Investors in the Ohio Life Insurance and Trust Company lost all of their lifesavings invested in the company, leaving many people destitute. Fearing that a similar scenario might happen to them, investors in other companies, already facing declining agricultural profits and weaker economy, withdrew their funds from stocks as well.
Numerous businesses failed as a result of the investor actions, and thousands of workers became unemployed. The panic was spreading quickly and the stock market plummeted. Behind the reaction of strong bankers restrictions after the closing of a trust company lay a mixture of national and international events that increased their concern. Unfortunately, all their actions just strengthened the panic.
British investors withdrew large amounts of capital from national banks, grain prices dropped causing foreclosures for many farmers, Russia undersold cotton on the open market which affected the industry, and manufactured goods lay in surplus as merchants had no one to sell them to.
Railroad speculation bubble burst
Many railroads were overbuilt and some defaulted on debts at the time. The Illinois Central, Erie, Pittsburgh, Fort Wayne and Chicago and Reading Railroad lines all were forced to shut down due to the financial downturn. The Delaware, Lackawanna and Western and the Fond du Lac Railroad Companies were forced to declare bankruptcy. The Boston and Worcester Railroad Company also experienced heavy financial difficulties.
Accordingly, land schemes and projects that depended on new rail routes failed. Lots that brought $1,000 before the crash now could not be sold for $10. Hard-hit property owners were unable to pay their taxes, and thousands of properties slipped into tax delinquency.
As a result of such price decreases, land sales declined vastly and westward expansion essentially halted until the crisis ended. Merchants and farmers both began to suffer for the investment risks.
Government bonds issue and economic measures
As banking institutions of the day dealt in specie (gold and silver coins instead of paper money) the loss of some thirty thousand pounds of gold on the SS Central America reverberated through the financial community. Howell Cobb, secretary of the treasury, encouraged not only the placement of vast amounts of such government gold on the market, but also redemption of government bonds at a premium. At his suggestion, President James Buchanan proposed to Congress that the Treasury be authorized to sell revenue bonds for the first time since the Mexican American War.
In the late 1980s the wreck of the SS Central America was located about 8,000 feet under water. One ton of extraordinary riches surfaced including the world's largest bar of gold ingot, weighing more than eighty pounds, and thousands of Liberty Double Eagle twenty-dollar gold pieces, each of which contained nearly a full ounce of gold.
By 1859 the country was slowly pulling out of the downturn, but the effect lasted until the opening shots of the Civil War. The economy had begun to stabilize and recession was beginning to fade away. President James Buchanan, after announcing that the paper-money system seemed to be at the root cause of the crisis, decided to withdraw the usage of all bank notes under twenty dollars. He also advised the State banks to follow the example of the Federal Government specifically with the Independent Treasury System.
President James Buchanan believed this measure would decrease the paper money supply to allow the species supply time to increase and reduce inflation rates. The system allowed the Federal Government to keep up with specie payments, which helped alleviate some financial stress that the bank suspensions had brought on.