal condition."

To this gloomy picture in the northern and western states there stood forth a striking contrast in the continued prosperity of the "cotton states." Bank failures and suspensions occurred among them, it is true, since the connection of southern with northern banking was too intimate to permit of escape; but the great staple industry of the south, the cotton production, upon which prosperity rested, was almost undisturbed by the panic. The crops of 1856 and 1857 were large and that of 1858 was up to the average, the price of cotton held firm, exports increased, and while the whole north waited in sullen stagnation to recover courage, the southern planters felt a confidence in their present strength and future prosperity which passed all bounds.

"The wealth of the South," said De Bow's Review, "is permanent and real, that of the North fugitive and fictitious. Events now transpiring are exposing the fiction as humbug after humbug explodes." The price of negroes, a good index of commercial confidence, as indicating a demand for capital, rose in these years to unheard-of figures, good field hands bringing in places from fifteen hundred to two thousand dollars. The contrast between the two sections confirmed the belief of southern leaders in the world supremacy of cotton. "Cotton is king," exulted Hammond, of South Carolina, in the Senate. "Who can doubt it, that has looked upon recent events? When the abuse of credit had annihilated confidence, . . . when you came to a deadlock and revolutions were threatened, what brought you up? Fortunately for you, it was the commencement of the cotton season and we have poured in upon you one million six hundred thousand bales of cotton just at the crisis to save you." A still more exalted enthusiast called the cotton crop "The gravitating power that keeps the civilized world in its proper orbit as it whirls through the grand cycles of its existence."

During this panic, the financial situation of the federal government depended to a great extent upon the disturbances produced in foreign trade, since at that time about nine-tenths of the revenue was derived from the tariff. As soon as the crash came, the demand for imports fell off sharply, and for the year 1858, they amounted to little more than two-thirds of what they had been in 1857. In 1859 they increased again but still did not reach the figures of 1857. Although exports fell off, mainly in grain and tobacco, their decline was so much less than that of imports that in 1858, for the first time in years, there was an international balance in favor of the United States. In the next two years, the flow of imports once more exceeded exports, and the normal relation of the United States to the outside world as a gold-producing nation was established, showing that the effects of the loss of confidence in 1857 had worn off.

Meanwhile, the government revenue had been affected. The receipts from customs dropped one-third in 1858, and the surplus, habitual before the tariff reduction of 1857, was changed into a deficit of twenty million dollars. In 1859 and i860 this condition continued until the accumulated deficits amounted to over fifty millions, a result due in part, no doubt, to the lower rates of the tariff of 1857, but primarily to the decline in imports. The policy of Secretary Cobb, to whom it fell to meet the panic, was devoid of originality and offers little of interest. Cobb was an intelligent man, and he found the treasury department in such good condition after Guthrie's administration that not even the rotation of officeholders was enough to prevent its easy operation. Cobb, however, was not primarily a financier, but a politician, and a southern one at that, and his relations with the financial world were neither close nor cordial. Further, the majorities in each House of Congress were northern in business and financial feeling and stood in no relations of confidence with the administration or with Cobb himself. Consequently, the action of the government was unimportant and rather ineffective.

When the panic began, Cobb tried to unlock some of the gold in the sub-treasuries by bond purchases to the extent of several millions, but without any particular result except to transfer some specie to the banks and to force government securities up a few points in the market. When Congress met, the deficit was visible and Cobb was forced, under the authorization of an act dated December 23, 1857, to resort to the issue of treasury notes. Later in the same session, as the deficit grew steadily larger, Congress authorized a loan of twenty millions, in response to a report of Cobb and a message of Buchanan; and a year later it authorized the reissue of treasury notes. This comprises the entire policy of the government. No attempt was made to reduce expenses, nor were any new sources of revenue provided, and the debt steadily increased from under twenty-nine millions in 1857 to nearly sixty-five millions in i860. This was not, however, considered as in any degree impairing the government credit, which stood untouched during the panic, the sub-treasuries maintaining specie payments through the months of bank suspension, and government bonds commanding a considerable premium when railway securities were prostrate and state bonds were at a considerable discount. It was not until after i860, when political dangers thickened, that confidence in government solvency was shaken.

In these years appeared a significant forerunner of later economic changes in the shape of a revival of protectionist sentiment in Pennsylvania under the stress of hard times. Some influential papers, notably the New York Tribune under Greeley, declared that the panic was a result, direct or indirect, of the tariff of 1846, and urged, unremittingly, a return to protective duties. Buchanan was so far influenced by the feeling of his state as to urge, in his message of December 1858, an increase in the tariff for the purpose of incidental protection as well as for increased revenue, recommending, in addition, a change to specific duties. Cobb was ready to advocate a return to the rates of 1846, but although an attempt was made at the end of the session to introduce a tariff bill, a two-thirds vote, necessary under the rules, could not be obtained. In December 1859, Buchanan again asked for an increase in import duties, and again an attempt was made to meet the situation by the introduction, in April, i860, of the so-called Morrill tariff. After a brief consideration, this bill, which was not much more protective than the tariff of 1846, passed the House on May 10 by 105 to 64. The Senate, however, postponed its consideration, influenced by the strong southern feeling against tariffs and the Democratic party tradition, now firmly implanted.

The slight interest felt in the subject by most northern members was sufficient to prevent any action by Congress to provide additional revenue during Buchanan's term; and the decade ended with an empty treasury, an increasing debt, and much discomfort in the government departments. Had Congress shown any desire to reduce the expenditures it would not have been difficult to relieve the embarrassment, but the appropriations continued undiminished and the whole scale of government expenditures remained at the point reached in the "flush times" immediately preceding the panic. Although Buchanan and Cobb in hesitating tones suggested retrenchment, no notice was taken; and the government remained unable to cover running expenses without repeated issues of bonds and treasury notes. By i860, although the federal treasury still felt the effects of the crisis, the country as a whole had begun to recover its confidence and prosperity. Manufacturers started up again, railroads operated with greater ease, and capital again began to be loaned with freedom. By the time of the census of 1860, even the production of iron, which was the worst sufferer in public estimation, had so far recovered as to surpass any previous figures. Railway stock, which had been at a low level in the market, rose on the average by a third or more; and railway construction, which had been reduced one-third in 1858, now increased to the average rate of the earlier years of the decade, until by i860 there were no less than 30,592 miles of track laid down, as compared with 8585 in 1850. The superior prosperity of the southern states is indicated by the fact that construction there was not affected by the panic but went on at a higher rate than before. In these years the southern connections between the Atlantic seaboard and the interior were completed, the system of roads from Virginia and South Carolina reaching Memphis on the Mississippi through Chattanooga in 1858 and 1859. Still, the south remained far behind the north as a whole, having less than a third of the total railway mileage.

The year 1858 was signalized by the partial success of an invention which was to revolutionize modern commerce and modern diplomacy. On August 5, 1858, the third attempt to lay an electric telegraph across the Atlantic was successfully carried through. Although the excitement and congratulation over this event, "exceeding the capacity of language," was suddenly cut short by the breakdown of the cable in September, the fact that four hundred messages had meanwhile been sent encouraged Cyrus W. Field, the promoter of this enterprise, to renew his efforts until complete success was attained eight years later.

The reverse side of this tremendous extension of railways into the interior and the expansion of internal trade is to be seen in the fact that the American merchant marine came in these years to a stand-still. After 1856 the disorganization of British commerce due to the Crimean War was at an end, and British competition, especially in the import trade, was much more vigorous. American tonnage, while continuing to be the greatest in the world, ceased to increase in amount and began to show the effects of the change from wood to iron. The Collins line of steamers, which up to 1856 maintained a spirited rivalry with the Cunard line for the Atlantic passenger trade, was ruined by the shipwrecks of the Arctic in 1854 and the Pacific in 1856; the congressional subsidy was withdrawn in that year, and in 1858 the remaining vessels were sold. The future loss of the carrying trade, as a result of the turning of capital and invention into the more profitable fields of internal development, was foreshadowed.

The return of prosperity was indicated by the revival of banking. Although the long credits common before the panic were curtailed, the extension of loans was resumed and new charters taken out until by i860 there were nearly sixteen hundred banks with loans of $692,000,000 as against $648,000,000 in 1857, and a circulation of $207,000,000 as against $215,000,000 in 1857. Surveying the country as a whole, it may be said that the census of i860 found all regions except the northwest, where the recovery was less complete, in substantially the same situation as in the years before the panic.

The economic changes of the decade were reflected in alterations in population both in distribution and density. The increase in numbers since 1850 was at about the same rate as in preceding decades, the total population growing from twenty-three millions to thirty-one and a half, but the gain was very unequally distributed. The rural states in New England and the older slave states gained little or nothing, but the manufacturing states, from Massachusetts to Pennsylvania, increased a fourth, the cotton states nearly a third, and the grain-growing interior more than two-thirds, showing how the new railroads had stimulated western settlement.

The increase in urban population, a feature of modern industrialism which had already appeared in the earlier censuses, continued until the proportion of urban population was now almost exactly one-sixth of the whole. All cities did not profit equally by this increase: the lake cities, at the junction of water and rail transportation, made the first great strides, and Chicago, Buffalo, Cleveland, Detroit, and Milwaukee sprang ahead of the river cities — Pittsburg, Cincinnati, Louisville, and St. Louis, which had hitherto been foremost in the west. On the seaboard, New York, Brooklyn, and Philadelphia swelled prodigiously, and by i860 the modern great city had come into being all over the north.

This increase in population, it should be observed, was due in part to an immigration such as the country had never experienced before. The Irish influx which began after the famine in the preceding decade, continued undiminished, settling in great numbers in the eastern cities, furnishing cheap labor for railway construction, and introducing new social elements. But still more striking was the inflow from Germany, which began after the revolutions of 1848 and sent hundreds of thousands to settle in the northern states, the west as well as the east. By i860 the United States had not only revolutionized its system of internal transportation and begun the era of great internal industrial expansion, as well as the epoch of grain-raising for the world market, but had opened the continent to the easy settlement of European immigrants, differing in race, speech, social habits, and economic ideals, and destined profoundly to affect the future development of the country.