The Panic of 1857 was just another of the tumultuous 19th century in American finance. In the western United States, it had begun two years earlier in San Francisco. At the start of 1855, the city still seemed to be booming, growing from a population not much greater than zero a decade earlier into a small city. Far away from any other banking center, San Francisco had to build its own, much of it oriented around the state’s gold mining economy. Despite the booming conditions of their environment, the banks there proved just as vulnerable as any other in that era of fragile banking.
Gold was discovered on January 24, 1848 at the building site of a sawmill in Coloma, California. There had been only a limited amount of gold production in the United States until that discovery. In the next twenty years though, $750 million in gold would be shipped east from the ‘Golden State’. The opening of the Panama Canal still decades in the future, much of this was sent to Central America and carried overland across Panama or Nicaragua before being shipped back up to the East Coast of the US.
During these years, hundreds of thousands migrated to California. The city of San Francisco, which had a population of just 150 in 1846, grew to 50,000 in a decade. Many new towns would be settled from scratch during the gold rush and there was a tremendous demand for people and money. Mark Twain reported, facetiously of course, that haircuts cost $1,000 yet people still paid such an amount happily.
Almost as expensive as haircuts was the price of borrowed money. Interest rates in California were high, 10% per month or higher in the very early days of the boom. This meant that banking could be very profitable. So, bankers migrated westward as others had and they established many new banks. In short order, Montgomery Street in San Francisco became a western Wall Street.
A typical California bank might have started as a merchant or freight agent who would accept deposits, facilitate payments, and make loans. After receiving a charter, such a bank might start issuing banknotes and become indistinguishable from any ordinary bank in the eastern half of the country. Private banknotes were especially important in California though since prior to the opening of a mint in San Francisco, there was a shortage of coins.
Facilitating cross country payments was critical to the business of banks in California. They often had correspondence relationships with banks elsewhere, allowing someone to make payments in other cities. A lot of money was being transferred west to east then, often in the form of gold exports or remittances from miners to families elsewhere.
This prevailing west-to-east flow meant there was a shortage of money in California, so much so that bankers were willing to transfer funds in the reverse direction, namely westbound, at a premium, so that rather than collect a fee for their service they would actually pay the remitter of money a premium for their business. In any case, beyond correspondence relationships, California banks were often backed with capital from East Coast banks which also sent associates to California to staff these new West Coast banks.
Banks founded in California in these early years included Adams & Co., Palmer, Cook & Co., Drexel, Sather & Church, and Page, Bacon & Co. They were just a few; even faraway NM Rothschild & Sons placed an agent in San Francisco. Some of these banks, like Wells Fargo, started in the business of shipping gold.
Eventually they would purchase gold themselves to ship out of California, even after the new mint opened in San Francisco, as that mint could hardly keep up with the local demand for minted coins let alone absorb the entire local output of gold. The banks would sell an ounce of gold dust back east for between $17.50 and $17.70 and the price they would be willing to pay would depend on any competition in the market along with the prevailing freight and insurance rates at the time.
As the volume of trade in the western United States grew, the business of a San Francisco bank would become complex. For example, one early prominent San Francisco banker, James King of William, noted a brisk trade in imports to California carried by Australian merchants from Sydney and Hobart. These merchants preferred to be paid in bills on London rather than bills payable in eastern American states.
This offered the San Francisco banker an opportunity. If he could offer bills payable in London, in partnership with a London correspondent, then he could capture for himself a ‘float’ of customer money because of the differential in shipping times between westward and eastward routes to London from San Francisco.
Specifically, James King of William estimated it would take ten weeks for the Australian merchants to travel from San Francisco back to Sydney with their profits and then ten weeks more, at least, to pass the bill along to London for payment. Meanwhile, it would take James King of William just seven weeks to ship gold to London through the Isthmus of Panama to satisfy payment with his London correspondent. This meant he would have free access to customer funds for a few months in between. Money he could lend out at those high California interest rates.
In 1851, gold production rose from $41 million to $76 million. Unfortunately, that year also saw a fire that destroyed much of early San Francisco. To make matters worse, gold production then began to fall after 1852. Still, the city was growing and everything seemed fine with California’s banks for another two years until crisis arrived from outside the state.
One of the banks mentioned earlier, Page, Bacon & Co., was backed by an affiliate in St. Louis which failed after financing for a railroad project the bank had promoted fell through. This in turn brought down the bank’s San Francisco partners, individuals which a certain William Tecumseh Sherman, the future Civil War general who was then a San Francisco-based banker himself, described as “the most prominent bankers in California in 1853-’55”.
The effect was monumental. February 1855 saw a banking panic plague San Francisco. Some $600,000 of the $2,000,000 in deposits at Page, Bacon & Co. were withdrawn in just one day. After surviving a few days of withdrawals, the firm suspended operations on February 22nd and so the panic spread to other banks. The ensuing bank run also took down Adams & Co., whose controlling shareholder had been plundering the bank before fleeing the state.
“Beyond all comparison, Page, Bacon & Co. were the most prominent bankers in California in 1853-’55. Though I had notice of danger in that quarter, from our partners in St. Louis, nobody in California doubted their wealth and stability. They must have had, during that winter, an average deposit account of nearly two million dollars, of which seven hundred thousand dollars was in ‘certificates of deposit,’ the most stable of all accounts in a bank. Thousands of miners invested their earnings in such certificates, which they converted into drafts on New York, when they were ready to go home or wanted to send their “pile” to their families. Adams & Co. were next in order, because of their numerous offices scattered throughout the mining country.” – Memoirs of William Tecumseh Sherman, Chapter V
Other San Francisco banks, including several branches of Wells Fargo, had to suspend payment and shut temporarily. Like Wells Fargo, many of these would survive and recover. Among them was Drexel, Sather & Church. Peder Sather, who ran that bank, became very wealthy and founded what would become the University of California, Berkeley.
William Tecumseh Sherman described the San Francisco banking panic in his memoirs. Sherman was then the San Francisco manager of Lucas, Turner & Co. There, Sherman had replaced his army comrade, the co-founder Henry Smith Turner when family matters forced the latter to return to St. Louis. The bank survived the panic as it had bullion, vault cash, and short-term bills payable on demand sufficient to cover all of its deposits. Still, Sherman himself had to hound a lumber supplier and prominent San Francisco resident, Henry Meiggs, who had borrowed $800,000 on fraudulent collateral.
“Our financial condition on that day (February 22, 1855) was: Due depositors and demand certificates, five hundred and twenty thousand dollars; to meet which, we had in the vault: coin, three hundred and eighty thousand dollars; bullion, seventy-five thousand dollars; and bills receivable, about six hundred thousand dollars. Of these, at least one hundred thousand dollars were on demand, with stock collaterals. Therefore, for the extent of our business, we were stronger than the Bank of England, or any bank in New York City.” – Memoirs of William Tecumseh Sherman, Chapter V
In 1857, Sherman left California in search of greener pastures back east but the panic had caught up with him there that same year. Indeed, in 1857, the San Francisco banking panic was superseded by a larger crisis. The loss at sea of a California gold shipment worth $2 million when the SS Central America sank on September 1857 was costly to some firms and serves to poetically connect the events in San Francisco to the larger national crisis about to begin.
In reality though, for the country at large, the failure of the Ohio Life Insurance and Trust Company around the same time caused the greatest alarm and is considered the trigger of the Panic of 1857. The firm had lost $5 million, the victim of large speculations and embezzlement. Further, stock prices were falling and banks holding these with borrowed money found trouble. The crisis peaked in mid-October 1857. Sherman wouldn’t be the only future Civil War general battered by the banking panics of the 1850s. A certain Ulysses S. Grant was also affected, so badly apparently that he resorted to pawning his gold watch to buy Christmas presents.
“all Wall Street was thrown into a spasm by the failure of the Ohio Life and Trust Company, and the panic so resembled that in San Francisco, that, having nothing seemingly at stake, I felt amused. But it soon became a serious matter even to me. Western stocks and securities tumbled to such a figure, that all Western banks that held such securities, and had procured advances thereon, were compelled to pay up or substitute increased collaterals … In September, the panic extended so as to threaten the safety of even some of the New York banks not connected with the West; and the alarm became general, and at last universal.” – Memoirs of William Tecumseh Sherman, Chapter VI
Nationally, stock prices fell 50% and more than 5,000 businesses failed as a result of the panic. There was no scarcity of failed firms in San Francisco. There, real estate values fell and bank formation was interrupted. Eventually though, new banks replaced the old and those that survived thrived. However, the new California economy would be very different. The state shifted its economy away from gold. Independent prospectors left the industry, some leaving for Australia, as gold mining became more capital intensive. Silver mining, also capital intensive, replaced some of the focus on gold. Elsewhere, California’s agricultural and manufacturing production grew and banks would now serve them.
“Our bank, having thus passed so well through the crisis, took at once a first rank; but these bank failures had caused so many mercantile losses, and had led to such an utter downfall in the value of real estate, that everybody lost more or less money by bad debts, by depreciation of stocks and collaterals, that became unsalable, if not worthless. … Foreign capital, also, which had been attracted to California by reason of the high rates of interest, was being withdrawn, … the community itself was shaken, and loans of money were risky in the extreme. A great many merchants, of the highest name, availed themselves of the extremely liberal bankrupt law to get discharged of their old debts, without sacrificing much, if any, of their stocks of goods on hand, except a lawyer’s fee; thus realizing Martin Burke’s saying that ‘many a clever fellow had been ruined by paying his debts.’ The merchants and business-men of San Francisco did not intend to be ruined by such a course. … and I labored hard to collect old debts, and strove, in making new loans, to be on the safe side. The State and city both denied much of their public debt; in fact, repudiated it; and real estate, which the year before had been first-class security, became utterly unsalable.” – Memoirs of William Tecumseh Sherman, Chapter V
San Francisco’s 1855 banking panic shows just how vulnerable any bank in that era was. Without any sort of deposit insurance or regulation, no one had any reason to be confident in the safety of their bank deposits. The only way to test its resilience was to withdrawal deposits and demand redemption of banknotes. As the example of Page, Bacon & Co. illustrates, these bank runs could be massive in terms of the proportion of a bank’s deposits being withdrawn.
Surviving banks could no-doubt regain the trust of their customers though and gain the trust of new ones. William Tecumseh Sherman himself noted the surprising fact that his surviving bank began to experience net deposits, rather than net withdrawals, just a few days into the banking crisis. For what its worth, though 19th century banking crises were often very destructive, as was that of San Francisco in 1855, at least many of them were also very short. A prospector heading out for a week of gold panning in the wilderness could have returned to find a banking sector in smithereens, unrecognizable from the one he knew but already beginning the process of picking up the pieces.
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1. Armstrong, Le Roy, and Denny, J. O. “Chapter III: Early-Day Bank Failures.” Financial California: An Historical Review of the Beginnings and Progress of Banking in the State, Arno Press, New York, 1980, pp. 54–65.
2. Markham, Jerry W. A Financial History of the United States. Sharpe, 2002.
3. Schweikart, Larry, and Lynne Pierson Doti. “Chapter 10 – From Hard Money to Branch Banking: California Banking in the Gold-Rush Economy.” A Golden State: Mining and Economic Development in Gold Rush California, edited by James J. Rawls and Richard J. Orsi, University of California Press, Berkeley, CA, 1999, pp. 209–229.
4. Sherman, William T. Memoirs of General William T. Sherman. 2nd ed., D. Appleton and Co., 1889.
5. Tiemann, Jonathan. “Discounting Gold: Money and Banking in Gold Rush California.” University of Oxford – Global History of Capitalism Project, Edited by Christopher McKenna, no. 22, Apr. 2021.