Collection of the Museum of American Finance
Check for one pound sterling issued to John Thompson and signed by Jay Cooke , Philadelphia , August 16 , 1873 . Affixed note from John Newton & Sons Notaries , London says “ Cannot be paid at present . Refer to diaries .”
First , it is an outlier , as it lies outside the realm of regular expectations , because nothing in the past can convincingly point to its possibility . Second , it carries an extreme ‘ impact .’ Third , in spite of its outlier status , human nature makes us concoct explanations for its occurrence after the fact , making it explainable and predictable . I stop and summarize the triplet : rarity , extreme ‘ impact ’ and retrospective ( though not prospective ) predictability . A small number of Black Swans explains almost everything in our world , from the success of ideas and religions , to the dynamics of historical events , to elements of our own personal lives .
Patterson summarizes the alternate position taken by Sornette , founder of the Financial Crisis Observatory in Zurich , Switzerland .
[ He ] concocted his own exotic beast for the land of the super extreme : The Dragon King , a term he invented in 2009 to compete with Taleb ’ s tempestuous waterfowl . Dragon Kings … were outliers with specific properties that , in extremis , can be detected … tiny earthquakes leading to a massive rupture [ which might ] be used to predict when they might blow up .
Both Black Swan and Dragon King events are rare and difficult to predict . Yet while the former is characterized by novelty , Dragon King events may be associated with some degree of foreseeability . And while Dragon Kings tend to have exceptional magnitudes , Black Swan events are associated more with gravity and rarity than their relative sizes .
So which , if either , was the Panic of 1873 ? Was it , as Patterson describes Sornette ’ s explanation , the end point of a “ dynamic process that moves toward instability ” albeit to some extent calculable ? Or Taleb ’ s : An event for which the “ probability [ was ] low based upon past knowledge …[ and ] has a massive impact ,” but which is “ prospectively unpredictable but retrospectively predictable ?”
While there is evidence of both , a stronger case can be made in favor of the Dragon King classification on two counts . The first is the appearance of several of the “ tiny earthquakes ” which presaged and laid the foundation for the panic ; five such contributors follow .
1 . The Opening of the Suez Canal ( 1869 )
Both the Suez Canal and the Transcontinental Railroad facilitated the establishment of new circumnavigation records . But just as the March 2021 lodging of the massive cargo ship Ever Given in the Suez Canal exacerbated pandemic-borne supply chain problems , the opening of the canal in 1869 may have contributed to the 1873 panic . The final cost of the canal was more than double the original estimates and the first few years of passage were lower than expected . That led to financial hardship among its investors and “ bankruptcies , escalating unemployment , a halt in public works and a major trade slump that lasted arguably until 1897 ,” according to Edelstein and Edelstein in a 2014 UC Berkeley Working Paper entitled “ Crashes , Contagion , Cygnus and Complexities .”
2 . The Franco-Prussian War ( 1870 – 1871 )
The Franco-Prussian War had indirect effects which , combined with other factors , assisted in the development of economic conditions which laid the groundwork for the panic . The disruption of trade amid hostilities acted as a drag on economic growth in Europe , which inevitably spread to the United States .
More important , however , were a handful of policy actions undertaken upon the cessation of hostilities by German Chancellor Otto von Bismarck . The 1871 decision to stop minting silver coins eliminated a major source of demand for silver
28 FINANCIAL HISTORY | Summer 2023 | www . MoAF . org