When Prosperity Merges into Crisis: The Decline and Fall of Ohio Life, Political Economy of Bank Suspension, and the Panic of 1857

Abstract

The historical record has remained incomplete as to exactly why the Ohio Life failed on August 24, 1857 and what, if any, causal connection existed between the failure and the subsequent panic. Using new information sources, we make three main contributions to the literature. First, we conduct a detailed analysis of how and why Ohio Life’s head cashier, Edwin Ludlow, misappropriated funds to support his stock and bond market operations. Second, we show that when Ohio Life collapsed panic ensued with bank assets transitioning into an information sensitive state. Third, we show that Ohio Life’s failure and the subsequent state transition caused significant uncertainty and hysteresis amongst banks by revealing a critical vulnerability in New York state bank regulation. We conclude that is was the manner in which Ohio Life failed that links it to the panic of 1857.