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The Panic of 1857 and the Farm-Mortgage Crisis | Wisconsin Historical Society

Historical Essay

The Panic of 1857 and the Farm-Mortgage Crisis

From Boom to Bust and Civil War

The Panic of 1857 and the Farm-Mortgage Crisis | Wisconsin Historical Society

 

Railroad Investment

Caught up in the energy of the Gold Rush of 1848 and 1849, settlers flocked west in search of gold, and Wisconsin’s railroad industry swelled alongside them. Wisconsin’s fertile land and location at the frontier of development made the new state a popular investment for railroad companies. Despite a sharp decline in railroad share prices in the mid-1850s, railroad investment continued to rise, and from 1850 to 1856, railroad projects provided 25% of the United States’ GDP. 

The Panic of 1857

However, the demand for railroads failed to keep up with the rising costs. Railroads used more debt relative to equity to finance companies, and banks had difficulty evaluating the actual worth of railroad companies. As a result, railroad companies got increasingly creative in how they financed rail lines, doing anything to raise capital without disclosing the company’s true value. However, this approach came crashing down in 1857 when the failure of the Ohio Life Insurance and Trust Company triggered a full-scale market meltdown across the country, plunging railroad share prices. Wisconsin’s habit of laying down track ahead of demand made it so that citizen investors caught a huge amount of this blowback.

As Wisconsin railroad companies strove to reestablish their status, capital investors from Europe and in Northeastern states demanded that local investments prove the future value of railroads. However, limited federal aid inspired companies to approach individual farmers who lived on railroad routes, asking the farmers to mortgage their farms in return for shares of stock. Companies assured the farmers that the dividends on stocks would be equal to the interest payments on mortgages and that the value of farmland would be improved by adding infrastructure near the property, as well as that farmers would earn money through appreciation of stock prices. In turn, railroad companies could claim they sourced local equity capital and lower their reported leverages. 

In reality, these railroad farm mortgages were high-leverage, no-documentation, no-down-payment loans that didn’t require actual mortgage payments. Railroad farm mortgage-back security consisted of the farmer’s signed obligation to pay the mortgage amount; the mortgage, which labeled the farm as collateral; and the bond of the railroad, which offered the reputation of the railroad company for repayment.

Despite their efforts, Wisconsin railroads failed in 1857 with the Ohio Life Insurace Trust Company, a shadow bank that lent money almost exclusively to northwestern railroads. The failure triggered a massive farm mortgage foreclosure crisis. No-interest farm mortgages robbed investors of any securities for investment in failed railroads, while over-appraised mortgage values and declining land prices deepened the economic blow. Tensions between Eastern financiers and Wisconsin farmers spiked. Though circuit courts in Wisconsin overwhelmingly sided with farmers and placed stays of foreclosure on affected properties, many farmers still lost everything after speculators and investors bought out properties at steeply-discounted prices.

Aftermath

In 1860, hesitant to anger Eastern investors as the Civil War loomed, the Wisconsin Supreme Court ruled in favor of Eastern security holders. Though the railroad industry would once again bring economic prosperity to Wisconsin, spurred by the Civil War’s rejuvenation of railroad trade to the east, the state’s farmers were slow to forgive. Throughout the following decades, Wisconsin’s particular brand of populism and progressivism would draw directly from farmers’ wariness of predatory financial institutions.

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