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Crisis Chronicles: Defensive Suspension and the Panic of 1857

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Abstract
Sometimes the world loses its bearings and the best alternative is a timeout. Such was the case during the Panic of 1857, which started when a prestigious bank in New York City collapsed, making all banks suddenly suspect. Banks, fearing a run on their gold reserves, started calling in loans from commercial firms and brokers, leading to asset sales at fire-sale prices and bankruptcies. By mid-October, banks in Philadelphia and New York suspended convertibility, meaning they would not allow gold to be withdrawn from their vaults even while all other banking services continued. Suspension then swept the nation as part of a defensive strategy, supported by local business interests, to prevent the Panic from spreading. While the suspensions appeared successful and few banks ended up failing, President Buchanan was outraged by what he viewed as yet another corrupt banking practice. He proposed making suspension a ?death sentence? for banks as a draconian incentive to encourage safer banking practices. In this edition of Crisis Chronicles, we describe the Panic of 1857 and explain why businesses pushed for national suspension to save themselves.

Suggested Citation

  • Thomas Klitgaard & James Narron, 2015. "Crisis Chronicles: Defensive Suspension and the Panic of 1857," Liberty Street Economics 20151002, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87065
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    Cited by:

    1. Rustam Jamilov & Tobias König & Karsten Müller & Farzad Saidi, 2024. "Two Centuries of Systemic Bank Runs," CRC TR 224 Discussion Paper Series crctr224_2024_589, University of Bonn and University of Mannheim, Germany.

    More about this item

    Keywords

    panic; 1857; suspension; banking; specie; gold; New York (N.Y.);
    All these keywords.

    JEL classification:

    • N2 - Economic History - - Financial Markets and Institutions

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