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. 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. After the failure of Ohio Life Insurance and Trust Company, the financial panic quickly spread as business 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.

In the early 1850s, there was much economic prosperity in the United States. However, in the beginning of 1857, the European market for goods from western America began to decline, which caused western bankers and investors to become wary. Eastern banks became cautious with their loans to the west and some even refused to accept western currencies. Prior to 1857, the railroad industry was booming due to vast migrations of people to the west, especially in Kansas. With the large influx of people moving, the railroads became a profitable industry and the banks seized the opportunity and began to provide railroad companies with large loans. However, by late summer, the value of western land fell and migration drastically slowed causing railroad securities to fall in value. By the spring, “commercial credit had dried up, forcing already debt-ridden merchants of the West to curtail new purchases of inventory.” As a result of limited purchasing in the west, merchants around the country began to see decreases in sales and profits.

The tipping point to really set the Panic of 1857 in motion was the failure of Ohio Life Insurance and Trust Company on August 24. Ohio Life was an Ohio based bank with a second main office in New York City. The company had large mortgage holdings and was the liaison to other Ohio investment banks.

Ohio Life failed due to fraudulent activities by the company’s management and its failure threatened the failure of other Ohio banks or even worse, a run on the banks.

According to an article printed in the New York Daily Times, Ohio Life Insurance and Trust Company’s “New York City and Cincinnati [branches were] suspended; with liabilities, it is said, of $7,000,000.” Luckily, the banks connected to Ohio Life Insurance and Trust Company were reimbursed and “avoided suspending convertibility by credibly coinsuring one another against runs.” The failure of Ohio Life brought attention to the financial state of the railroad industry and land markets, thereby causing the financial panic to become a more public issue.

The final event that led to the cause of the Panic of 1857 was the Supreme Court ruling in Dred Scott v. Sandford in March 1857. After Scott attempted to sue for his freedom, Chief Justice Roger Taney ruled that Dred Scott was not a citizen because he was an African American and therefore did not have the right to sue in court. The ruling also made the Missouri Compromise unconstitutional and it was clear that the decision would have a lasting impact. Soon after the Dred Scott ruling, “the political struggle between ‘free soil’ and slavery in the territories” began. The western territories were now opened to the option of slavery and it was quickly evident that this would have drastic financial and political effects. “Kansas land warrants and western railroad securities’ prices declined slightly just after the Dred Scott decision in early March.” This fluctuation in railroad securities proved “that political news about future territories called the tune in the land and railroad securities markets”. Shortly after the Dred Scott ruling, the Panic of 1857 began to escalate to its peak.