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Crisis episode- 1857 - The Panic of 1857

Give a brief description of a crisis episode, emphasising mostly how aspects of today’s
financial system originated and what lessons are useful for today’s regulators.

The Panic of 1857 was a financial panic in the United States caused by the declining
international economy and over-expansion of the domestic economy. Because of the
interconnectedness of the world economy by the 1850s, the financial crisis that began in late
1857 was the first worldwide economic crisis.
In Britain, the Palmerston government circumvented the requirements of the Peel
Banking Act of 1844, which required gold and silver reserves to back up the amount of
money in circulation. Surfacing news of this circumvention set off the Panic in
Britain.Beginning in September 1857, the financial downturn did not last long; however, a
proper recovery was not seen until the American Civil War. The sinking of the SS Central
America(The ship of Gold) contributed to the panic of 1857, as New York banks were
awaiting a much-needed shipment of gold. American banks did not recover until after the
civil war. After the failure of Ohio Life Insurance and Trust Company, the financial panic
quickly spread as businesses began to fail, the railroad industry experienced financial
declines and hundreds of workers were laid off.
Since the years immediately preceding the Panic of 1857 were prosperous, many
banks, merchants, and farmers had seized the opportunity to take risks with their
investments and as soon as market prices began to fall, they quickly began to experience
the effects of financial panic.
The Panic of 1857 vs the Global Financial Crisis

Similarities
- both started in America then went global
- beginning with a speculative bubble, which was followed by a severe stock market
crash and a recession.
- caused by the declining international economy and over-expansion of the domestic
economy ??????????

Differences
1. 1857 - This crisis began with an unprecedented discovery of gold followed by a
collapse of the stock and bond markets
(Since the United States was on a bi-metallic, gold and silver, standard at the
time, the discovery of gold eff ectively doubled the money supply. Consequently, a
speculative bubble emerged, mainly in railroads and the land required to build them . As the
bubble burst, speculators were unable to repay their debts causing some banks to fail. )
GFC - The crisis began with a housing bubble that burst in 2007 followed by the
collapse in the subprime mortgage market
(Th is bubble was caused by several factors including low interest rates,
which led to criticism that the “Fed kept interest rates too low for too long,” government
programs to pursue increased homeownership, and large trade deficits leading to foreigners
investing heavily in the United States. In addition, the structure of the fi nancial system
exacerbated the bubble, as there were highly leveraged institutions that oft en had the
principle agent problem where they invested other people’s money and thus took increased
risk.)
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2. 1857 - although nation-wide coordination among banks was impossible in America as the
crisis continued, some regional coordination of banks emerged. Institutions, such as the New
York Clearing House, coinsured coalitions in Indiana and Ohio, and branch banking in the
South being relatively successful in responding to this panic limiting further bank failures

GFC - despite extraordinary measures from the Fed and Treasury, banks continued to fail
and the recovery still appear extraordinarily fragile

3. 1857 - British investors to removed funds from American banks and when Overend &
Gurney, a huge lender, needed emergency cash, the Bank of England refused to rescue it,
wiping out its shareholders.
( Britain then enjoyed 50 years of financial calm, a fact that some historians reckon was due
to the prudence of a banking sector stripped of moral hazard. )

GFC - Britain played a major role coordinating an international response to the crisis.
London hosted the April 2009 G-20 meetings and Brown drafted an ambitious plan for fixing
international financial regulation ahead of the meetings. British Prime Minister Gordon Brown
was credited for his bank bailout plan, however, which created a template later followed
across Europe and in the United States.
or
Th e U.K. fi nancial regulatory structure prior to the crisis was two tiered with a Financial
Services Authority (FSA) that regulated the fi nancial services industry and the Bank of
England (the central bank) that set monetary policy and promoted fi nancial stability. With
the failure of regulation, the U.K. government abolished the FSA and assigned its powers to
the Bank of England.

Think about a future for finance based on the lessons from the crises described above. What
should finance do to better serve the society? Find ideas at CFA Institute / Future of Finance

- the financial system and the process of financialisation could better power the
development of a greener economy and fund green investment.
- Financial institutions must find new ways in order to better engage with individuals
and respond to their customer’s real and actual needs. For example: many people
don’t want credit cards or don’t trust to put their savings into an account at the bank
In addition, financial specialists must provide information about future financial
obligations and the risks concerning of debts, to explain the reality not only in finance
but also challenges that can arise in other spheres. This can be a stimulation of
higher client ratings for a private financial institution, and will provide a better financial
indicators and credit rating.
- (Experience confirms that a lot of customers who benefit from the financial services
don't know the real risks they're colliding.)
- innovations are not always directed toward the reduction of poverty but mainly for
enrichment of investors and businessmen.The main locomotive of global finance in
each country is to improve the conditions of small and medium businesses. For that
we need to learn a lot about how to regulate small and medium business in the
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globalization of finance, how to integrate small businesses of poor countries to

international markets.
- We see the future of finance in more appropriate risk management, innovative
financial instruments, and global financial education. Such kind of financial services
as micro lending which help poor communities has to be more active, as the global
development cannot be complete without developing the poorer part of the economy
- Lending funds to the lowest sector of society would seem too much risky and
inexpedient. It means one of the challenges of financial professionals is to find
solutions how to minimize risks in micro lending.
- The financial industry can better serve society only when the financial professionals
correctly identified the needs of the all layers of the economy. When we exactly know
our needs and opportunities, it's time to start using innovative financial instruments
and mechanisms to give the best result.

Draw a concept / mind map that answers previous questions. The map can be created
manually (handwriting), in Prezi or using one of the existing programs / software (not limited
to): Freemind, MindManager, iMindMap, MindGenius, Mindnode, Xmind, MindMeister,
NovaMind, etc. It is recommended that the map is animated for presentation in class.

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Panic of 1857

The panic of 1857 comes as a result from a preceding inflationary expansion of the money
supply which leads to a boom in the capital intensive industries of that time.
But if we want to know the real face of the crisis we should go back to the very beginning of
the events which start the American-Mexican war (1846-1848) and us army occupied
California in 1846
In January 24 1848 gold was found in California by james marshall and that what starts the
(california gold rush) from 1848-1855
That gold found was the raison that fueled the us economy in the east that already knew
kind of growth and led also to inflation( very law interest rates and a lot of opportunities for
investment)(land speculation excessive loans…etc)
But in the 1850 and with all the prosperity that US known it was what we are calling today an
emerging economy (like turkey,china,brazil…) and that s made them dependent to an other
entity or economy which was the united kingdom
Unfortunately the growth bubble of US burst by a needle from europ in form of the Crimean
war which was between (france,britain,ottman empire,Sardinia VS Russian empire)(1853-
1856) that make England to ask for farm goods from US ,in the meantime citizens or
investors were moving from the east to the west searching for new lands or farms to satisfy
the the high demand on agriculture products. However they didn’t have any mean of
transportation to export the product from the new farms to the east coast
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The railroad companies took the advantage of the situation and offered to make railroad
network line from NY to sanfransisco (1850-1890) but they didn’t have enough capital so
they decide to raise capital from farms and lands where they will build the railroads so they
made a deal with the landlords which is:
-landlords need to sell their crops and get more income
-railroads company will transport them
And they will give stocks in exchange of a mortgage on a land this way the landlords could
pay them back when income flows, and this way the railroads companies increase their
equity and assets through the mortgages receivable and in order to get cash they pool the
mortgages together and try to sell them in wallstreet and that was the first pool mortgages
securitization but it didn’t work so they sold bonds back by the mortgages and allow them
self in the contracts to keep portion from the bonds off or out of the blancesheet
The growth continue to improve till Europe decide to have peace for a while in 1856 so
instead of destroying the lands they decide that will more profitable to increase their
production and use them for crops however with the end of the Crimean war nobody needs
to import from US, farmers didn’t have anybody to sell their crops and railroad companies
didn’t have many crops to transport
The subsequent downturn in the railroad industry impact directly the other industries which
are iron,steal and coal then a domino effect to be show in the bankruptcy of securities
brokers who borrowed from eastern banks to finance their dealings in the stock and bond
market
Then the Ohio Life Insurance and Trust Company fall down in august 24,1857 and the crisis officially
heats the other banks
On September 19,1857 the SS central America known as the ship of gold sank near Carolina coast with an
equivalent of 400 million of gold and the us stand on the gold standard so that event mad the us economy worst
and sank it deeper to the panic, farmers,railroad and others industries, banks are all failing .
In Europe they were also touched by the crisis because in the early 1850s (gold rush) foreigners begun to invest
millions in US and 1856-1857 Europeans put approximately 409 million it s almost 8 billion dollar into the US
economy and owned more than the half of the outstanding railroads stocks and bonds ,when the railroad
companies begun dying those foreigner investors knew that did a mistake specially in England ,France and
Germany and they were so concern about this financial crisis that some of them runaway from the bank of
England and for this raison it s cold the first global financial crisis
Solution in the US territory :
-The government convince everyone to prevent a run on banks and issue revenue bonds for the first time since
the Mexican war and that gave time the government to raise capital again and fix the problem
And in the other part robert hunter verginia senateur draft the tariff of 1857 which is a major tax reduction that
drops tariffs from 25% to 17% it increased the flow of money into the US economy and help to import cheaper
slave labor
The government give time to stabilize to the farmers that they invested in the railroads companes and allow the
banks to collect their money till 1560